-----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, WDHX2P5CU335Oq3Atu7wiIXWQAQYJ3jW1D7KM0Ejt0c5Z7RVI8jIh9XEfRDEZFp5 sEofb27CZmP71ytg8ghyAQ== 0001035704-99-000210.txt : 19990421 0001035704-99-000210.hdr.sgml : 19990421 ACCESSION NUMBER: 0001035704-99-000210 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990420 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-09065 FILM NUMBER: 99597703 BUSINESS ADDRESS: STREET 1: 370 17TH STREET STREET 2: SUITE 5200 CITY: DENVER STATE: CO ZIP: 80202-5638 BUSINESS PHONE: 3032799375 MAIL ADDRESS: STREET 1: 370 17TH STREET STREET 2: SUITE 5200 CITY: DENVER STATE: CO ZIP: 802025638 FORMER COMPANY: FORMER CONFORMED NAME: BENEDICT NUCLEAR PHARMACEUTICALS INC DATE OF NAME CHANGE: 19920703 10QSB 1 FORM 10-QSB FOR QUARTER ENDED FEBRUARY 28, 1999 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER: 0-9065 GOLDEN PHARMACEUTICALS, INC. (Name of small business issuer in its charter) COLORADO 84-0645174 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3000 W. WARNER AVENUE, SANTA ANA, CALIFORNIA 92704 (Address of principal executive office)(Zip Code) (714) 754-5800 Issuer's telephone number Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of common stock outstanding as of MARCH 31, 1999, was 125,162,873 Transitional Small Business Disclosure Format: Yes No X --- --- =============================================================================== 2 PART I ITEM 1. FINANCIAL STATEMENTS GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
FEBRUARY 28, AUGUST 31, 1999 1998 --------------- --------------- CURRENT ASSETS Cash $ 92,128 $ 61,860 Trade receivables, net of allowance for doubtful accounts of $112,409 and $535,945 at February 28, 1999 and August 31, 1998 1,394,285 1,377,291 Notes receivable 139,797 139,797 Inventories 518,806 577,947 Prepaid expenses and other 127,984 141,144 Net assets held for sale - 173,000 --------------- --------------- TOTAL CURRENT ASSETS 2,273,000 2,471,039 PROPERTY, PLANT AND EQUIPMENT - AT COST 2,188,458 2,166,642 Less accumulated depreciation and amortization 1,036,205 873,325 --------------- --------------- TOTAL PROPERTY, PLANT & EQUIPMENT 1,152,253 1,293,317 OTHER ASSETS Intangibles - net of accumulated amortization of $2,333 and $1,933 at February 28, 1999 and August 31, 1998 9,667 10,067 Non-compete agreement 51,788 69,050 --------------- --------------- TOTAL OTHER ASSETS 61,455 79,117 --------------- --------------- TOTAL ASSETS $ 3,486,708 $ 3,843,473 =============== ===============
See Notes to Consolidated Financial Statements 3 ITEM 1. FINANCIAL STATEMENTS (continued) GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) - continued LIABILITIES AND STOCKHOLDERS' DEFICIT
FEBRUARY 28, AUGUST 31, 1999 1998 ---------------- ---------------- CURRENT LIABILITIES Notes payable $ 654,980 $ 833,639 Notes payable - related parties 5,483,400 5,014,200 Current maturities of long-term debt 50,000 212,228 Current maturities of capitalized lease obligations 229,750 224,588 Accounts payable 1,115,421 1,142,999 Deferred revenue - non-compete agreement 250,000 - Accrued liabilities Salaries, wages and other compensation 43,368 47,070 Interest 553,143 316,854 Other 108,888 114,653 ---------------- ---------------- TOTAL CURRENT LIABILITIES 8,488,950 7,906,231 LONG-TERM OBLIGATIONS, less current maturities - 25,000 CAPITALIZED LEASE OBLIGATIONS, less current maturities 362,262 467,191 EXCESS LOSS ON INVESTMENT IN JOINT VENTURE 41,493 39,875 CONTINGENCIES AND COMMITMENTS - - MINORITY INTEREST 1,000,000 - STOCKHOLDERS' DEFICIT Common stock - no par value; 200,000,000 shares authorized; 128,451,873 issued; and 125,162,873 outstanding at February 28, 1999 and August 31, 1998, respectively 24,714,858 24,714,858 Preferred stock - no par value; 10,000,000 shares authorized Class A 15%/ 30% cumulative convertible, 29,653 shares, issued and outstanding at February 28, 1999 and August 31, 1998, respectively- 292,558 292,558 Dividends accrued on preferred stock 239,088 236,419 ---------------- ---------------- 25,246,504 25,243,835 Accumulated deficit (31,558,369) (29,744,527) ---------------- ---------------- (6,311,865) (4,500,692) Less common stock in treasury at cost, 3,289,000 shares at February 28, 1999 and August 31, 1998, respectively 94,132 94,132 ---------------- ---------------- TOTAL STOCKHOLDERS' DEFICIT (6,405,997) (4,594,824) ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,486,708 $ 3,843,473 ================ ================
See Notes to Consolidated Financial Statements 4 ITEM 1. FINANCIAL STATEMENTS (continued) GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED FEBRUARY 28, --------------------------------------- 1999 1998 ----------------- ---------------- NET SALES $ 3,692,614 $ 2,760,983 COST OF SALES 2,830,793 2,233,057 ----------------- ---------------- GROSS MARGIN 861,821 527,926 Selling, general and administrative expense 2,463,941 3,086,569 Unusual charge - impairment loss - 230,000 ----------------- ---------------- OPERATING LOSS (1,602,120) (2,788,643) OTHER INCOME/ (EXPENSE) Interest expense (413,917) (240,980) Joint venture loss (22,618) (62,943) Settlement of accounts payable and other liabilities 211,330 - Gain on disposal of assets - 135 Other income 23,656 51,551 ----------------- ---------------- TOTAL OTHER INCOME (EXPENSE) (201,549) (252,237) ----------------- ---------------- LOSS BEFORE INCOME TAX EXPENSE (1,803,669) (3,040,880) ----------------- ---------------- INCOME TAX EXPENSE (BENEFIT) 1,258 200 ----------------- ---------------- LOSS BEFORE MINORITY INTEREST (1,804,927) (3,041,080) MINORITY INTEREST - 416,710 ----------------- ---------------- NET LOSS $ (1,804,927) $ (2,624,370) DIVIDENDS ON PREFERRED SHARES 6,247 - ----------------- ---------------- NET LOSS APPLICABLE TO COMMON SHARES $ (1,811,174) $ (2,624,370) ================= ================ BASIC AND DILUTED LOSS PER SHARE $ (.01) $ (.02) ================= ================ WEIGHTED AVERAGE SHARES OUTSTANDING 125,162,873 125,127,847 ================= ================
See Notes to Consolidated Financial Statements 5 ITEM 1. FINANCIAL STATEMENTS (continued) GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, --------------------------------------- 1999 1998 ----------------- ---------------- NET SALES $ 1,679,779 $ 1,449,495 COST OF SALES 1,233,618 1,121,017 ----------------- ---------------- GROSS MARGIN 446,161 328,478 Selling, general and administrative expense 1,190,556 1,457,524 Unusual charge - impairment loss - 430,000 ----------------- ---------------- OPERATING LOSS (744,395) (1,559,046) OTHER INCOME/ (EXPENSE) Interest expense (188,147) (122,364) Joint venture loss (8,647) (35,237) Settlement of accounts payable and other liabilities 26,760 - Gain on disposal of assets - 135 Other income 22,240 26,984 ----------------- ---------------- TOTAL OTHER INCOME (EXPENSE) (147,794) (130,482) ----------------- ---------------- LOSS BEFORE INCOME TAX EXPENSE (892,189) (1,689,528) ----------------- ---------------- INCOME TAX EXPENSE (BENEFIT) 3,900 1,600 ----------------- ---------------- LOSS BEFORE MINORITY INTEREST (896,089) (1,691,128) MINORITY INTEREST - 310,954 ----------------- ---------------- NET LOSS $ (896,089) $ (1,380,174) DIVIDENDS ON PREFERRED SHARES 6,247 - ----------------- ---------------- NET LOSS APPLICABLE TO COMMON SHARES (902,336) (1,380,174) ================= ================ BASIC AND DILUTED LOSS PER SHARE $ (.01) $ (.01) ================= ================ WEIGHTED AVERAGE SHARES OUTSTANDING 125,162,873 125,127,847 ================= ================
See Notes to Consolidated Financial Statements 6 ITEM 1. FINANCIAL STATEMENTS (continued) GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28, ------------------------------------- 1999 1998 --------------- --------------- CASH FLOWS USED IN OPERATING ACTIVITIES Net loss before minority interest $ (1,804,927) $ (2,624,370) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 180,542 357,831 Settlement of accounts payable and other liabilities (211,330) - Gain on sale of equipment - (135) Minority interest - (416,710) Joint venture loss 22,618 62,943 Reduction in carrying value of fixed assets - 230,000 Changes in assets and liabilities net of effects of acquisition and joint venture: (Increase) decrease in accounts receivable (16,994) 90,682 (Increase) decrease in inventories 82,141 138,902 (Increase) decrease in prepaid expenses and other 13,160 (91,988) Increase in accounts payable 44,989 11,908 Decrease in income taxes payable - (40,000) Increase in deferred revenue - non-compete agreement 250,000 - Increase in accrued liabilities 226,822 81,569 --------------- --------------- TOTAL ADJUSTMENTS 591,948 425,002 --------------- --------------- NET CASH USED IN OPERATING ACTIVITIES (1,212,979) (2,199,368) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant, and equipment (21,816) (97,266) Proceeds from sale of equipment 150,000 901 Increase investment in joint venture (21,000) (42,000) Decrease in notes receivable - 100,203 --------------- --------------- NET CASH USED BY INVESTING ACTIVITIES 107,184 (38,162) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of preferred shares in subsidiary 1,000,000 - Dividends on preferred shares (6,247) - Borrowings under notes payable - related parties 469,200 2,590,000 Borrowings under capitalized lease and other long-term obligations 21,816 21,855 Payments on capitalized lease and other long term obligations (170,047) (167,946) Borrowings on line of credit 3,946,126 4,918,609 Payments on line of credit (4,124,785) (5,125,038) --------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,136,063 2,237,480 --------------- --------------- NET INCREASE (DECREASE) IN CASH 30,268 (50) CASH, BEGINNING OF PERIOD 61,860 26,143 =============== =============== CASH, END OF PERIOD $ 92,128 $ 26,093 =============== =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES: Interest paid $ 177,628 $ 129,804 =============== =============== Income taxes paid (received) $ 1,258 $ 40,200 =============== ===============
See Notes to Consolidated Financial Statements 7 GOLDEN PHARMACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF ACCOUNTING POLICIES The accompanying unaudited financial statements of Golden Pharmaceuticals, Inc. and its consolidated subsidiaries (collectively, the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. The accompanying unaudited condensed financial statements and disclosures reflect all adjustments which, in the opinion of the management, are necessary for a fair presentation of the results of operations, financial position, and cash flow of the Company. The results of operations for the periods indicated are not necessarily indicative of the results for the full year. The financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended August 31, 1998, as filed with the Securities and Exchange Commission. Basic and diluted earnings per share for the six months ended February 28, 1999 and 1998 is calculated as follows:
SIX MONTHS ENDED FEBRUARY 28 ---------------------------------------- 1999 1998 ---------------- ----------------- Net loss applicable to common shares $ (1,811,174) $ (2,624,370) ================ ================= Weighted average number of shares outstanding Basic earnings per share Weighted average shares outstanding for Basic earnings per share calculation 125,162,873 125,127,847 ================ ================= Diluted earnings per share Weighted average shares outstanding 125,162,873 125,127,847 Effect of exercise of options * * Effect of conversion of Class A 15%/30% cumulative convertible preferred stock and accrued dividends thereon * * Effect of conversion of Series A redeemable convertible preferred stock of subsidiary * N/A ---------------- ----------------- Weighted average shares outstanding for diluted earnings per share calculation 125,162,873 125,127,847 ================ =================
8 * The effect of options and convertible shares was not included in the diluted earnings per share calculation for the six months ended February 28, 1999 and 1998 as they would have been anti-dilutive. The total number of common shares not included in the diluted earnings per share calculation for the six months ended February 28, 1999 and 1998 that could potentially dilute earnings per share in the future were 6,485,618 shares and 2,531,059 shares, respectively. Reclassification / Restatement- Certain reclassifications have been made to conform prior years' information with the current year presentation. Use of Estimates - In preparing the Company's consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, at the date of the consolidated financial statements. Actual results could differ from those estimates. NOTE 2. REALIZATION OF ASSETS The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company incurred operating losses of $1,602,000 and $10,131,000, respectively, during the six months ended February 28, 1999 and during the fiscal year ended August 31, 1998. In addition, at February 28, 1999, the Company had a negative working capital position of $6,216,000 due primarily to $5,483,400 in short term borrowings from related parties (see Note 7), and the Company had a total stockholders' deficit of $6,406,000. These factors among others raises substantial doubt that the Company will be able to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments related to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. As described in Note 5, as of February 28, 1999 the Company was not in compliance with the covenants of its Norwest Credit, Inc. ("Bank") revolving line of credit (the "Bank Revolving Facility", and the Bank elected to exercise certain of its remedies under the Amended and Restated Credit Agreement dated August 7, 1995 between the Bank and the Company (the "Credit Agreement"). The Bank Revolving Facility was paid in full on April 6, 1999 (See Note 9). The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional equity financing in fiscal 1999 to re-capitalize the Company, and ultimately to attain profitability. NOTE 3. DISCONTINUED LINE OF BUSINESS On August 3, 1998, the Company and the other member ("Member") of Pharma Labs, LLC ("Pharma Labs") entered into an agreement for the dissolution and liquidation of Pharma Labs. In order to facilitate the liquidation of Pharma Labs, the Company entered into a Unit Purchase Agreement on October 8, 1998 with the Member, whereby the Company purchased the Member's 48% equity interest in Pharma Labs for $35,000. On December 3, 1998, the Company completed the sale of Pharma Labs' machinery and equipment to Adams Equities, Inc. (Buyer) for $150,000, pursuant to the terms of a Purchase Agreement dated November 10, 1998. The Purchase Agreement also includes a non-compete agreement between the Company and the Buyer, for which the Company received $250,000 at closing. In addition, the Buyer assumed Pharma Labs' obligations under two (2) equipment leases and an affiliate of Buyer entered into a sublease with the Company to sublease Pharma Labs' facility and reimbursed the Company $57,000 for a lease deposit. 9 NOTE 4. UNUSUAL CHARGE - IMPAIRMENT LOSS AND UNCERTAINTY At the end of the quarter ended February 28, 1998, Pharma Labs recorded a non-cash impairment loss of $230,000 related to the write-down of property, plant, and equipment to estimated fair market value. NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT The Company was not in compliance at August 31, 1998 and at February 28, 1999 with covenants under the Bank Revolving Facility and, accordingly, the balance due on the Bank Revolving Facility was past due on February 28, 1999. On April 6, 1999, the Company paid in full the amounts due under the Bank Revolving Facility with proceeds of a credit facility with ALCO Financial Services, LLC (See Note 9). NOTE 6. SALE OF PREFERRED STOCK In January 1999, Quality Care Pharmaceuticals, Inc. ("QCP"), a wholly-owned subsidiary of the Company, sold 1,000,000 shares of its Series A Preferred Stock, no par value ("QCP Preferred Stock"), for an aggregate purchase price of $1,000,000 to one accredited investor pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. The QCP Preferred Stock is convertible at the option of the holder into shares of the Company's no par value common stock at a conversion price of $.20 per share, which is subject to adjustment upon certain events. Dividends are cumulative and payable on each share of QCP Preferred Stock at the rate of $.06 per annum. The QCP Preferred Stock restricts the payment of dividends to the common stock holders of QCP until the payment of all accrued but unpaid dividends on the QCP Preferred Stock. Each share of QCP Preferred Stock is entitled to a liquidation preference of $1.00 per share plus all accrued but unpaid dividends. QCP may redeem the QCP Preferred Stock at any time on or after January 14, 2004 at a price equal to the liquidation preference. NOTE 7. RELATED PARTY TRANSACTIONS During fiscal 1999, and through April 15, 1999, the Company borrowed $174,600, net of repayments, from certain shareholders who are also officers and directors. During the six months ended February 28, 1999, the Company recorded $263,000 in interest expense on loans from related parties. At February 28, 1999, the Company owed $4,983,400 in notes payable to one of the above shareholders, $30,000 to another of the above shareholders, and $470,000 in notes payable to a director of the Company. At February 28, 1999 $553,000 in accrued interest was payable on the preceding notes. Certain of these loans are payable on demand and all such loans bear interest at bank prime plus 2%. Certain of these loans ($1,425,000 payable to Charles R. Drummond and $470,000 payable to Arch G. Gothard at February 28, 1999) were payable on demand or no later than April 1, 1998, and, accordingly, were past due at February 28, 1999. By letter dated October 30, 1998, Charles R. Drummond committed not to demand payment of, or take action to collect, promissory notes, including those past due, owed to him until August 31, 1999 or such time as the Company has the ability to pay such notes. All amounts due to Mr. Drummond were at February 28, 1999 subordinate to all amounts due under the Bank Revolving Facility. Additionally, all amounts due to Mr. Drummond are subordinate to all amounts due under the ALCO Facility (as defined below). Loan proceeds were used for working capital. See "Management's Discussion and Analysis - Liquidity and Capital Resources." NOTE 8. INVESTMENT IN JOINT VENTURE In October 1998, the Company and VNA Home Health Systems ("VNA") signed an agreement pursuant to which VNA will withdraw from RxDirect, LLC ("RxDirect"). Under the terms for 10 the withdrawal agreement, VNA was to pay the Company a $154,000 withdrawal fee by December 1, 1998. To date, the Company has collected $32,000 of such amount and is considering various collection alternatives with respect to the remaining $122,000. NOTE 9. SUBSEQUENT EVENTS On April 2, 1999, the Company and QCP entered into an agreement with ALCO Financial Services, LLC ("ALCO") for a $1,500,000 revolving credit facility (the "ALCO Facility") bearing interest at bank prime rate plus three percent (3%). The first draw under this new credit facility was made on April 6, 1999 in the amount of $563,500 and was used to repay in full the Bank Revolving Facility. The ALCO Facility is for a period of two years with a one year renewal term. The ALCO Facility is collateralized by equipment, general intangibles, inventory and accounts receivable. The amount of funds available to borrow (the "Borrowing Base") under the ALCO Facility is determined based on eligible accounts receivable and inventory. As of April 19, 1999, the Company had $628,800 of accounts receivable and $345,000 of inventory eligible for the Borrowing Base and had $563,563 of principal outstanding under the ALCO Facility. The ALCO Facility includes customary covenants that, among other things, restrict the ability of the Company and QCP to sell assets, incur additional indebtedness or declare or pay dividends. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with the selected financial data and the financial statements and notes thereto filed herewith. The statements contained in this report, if not historical, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties that could cause actual results to differ materially from the financial results described in such forward looking statements. These risks and uncertainties include, among others, the level and rate of growth in the Company's operations, the capital requirements of the Company and the ability of the Company to achieve earnings per share growth through internal investment, strategic alliances, joint ventures and other methods. The success of the Company's business operations is, in turn, dependent on factors such as the effectiveness of the Company's marketing strategies to grow its customer base, the appeal of the Company's mix of products, the Company's success at entering into and collaborating with others to conduct effective strategic alliances and joint ventures, general competitive conditions within the health care market and general economic conditions. Further, any forward looking statements speak only as of the date on which such statement was made, and the Company undertakes no obligation to update any forward looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. Therefore, forward looking statements should not be relied upon as a prediction of actual future results. RECENT DEVELOPMENTS The Company had a net loss of $1,805,000 during the six months ended February 28, 1999, and, as of February 28, 1999, the Company's current liabilities exceeded its current assets by $6,216,000 and its total liabilities exceeded its total assets by $6,406,000. For the last fiscal year and through the first six months of fiscal 1999, the Company has been operating in an increasingly difficult environment, and the Company expects to continue to operate in this environment for the foreseeable future. The Company's operations in fiscal 1998 and the first six months of fiscal 1999 have consumed substantial amounts of cash and have generated significant net losses which reduced shareholder's equity to a deficit of $6,406,000 at February 28, 1999. Also, QCP has a current period operating loss and negative cash flow from operations, and is expected to have continuing losses and negative cash flow from operations in the near term. There is substantial doubt about the Company's ability to continue as a going concern. 11 The Company's ability to continue as a going concern is dependent upon its ability to obtain funding to support the Company's operating losses and capital requirements, as to which no assurance can be given. On April 2, 1999, the Company entered into an agreement with ALCO for a $1,500,000 revolving credit facility bearing interest at Bank Prime plus three percent (3%). The first draw under this new credit facility was made on April 6, 1999 in the amount of $563,500 and was used to pay in full all amounts due under the Bank Revolving Facility. The ALCO Facility is for a period of two years with a one year renewal term. The ALCO Facility is collateralized by equipment, general intangibles, inventory and accounts receivable, and availability under the ALCO Facility is determined based on eligible accounts receivable and inventory. As of April 19, 1999, the Company had $628,800 of accounts receivable and $345,000 of inventory eligible for the Borrowing Base and had $563,563 principal outstanding under the ALCO Facility. RESULTS OF OPERATIONS SIX MONTHS ENDED FEBRUARY 28, 1999, COMPARED TO SIX MONTHS ENDED FEBRUARY 28, 1998, ($ ROUNDED TO NEAREST THOUSAND) NET SALES - Net sales for the six months ended February 28, 1999, increased 34% to $3,693,000 from $2,761,000 for the same period last year. This sales gain was primarily due to the expansion of QCP sales into the following new business areas: seasonal sale of flu vaccine, $415,000, sales to new government accounts, $265,000, and sales of new products, $306,000. Partially offsetting the QCP sales gain was lower sales at Pharma Labs, which declined 92 % to $29,000 in the six months from $340,000 for the comparable six months last year. The Pharma Labs business discontinued operations on October 9, 1998. COST OF SALES - Cost of sales as a percentage of sales decreased to 76.7%, or $2,233,000, for the six months ended February 28, 1999, as compared to 80.9%, or $3,693,000, for the same period last year. Contributing to this decrease was a write-down of Pharma Lab inventory by $200,000 to net realizable value recognized in the six months ended February 28, 1998. SELLING GENERAL AND ADMINISTRATIVE - Selling, general and administrative expenses (SG&A) were $2,464,000, a decrease of $853,000 compared to $3,317,000 during the comparable quarter last year. Pharma Labs SG&A decreased $313,000 to $48,000 as a result of the liquidation of this business which discontinued operations on October 9, 1998. The balance of the SG&A expense decrease was primarily the result of overhead cost reductions in the current period. OTHER INCOME (EXPENSE) - Interest expense increased to $414,000 from $241,000 in the comparable period last year. This increase is due to interest payable on additional working capital borrowings from a shareholder who is also an officer and director. See "Note 7" to "Notes to Consolidated Financial Statements." The joint venture loss from RxDirect decreased to $23,000 from $63,000 during the comparable period last year. This reduction in loss was the result of overhead cost reductions and a substantial reduction in operations at RxDirect. The $211,000 gain on settlement of accounts payable and other liabilities during the six months ended February 28, 1999, resulted from the settlement of a payable due the other member of Pharma Labs under a non-compete agreement, $125,000, and the resolution of other Pharma Labs payables and liabilities, $86,000. UNUSUAL CHARGE / IMPAIRMENT LOSS - At the end of the six months ended February 28, 1998, Pharma Labs recorded a non-cash impairment loss of $230,000 related to the write-down of property, plant and equipment to estimated net market value. NET LOSS - The Company reported a $1,805,000 net loss for the six months ended February 28, 1999 compared to a $2,624,000 net loss for the comparable period last year. The improved results are due primarily to reduced overhead expenses, $853,000, including cost savings from the wind-down of Pharma Labs of $620,000 and a $211,000 gain on the settlement of Pharma 12 Labs liabilities. Partially offsetting the above reductions was an increase in interest expense of $171,000 as a result of increased short term borrowings. THREE MONTHS ENDED FEBRUARY 28, 1999, COMPARED TO THREE MONTHS ENDED FEBRUARY 28, 1998, ($ ROUNDED TO NEAREST THOUSAND.) NET SALES - Net sales for the three months ended February 28, 1999 were $1,680,000, an increase of $231,000 compared to $1,449,000 for the same period last year. The increase is due to the expansion of QCP's sales into the business areas of government accounts , $112,000, and new product line sales, $140,000. Partially offsetting the QCP sales gain was the Pharma Labs discontinued operations on October 9, 1998 resulting in a reduction in sales of $245,000 from the quarter ended February 28, 1998. COST OF SALES - Cost of sales as a percentage of sales was 73.4%, or $1,234,000, in the quarter ended February 28, 1999, compared to 91.1%, or $1,121,000, for the comparable quarter last year. Included in cost of sales in the quarter ended February 28, 1998 was a $200,000 inventory write-down to net realizable value which was the major reason cost of sales was substantially higher in the second quarter last year. SELLING, GENERAL AND ADMINISTRATIVE - SG&A expenses decreased to $1,191,000 in the quarter ended February 28, 1999 from $1,458,000 during the same period last year. Pharma Labs SG&A decreased by $137,000 during the quarter ended February 28, 1999 due to discontinued operations on October 9, 1998. The Company's SG&A decreased by $103,000 due to reductions in staffing from the quarter ended February 28, 1998. OTHER INCOME (EXPENSE) - Interest expense increased to $188,000 from $122,000 in the comparable quarter last year. This increase is due to interest on additional working capital borrowings from shareholders who are also officers and directors. See "Note 7" to "Notes to Consolidated Financial Statements." The joint venture loss from RxDirect decreased to $9,000 from $35,000 during the comparable quarter last year. This reduction in loss was the result of overhead cost reductions and a substantial reduction in operations at RxDirect. An additional $27,000 gain on settlement of accounts payable and other liabilities resulted from the settlement of other Pharma Labs payables and liabilities during the quarter ended February 28, 1999. UNUSUAL CHARGE / IMPAIRMENT LOSS - In the quarter ended February 28, 1998, Pharma Labs recorded a non-cash impairment loss of $230,000 related to the write-down of property, plant and equipment to estimated net market value. NET LOSS - The Company reported a net loss of $896,000 in the quarter ended February 28, 1999, compared to a net loss of $1,380,000 for the comparable period last year. Losses from operations were $744,000 in the quarter ended February 28, 1999, compared to an operating loss of $1,559,000 in the second quarter of fiscal 1998. The improved results, as discussed above, are primarily due to a reduction in SG&A of $267,000 and the non-cash impairment losses in Pharma Labs that occurred in the second quarter of fiscal 1998 (including the $230,000 write-down of property, plant and equipment and the $200,000 inventory write-down). Partially offsetting the above reductions was an increase in interest expense of $66,000 in the quarter ended February 28, 1999 compared to the second quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES The following table is presented to facilitate the discussion of the Company's current liquidity and sets forth the Company's liquidity position as of February 28, 1999, as compared to August 31, 1998. 13
FEBRUARY 28, AUGUST 31, 1999 1998 ---------------- ----------------- Current assets $ 2,273,000 $ 2,471,000 Current liabilities 8,489,000 7,906,000 ---------------- ----------------- Net working capital (deficiency) $ (6,216,000) $ (5,435,000) ================ =================
At February 28, 1999, current liabilities were $8,489,000, an increase of $583,000 from August 31, 1998. Current liabilities increased primarily due to the following: additional borrowings, $439,000, from a shareholder who is also an officer and director (see "Note 7" to "Notes to Consolidated Financial Statements"), an increase in accrued interest of $236,000 and a $250,000 increase in deferred revenue on a non-compete agreement (see "Note 3" to "Notes to Consolidated Financial Statements"). Partially offsetting the above increases was a $179,000 decrease on the Bank line and a $125,000 decrease in a payable to the other Pharma Labs member resulting from the settlement of a non-compete agreement. Prior to September 1998, the Company's primary source of funds for working capital was the Bank Revolving Facility. At February 28, 1999, the balance outstanding was $655,000, and the interest rate under the Bank Revolving Facility was 11.75%. The Bank Revolving Facility was paid in full on April 6, 1999 with funds drawn on the ALCO Facility. In order to help meet its working capital requirements, the Company has borrowed money from certain shareholders and directors of the Company. The loans are evidenced by promissory notes which provide for interest at the Bank's prime plus 2%. The promissory notes are unsecured obligations. The amounts outstanding under the promissory notes in the aggregate were $5,014,200 ($4,594,200 payable to Charles R. Drummond; $470,000 payable to Arch G. Gothard, III) and $5,483,400, ($4,983,400 payable to Charles R. Drummond; $470,000 payable to Arch G. Gothard, III; $30,000 payable to John H. Grant) at August 31, 1998 and February 28, 1999, respectively. Certain of the promissory notes ($1,425,000 payable to Charles R. Drummond and $470,000 payable to Arch G. Gothard, at February 28, 1999) were payable on demand or no later than April 1, 1998 and, accordingly, are past due. Pursuant to a letter dated October 30, 1998, Charles R. Drummond committed not to demand payment of, or take any action to collect, the promissory notes owed him until August 31, 1999 or such time as the Company has the ability to repay such promissory notes. The promissory notes payable to Charles R. Drummond at February 28, 1999 were fully subordinated to the amounts due under the Bank Revolving Facility. On February 2, 1999, all promissory notes payable to Mr. Drummond became fully subordinated to the amounts due, or to become due, under the ALCO Facility. The Company has suffered substantial recurring losses from operations. The Company incurred a net loss of ($10,068,000) during the fiscal year ended August 31, 1998 and a net loss of ($1,805,000) during the six months ended February 28, 1999, and, as of February 28, 1999, the Company's current liabilities exceeded its current assets by $6,216,000 and its total liabilities exceeded its total assets by $6,406,000. These factors, in combination with the matters discussed in the previous paragraphs raise substantial doubt about the Company's ability to continue as a going concern. Approximately $5 million may be required to support the Company's ongoing operations, exclusive of debt repayments, through August 31, 1999. Except for the agreement with ALCO, the Company does not have any other commitments for financing and there can be no assurance that any additional financing will be available to the Company on terms acceptable to the Company, if at all. The Company's ability to continue as a going concern is dependent upon its ability to obtain funding for the Company's capital requirements and operating losses. The Company's shareholder deficit, and continuing losses create serious risk of loss for the holders of the Company's securities. DISCLOSURE OF SIGNIFICANT RISK AND UNCERTAINTY At August 31, 1998, the Company conducted a test for asset impairment in accordance with financial Accounting Standard 121. It is management's opinion that, exclusive of the write- 14 downs for Pharma Labs and the write-off of goodwill, no additional impairment loss occurred. QCP has a current period operating loss and negative cash flow from operations, and is expected to have continuing losses in the near term. Key assumptions in the asset impairment test include reversal of recent operating losses and sales declines, several years of significant sales growth, and product cost reduction achieved through purchasing and volume efficiencies. Management feels this projection is achievable considering the size of the retail pharmacy market, estimated to be $84 billion, the growth rate of competitors in the industry, and based on estimates of growth potential made by companies participating in the industry. If management's assumptions prove too optimistic, an impairment charge, based on an undiscounted cash flow analysis, would be required. The impairment charge would be computed based on the excess of carrying value over the fair value of assets. This would result in a valuation adjustment to the $1,152,000 in property, plant and equipment at February 28, 1999. Accordingly, it is possible that the results of the impairment test may change in the future and an impairment loss may result. YEAR 2000 The Company recognizes the need to ensure its operations will not be adversely impacted by year 2000 software failures. The Company is addressing this risk to the availability and integrity of financial systems and the reliability of operational systems. The Company has established processes for evaluating and managing the risks and costs associated with this problem. The Company is currently planning to install an upgrade to its existing business software package in 1999 to accommodate year 2000 issues. This upgrade is year 2000 compliant. An initial assessment has been completed and the incremental cost of achieving Year 2000 compliance is estimated to be not material. Timely installation of the upgrade to the business software package is critical to year 2000 compliance. Cost will be expensed as incurred and are estimated to continue through fiscal 1999. RISK FACTORS In addition to the other information contained in this Report, the Company cautions stockholders and potential investors that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results of and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by on or on-behalf of, the Company. The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose: o The Company has incurred a significant amount of indebtedness and the Company's cash flow from operations is not sufficient to fund debt service related thereto. o Due to the current indebtedness, the Company's ability to obtain additional financing in the future and the Company's flexibility in reacting to changes in the industry and economic conditions generally will be limited. o The ALCO Facility is subject to a variable rate of interest and a substantial increase in interest rates could adversely affect the Company's ability to service the debt obligations under the ALCO Facility. o The Company's ability to attract and return highly qualified management and product development personnel. o The Company's ability to anticipate changing technology and products and to efficiently develop, introduce or obtain the rights to technological advancements and new products that will gain customer acceptance. 15 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In January 1999, QCP sold 1,000,000 shares of QCP Preferred Stock, for an aggregate purchase price of $1,000,000 to one accredited investor pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. The QCP Preferred Stock is convertible into shares of the Company's no par value common stock at a conversion price of $.20 per share, which is subject to adjustment upon certain events. Dividends are cumulative and payable on each share of QCP Preferred Stock at the rate of $.06 per annum. The QCP Preferred Stock restricts the payment of dividends to the common stock holders of QCP until the payment of all accrued but unpaid dividends on the QCP Preferred Stock. Each share of QCP Preferred Stock is entitled to a liquidation preference of $1.00 per share plus all accrued but unpaid dividends. QCP may redeem the QCP Preferred Stock at any time on or after January 14, 2004 at a price equal to the liquidation preference. The proceeds from the sale of the QCP Preferred Stock were used to fund general operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 3 Certificate of Amendment to Articles of Incorporation of Quality Care Pharmaceuticals, Inc. filed January 15, 1999.* 10.1 ALCO Financial Services, LLC Loan Agreement and Security Agreement dated as of April 2, 1999 between ALCO Financial Services, LLC, the Company and Quality Care Pharmaceuticals, Inc.(1) 10.2 Letter Agreement dated April 2, 1999 by ALCO Financial Services, LLC.(1) 10.3 Revolving Credit Note dated April 2, 1999 in the principal amount of up to $1,500,000 made by the Company and Quality Care Pharmaceuticals, Inc.(1) 27 Financial Data Schedule.* - ------------ * Filed herewith (1) To be filed by Amendment b) Reports on Form 8-K No Current Reports on Form 8-K were filed during the period covered by this report. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GOLDEN PHARMACEUTICALS, INC. (Registrant) DATED: April 20, 1999 BY: /s/ John H. Grant ------------------------------ John H. Grant, Vice Chairman (Chief Accounting Officer) 16 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3 Certificate of Amendment to Articles of Incorporation of Quality Care Pharmaceuticals, Inc. filed January 15, 1999.* 10.1 ALCO Financial Services, LLC Loan Agreement and Security Agreement dated as of April 2, 1999 between ALCO Financial Services, LLC, the Company and Quality Care Pharmaceuticals, Inc.(1) 10.2 Letter Agreement dated April 2, 1999 by ALCO Financial Services, LLC.(1) 10.3 Revolving Credit Note dated April 2, 1999 in the principal amount of up to $1,500,000 made by the Company and Quality Care Pharmaceuticals, Inc.(1) 27 Financial Data Schedule.* - -------------- * Filed herewith (1) To be filed by Amendment EX-3 2 CERTIFICATE OF AMENDMENT OF THE ARTICLES OF INCORP 1 EXHIBIT 3 CERTIFICATE OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF QUALITY CARE PHARMACEUTICALS, INC. Pursuant to the provisions of the California General Corporation law, the undersigned officers hereby certify that: A. The name of the corporation is Quality Care Pharmaceuticals, Inc., (the "Corporation"). B. The Articles of Incorporation of the Corporation are amended as follows: Article IV of the Corporation's Articles of Incorporation is hereby amended in its entirety to read as follows: "IV The Corporation is authorized to issue two classes of shares, designated "Common Stock" and "Preferred Stock." The total number of shares of Common Stock that the Corporation is authorized to issue is one million two hundred fifty thousand (1,250,000), and each such share shall have no par value. The total number of shares of Preferred Stock that the Corporation is authorized to issue is twelve million (12,000,000), and each such share shall have no par value. The Board of Directors is authorized to provide for the issuance of the shares of Preferred Stock in series, to establish the number of shares to be included in such series, and to fix the designation, preferences, privileges, rights, and restrictions of the shares of each such series. The designation, preferences, privileges, rights and restrictions with respect to the Corporation's Series A Redeemable Convertible Preferred Stock shall be as follows: SERIES A PREFERRED STOCK 1. Designation. One million (1,000,000) shares of the Preferred Stock authorized above are designated Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock"). 2. Dividends. The holders of shares of Series A Preferred Stock shall be entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend or other distribution (payable other than in Common Stock of this Corporation) on the Common Stock of this Corporation. Dividends on each share of Series A 2 Preferred Stock shall be at the rate of $.06 per annum whenever funds are legally available therefor, payable quarterly when and as declared by the Board of Directors. Commencing on the quarter ending May 31, 1999, such dividends shall accrue and be deemed to accrue from day to day whether or not earned or declared, and shall be cumulative so that if at any time after May 31, 1999 such dividends on the Series A Preferred Stock shall not have been paid or declared and set apart for payment before any dividend shall be paid on or declared or set apart to any holders of shares of Common Stock and before any purchase or acquisition of any Common Stock is made by this Corporation except the repurchase of shares of Common Stock from officers and employees of this Corporation (or their transferees) upon termination of employment of such employees. An accumulation of dividends on the Series A Preferred Stock shall not bear interest. In the event that this Corporation shall have cumulative accrued and unpaid dividends outstanding immediately prior to, and in the event of, a conversion of Series A Preferred Stock (as provided in Section 5 hereof), such dividends shall, be converted into Common Stock in accordance with, and pursuant to the terms specified in, Section 5 hereof. 3. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, the holders of the shares of the Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether from capital, surplus or earnings, before any distribution of assets shall be made to the holders of the Common Stock or junior stock, an amount equal to one dollar ($1.00) per share plus any accumulated unpaid dividends. If upon liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of the Series A Preferred Stock the full amounts to which they respectively shall be entitled, then the holders of the Series A Preferred Stock shall share ratably in any such distribution of assets of the Corporation according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to said shares were paid in full. A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Corporation, or a series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of (each individually referred to herein as a "Change-in-Control"), shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 3(a). (b) In the event the Corporation shall propose to take any action of the type described in subparagraph (a) of this Section 3, the Corporation shall, within ten (10) days after the date the Board of Directors approves such action, or twenty (20) days prior to any shareholders' meeting called to approve such action, whichever is earlier, give each holder of shares of the Series A Preferred Stock initial written notice of the proposed action. Such initial written notice shall describe the material terms and conditions of such proposed action, including a description of the stock, cash and property to be received by the holders of shares of the Series A Preferred Stock upon consummation of the proposed action and the date of delivery thereof. If any material change in the facts set forth in the initial notice shall occur, 3 the Corporation shall promptly give written notice to each holder of shares of the Series A Preferred Stock of such material change. (c) The Corporation shall not consummate any proposed action of the type described in subparagraph (a) of this Section 3 before the expiration of thirty (30) days after the mailing of the initial notice or ten (10) days after the mailing of any subsequent written notice, whichever is later; provided that any such 30-day or 10-day period may be shortened upon the written consent of the holders of all of the outstanding shares of the Series A Preferred Stock. (d) In the event the Corporation shall propose to take any action of the type described in subparagraph (a) of this Section 3 which will involve the distribution of assets other than cash to the holders of shares of the Series A Preferred Stock, the Corporation shall promptly engage an independent competent appraiser to determine the value of the assets to be distributed to the holders of shares of the Series A Preferred Stock. The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice of the appraiser's valuation to each holder of shares of the Series A Preferred Stock. 4. Redemption. (a) At any time after January 14, 2004, the Corporation may, at the option of the Board of Directors upon satisfaction of the terms and conditions as stated herein, from any source of funds legally available therefor, redeem in whole or in part the Series A Preferred Stock by paying in cash therefor a sum equal to the amounts set forth in Section 3(a) in the same manner as if there had occurred a liquidation of this Corporation on the date of the redemption under this Section 4 (such total amount is hereinafter referred to as the "Redemption Price"). (b) In the event of any redemption of only a part of the then outstanding Series A Preferred Stock, this Corporation shall effect such redemption pro rata according to the number of shares held by each holder thereof. (c) At least fifteen (15) but not more than thirty (30) days prior to the date fixed for any redemption of Series A Preferred Stock (the "Redemption Date"), written notice shall be mailed, postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of Series A Preferred Stock to be redeemed, at the address last shown on the records of this Corporation for such holder or given by the holder to this Corporation for the purpose of notice or if no such address appears or is given at the place where the principal executive office of this Corporation is located, notifying such holder of the election of this Corporation to redeem such shares, specifying the Redemption Date, the Redemption Price, the place at which payment may be obtained and the date on which such holder's Conversion Rights (as hereinafter defined) as to such shares terminate and calling upon such holder to surrender to this Corporation, in the manner and at the place designated, his or her certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). On or after the Redemption Date, each holder of Series A Preferred Stock to be redeemed shall surrender to this Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be cancelled. In the event less than all the shares represented by 4 any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (d) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all dividends on the Series A Preferred Stock designated for redemption in the Redemption Notice shall cease to accrue, all rights of the holders of such shares as holders of Series A Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A Preferred Stock on any Redemption Date are insufficient to redeem all shares of Series A Preferred Stock designated to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed. The shares of Series A Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Series A Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. (e) If on or prior to the Redemption Date, this Corporation deposits the Redemption Price of all outstanding shares of Series A Preferred Stock designated for redemption in the Redemption Notice, and not yet redeemed or converted, with a bank or trust company in California as a trust fund for the benefit of the respective holders of the shares designated for redemption and not yet redeemed with irrevocable instructions and authority to such bank or trust company to pay, on and after the date fixed for redemption or prior thereto, the Redemption Price of the Series A Preferred Stock to their respective holders upon surrender of their certificates, then from and after the date of the deposit (although prior to the Redemption Date), the shares so called shall be redeemed and dividends on those shares shall cease to accrue after the Redemption Date. The deposit shall constitute full payment of the shares to their holders, and from and after the date of deposit the shares shall no longer be outstanding and the holders thereof shall cease to be shareholders with respect to such shares, and shall have no rights with respect thereto except the right to receive from the bank or trust company payment of the Redemption Price of the shares without interest upon the surrender of their certificates therefor. The balance of any moneys deposited by this Corporation pursuant to this paragraph remaining unclaimed at the expiration of one (1) year following the Redemption Date shall thereafter be returned to this Corporation upon its request expressed in a resolution of its Board of Directors, after which the holders of shares called for redemption shall be entitled to receive payment of the Redemption Price only from the Corporation. (f) Except as provided in this Section 4, the Series A Preferred Stock shall not be subject to any other right of redemption. 5. Conversion. The holders of the Series A Preferred Stock shall have the conversion rights as follows (the "Conversion Rights"): 5 (a) Each share of the Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such shares, at the principal office of this Corporation or the office of any transfer agent for the Series A Preferred Stock, into validly issued, fully paid and nonassessable shares (calculated to the nearest share, fractions being satisfied by cash payment as provided below) of Common Stock (the "GPI Common Stock") of Golden Pharmaceuticals, Inc. ("GPI") the parent company of the Corporation. Each share of Series A Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of GPI Common Stock as is determined by dividing $1.00 plus the amount of all accrued but unpaid dividends on each share, by the applicable Conversion Price as hereinafter provided in effect at the time of conversion. The initial conversion price shall be $.20 per share, subject to adjustment as hereinafter provided in effect at the time of conversion. (b) In case GPI shall: (i) pay a dividend or make any other distribution upon any stock of GPI payable in GPI Common Stock or securities of GPI convertible into GPI Common Stock; (ii) subdivide its outstanding shares of GPI Common Stock into a greater number of shares; or (iii) issue additional shares of GPI Common Stock or securities of GPI convertible into GPI Common Stock, the Conversion Price shall, concurrently with the effectiveness of such subdivision, be proportionately decreased in accordance with the following formula: the Conversion Price multiplied by the quotient obtained by dividing the aggregate number of shares of GPI Common Stock outstanding immediately prior to such subdivision by the aggregate number of shares of GPI Common Stock outstanding immediately after such subdivision. (c) In case GPI shall declare a reverse stock split, the Conversion Price shall, concurrently with the effectiveness of such reverse stock split, be proportionately increased in accordance with the following formula: the Conversion Price multiplied by the quotient obtained by dividing the aggregate number of shares of GPI Common Stock outstanding immediately after such reverse stock split by the aggregate number of shares of GPI Common Stock outstanding immediately prior to such reverse stock split. (d) In case after the date hereof GPI shall take any action affecting the GPI Common Stock, other than an action described in any of the foregoing subparagraphs (a) through (c) hereof, inclusive, which in the opinion of this Corporation's Board of Directors would have a material adverse effect upon these Conversion Rights, the Conversion Price shall be adjusted in such manner and at such time as such Board may in good faith determine to be equitable in the circumstances. (e) Notwithstanding the above, no adjustment of the Conversion Price, shall be made if such adjustment would be equal to less than one (1%) percent, but such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to one (1%) percent or more. (f) Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of GPI Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of GPI or of any transfer agent for the Series A Preferred Stock and shall give written notice to the Corporation and GPI at their respective offices that he elects to convert the same and shall state in writing therein the name or names in 6 which he wishes a certificate or certificates for shares of GPI Common Stock to be issued. GPI shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock or to his nominee or nominees a certificate or certificates for the number of full shares of GPI Common Stock to which he shall be entitled as aforesaid, together with cash in lieu of any fraction of a share as hereinafter provided. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted (such time being herein called the "Conversion Date"), and the person or persons entitled to receive the shares of GPI Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of GPI Common Stock on the Conversion Date. (g) No fractional shares of GPI Common Stock shall be issued upon conversion, and GPI shall, in lieu of issuing such fractional shares, make payment in cash based upon the then current market price of the fraction of a share. The number of full shares issuable upon conversion shall be computed on the basis of the aggregate number of shares of the Series A Preferred Stock evidenced by certificates surrendered for conversion at one time by the same holder. (h) GPI shall at all times reserve and keep available, out of its authorized but unissued shares of GPI Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock such number of its shares of GPI Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of GPI Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, GPI will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized by unissued shares of GPI Common Stock to such number of shares as shall be sufficient for such purpose. 6. Voting Rights. Except as otherwise provided in Section 8 hereof or by law, the shares of the Series A Preferred Stock shall have no voting rights. 7. Notices. Any notice required by the provisions hereof to be given to the holders of shares of the Series A Preferred Stock shall be deemed given when deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. 8. Protective Provisions. So long as any shares of Series A Preferred Stock are outstanding, this Corporation shall not, without first obtaining the approval (by vote or written consent of the holders of at least a majority of the total number of shares of Series A Preferred Stock outstanding: (a) alter or change the rights, preferences or privileges of the Series A Preferred Stock; or (b) liquidate, dissolve or wind-up the Corporation (as such terms are defined in Section 3(a) hereof); or (c) consummate a transaction that would result in a Change-in-Control; or 7 (d) increase the authorized number of shares of Series A Preferred Stock; or (e) create any new class of shares having preferences over the Series A Preferred Stock as to dividends or assets, unless the purpose of the creation of such class is, and the proceeds to be deemed from the sale and issuance thereof are to be used for, the retirement of all Series A Preferred Stock then outstanding. C. The foregoing amendment of the Articles of Incorporation was duly approved by the Corporation's Board of Directors. D. The foregoing amendment of the Articles of Incorporation was duly approved by the required written consent of the Corporation's shareholders in accordance with the provisions of Section 902 of the California General Corporation Law. The Corporation's total number of shares which were outstanding and entitled to vote or to furnish written consent with respect to the foregoing amendment at the time of the approval thereof was 1,062,500, all of which are of one class. The percentage vote of the number of the aforesaid outstanding shares which is required to vote or furnish written consent in favor of the foregoing amendment is 51%. The number of the aforesaid outstanding shares which voted or furnished a written consent in favor of the foregoing amendment is 1,062,500, and said number exceeded the percentage of the vote or written consent required to approve the foregoing amendment. 8 Signed on January 12, 1999 /s/ Charles R. Drummond -------------------------------------------- Charles R. Drummond, CEO and Chairman Signed on January 12, 1999 /s/ John H. Grant -------------------------------------------- John H. Grant, Secretary and COO On this 12th day of January, 1999, in the City of Santa Ana, in the State of California, each of the undersigned does hereby declare under the penalty of perjury that he signed the foregoing Certificate of Amendment to the Articles of Incorporation in the official capacity set forth beneath his signature, and that the statements set forth in said Certificate are true of his own knowledge. /s/ Charles R. Drummond -------------------------------------------- Charles R. Drummond, CEO and Chairman /s/ John H. Grant -------------------------------------------- John H. Grant, Secretary and COO EX-27 3 FINANCIAL DATA SCHEDULE
5 6-MOS AUG-31-1999 SEP-01-1998 FEB-28-1999 92,128 0 1,394,285 112,409 518,806 2,273,000 2,188,458 1,036,205 3,486,708 8,488,950 0 292,558 0 24,714,858 0 3,486,708 3,692,614 3,692,614 2,830,793 2,830,793 201,549 0 413,917 (1,803,669) 1,258 (1,804,927) 0 0 0 (1,811,174) (.01) (.01)
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