SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1997
OR
--- TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________to________________________
COMMISSION FILE NUMBER 1-10113
HALSEY DRUG CO., INC.
---------------------
(Exact name of registrant as specified in its charter)
New York 11-0853640
- --------------------------------------------------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1827 Pacific Street
Brooklyn, New York 11233
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(Address of Principal executive offices) (Zip Code)
(718) 467-7500
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(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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 50 days.
YES NO X
----- ------
As of May 13,1997 the registrant had 13,988,434 Shares of Common Stock, $.01 par
value, outstanding.
<PAGE>
HALSEY DRUG CO., & SUBSIDIARIES
-------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited) Page #
Condensed Consolidated Balance Sheets- 3
March 31, 1997 and December 31, 1996
Condensed Consolidated Statements of 5
Operations - Three months ended March 31, 1997
and March 31, 1996
Consolidated Statements of Cash 6
Flows - Three months ended March 31, 1997
and March 31, 1996
Consolidated Statements of Stockholders' 7
Equity - Three months ended March 31, 1997
Notes to Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(UNAUDITED)
(Amounts in thousands) 1997 1996
MARCH 31 DECEMBER 31
-------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 21 $ 118
Accounts Receivable - trade, net of
allowances for doubtful accounts of $454
at March 31, 1997 and $424 at
December 31, 1996, respectively 421 226
Other receivable -- 1,000
Inventories 3,699 3,758
Prepaid insurance and other current assets 195 252
------- -------
Total current assets 4,336 5,354
PROPERTY PLANT & EQUIPMENT, NET 5,798 6,222
OTHER ASSETS 392 406
------- -------
$10,526 $11,982
======= =======
The accompanying notes are an integral part of these statements
3
<PAGE>
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(Amounts in thousands) 1997 1996
MARCH 31 DECEMBER 31
-------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ 294 $ 286
Due to Banks 2,476 3,195
Notes payable 2,525 1,625
Convertible Subordinated Debentures 2,191 2,173
Department of Justice settlement 2,190 2,168
Accounts payable 4,124 4,533
Accrued expenses 4,880 3,575
-------- --------
Total current liabilities 18,680 17,555
LONG-TERM DEBT -- 1,508
CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized 20,000,000, shares; issued 139 131
and outstanding 13,979,767 shares at March 31,1997 and
13,175,708 shares at December 31, 1996
Additional paid-in capital 25,327 23,316
Accumulated deficit (32,631) (29,484)
-------- --------
(7,165) (6,037)
Less: Treasury stock - at cost -( 449,603 shares at March (989) (1,044)
-------- --------
31, 1997 and 474,603 shares at December 31, 1996)
Total stockholders' equity (deficit) (8,154) (7,081)
-------- --------
$ 10,526 $ 11,982
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
Amounts in thousands except per share data For the Three months ended
----------------------------
March 31
----------------------------
1997 1996
------------ ------------
Net Sales ...................................... $ 2,843 $ 4,166
Cost of goods sold ............................. 4,105 3,749
------------ ------------
Gross profit(loss) .......................... (1,262) 417
Research & Development ......................... 165 358
Selling, general and administrative expenses ... 1,460 1,377
------------ ------------
Loss from operations ........................ (2,887) (1,318)
Interest expense ............................... 260 435
------------ ------------
Loss before income taxes ................... (3,147) (1,753)
Provision for income taxes ..................... -- --
------------ ------------
Net loss ....................................... ($ 3,147) ($ 1,753)
============ ============
Net loss per common share ...................... ($ 0.24) ($ 0.22)
============ ============
Average number of outstanding shares ........... 12,959,342 7,886,101
============ ============
The accompanying notes are an integral part of these statements
5
<PAGE>
HALSEY DRUG CO., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
Amounts in thousands THREE MONTHS ENDED
MARCH 31
------------------
1997 1996
------- -------
Cash flows from operating activities
Net loss ................................................ ($3,147) ($1,753)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ....................... 457 533
Accrued Department of Justice interest .............. 50 59
Changes in assets and liabilities
Accounts receivable .............................. (195) 158
Other receivable ................................. 1,000 --
Inventories ...................................... 59 (191)
Prepaid insurance and other current assets ....... 57 47
Accounts payable ................................. (409) 414
Accrued expenses ................................. 1,305 147
------- -------
Total adjustments ................................ 2,324 1,167
------- -------
Net cash used in operating activities ......... (823) (586)
------- -------
Cash flows from investing activities
Capital expenditures ................................ -- (188)
(Decrease)increase in other assets .................. (1) 33
------- -------
Net cash used in investing activities ............ (1) (155)
------- -------
Cash flows from financing activities
Increase in notes payable ........................... 900 --
Decrease in due to banks ............................ (719) --
Issuance of common stock for payment of interest .... 112 --
Exercise of warrants of convertible debentures ...... 72 --
Exercise of stock options ........................... 254 --
Proceeds from issuance of treasury stock ............ 100 158
Bank overdraft ...................................... 8 480
------- -------
Net cash provided by financing activities ........ 727 638
------- -------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS . (97) 103
Cash and cash equivalents at beginning of period ......... 118 353
------- -------
Cash and cash equivalents at end of period ............... $ 21 $ 250
======= =======
The accompanying notes are an integral part of these statements
6
<PAGE>
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
Three months ended March 31, 1997
Amounts in thousands except per share data
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock, $.01 par value
---------------------------- Additional Treasury stock, at cost
paid-in Accumulated -----------------------
Shares Amount capital deficit Shares Amount Total
----------- ------- ----------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1997 13,175,708 $ 131 $ 23,316 ($ 29,484) (474,603) ($ 1,044) ($ 7,081)
Net Loss for the three months ended (3,147) (3,147)
March 31, 1997
Conversion of convertible subordinated 642,407 7 1,529 1,536
promissory note
Issuance of shares as payment of 34,754 112 112
interest
Sale of treasury stock 25,000 45 25,000 55 100
Exercise of warrants of convertible 22,267 72 72
debentures
Stock options exercised 79,631 1 253 254
----------- ------- ----------- ----------- ----------- -------- ---------
Balance at March 31, 1997 13,979,767 $ 139 $ 25,327 ($ 32,631) (449,603) ($ 989) ($ 8,154)
=========== ======= =========== =========== =========== ======== =========
</TABLE>
The accompanying notes are an integral part of this statement
7
<PAGE>
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HALSEY DRUG CO., INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Halsey Drug Co., Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for the three months ended March 31, 1997 have been made, but the financial
results for the three months period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the full year ended December
31, 1997. The unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto for the year ended December 31, 1996 included in the Company's Annual
Report on Form 10-K.
As of March 31, 1997, the Company has a working capital deficiency of
approximately $14,344,000, has an accumulated deficit of approximately
$32,631,000, has incurred a loss of approximately $3,147,000 during the three
months ended March 31, 1997, and is not in compliance with its financial
covenants pursuant to its banking agreement and its convertible subordinated
debenture agreement. In addition, the Company is delinquent in the payment of
its payroll taxes and the Company's credit agreement with its banks expires June
30, 1997. These factors and other matters as discussed in Annual Report on Form
10-K at December 31, 1996, raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relative to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence. Management's plans with
respect to those conditions include seeking alternative sources of financing. In
this regard, the Company (a) is reviewing several unsolicited expressions of
interest from prospective joint venture partners and investors, (b) plans to
refinance or extend the maturity date of the Company's bank debt, (c) has sold
the rights to one of its products to a major vendor and has received a
commitment for future production of such product and submitted Abbreviated New
Drug Applications ("ANDA") for approval by the Food and Drug Administration
("FDA"). There can be no assurance that management can obtain alternative
sources of financing or obtain approvals for the ANDA's.
Note 2 - Inventories
(Amounts in thousands)
Inventories consists of the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Finished Goods $2,087 $2,121
Work in Process 1,002 1,018
Raw Materials 610 619
------ ------
$3,699 $3,758
====== ======
8
<PAGE>
NOTE 3 - Debt
As per the agreement with Mallinckrodt Acquisition, Inc. (Mallinckrodt), on
January 9,1997, the Bank Group received payment of $1,000,000, towards principal
reduction, interest payments and legal expenses which reduced the principal
balance outstanding to approximately $2,476,000. In addition, during the first
quarter of 1997, the Company borrowed from and issued to several debenture
holders and shareholders, unsecured, demand promissory notes in the amount of
$900,000, bearing interest at 12% per annum, with interest payable quarterly.
During March 1997, pursuant to the agreement with Zatpack, Inc., the convertible
subordinated promissory note in the amount of $ 1,292,000 and accrued interest
of approximately $ 243,000 were converted to common stock.
Borrowings under long-term debt consist of the following at March 31, 1997 and
December 31, 1996.
(Amounts in thousands)
1997 1996
------- -------
Convertible subordinated promissory note $ -- $ 1,508
Subordinated promissory note 1,400 1,400
Other 1,125 225
------- -------
2,525 3,133
Less current maturities (2,525) (1,625)
------- -------
$ -- $ 1,508
======= =======
NOTE 4 - Contingencies
The Company currently is a defendant in several lawsuits involving product
liability claims. The Company's insurance carriers have assumed the defense for
all product liability and other actions involving the Company. The final outcome
of these lawsuits cannot be determined at this time, and accordingly, no
adjustment has been made to the consolidated financial statements.
NOTE 5 - New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share, which is
effective for financial statements for both interim and annual periods ending
after December 31, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this new
standard is not expected to have material impact on the disclosure of earnings
per share in the financial statements.
9
<PAGE>
HALSEY DRUG CO.,INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended
March 31
--------------------------------------------
Percentage Change
Year-to-Year
Percentage of Net Sales Increase (decrease)
----------------------- -------------------
- --------------------------------------------------------------------------------
1997 as
compared to
1997 1996 1996
------ ------ ------
% % %
------ ------ ------
<S> <C> <C> <C>
Net Sales 100.0 100.0 (31.8)
Cost of goods sold 144.4 90.0 (9.5)
------ ------ ------
Gross profit(loss) (44.4) 10.0 (402.6)
Research & Development 5.8 8.6 (53.9)
Selling, general and administrative expenses 51.4 33.0 (6.0)
------ ------ ------
Loss from operations (101.6) (31.6) (119.0)
Interest expense 9.1 10.4 (40.2)
------ ------ ------
Loss before income taxes (110.7) (42.1) (79.5)
Provision for income taxes -- --
------ ------ ------
Net loss (110.7) (42.1) 79.5
====== ====== ======
</TABLE>
10
<PAGE>
- --------------------------------------------------------------------------------
Three months ended March 31, 1997 vs three months ended March 31, 1996
- --------------------------------------------------------------------------------
Net Sales
- ---------
The Company's net sales for the three months ended March 31, 1997 of
$2,843,0000 represents a decrease of $1,323,000 (31.8%) as compared to net sales
for the three months ended March 31, 1996 of $4,166,000. This decrease is as a
result of the removal from the marketplace of four products and the withdrawal
of four ANDA's by the Company, pursuant to a requirement by the FDA, as a
pre-condition to release of the Company from the FDA's Application Integrity
Policy ("AIP").
Cost of Goods Sold
- ------------------
For the three months ended March 31, 1997, cost of goods sold increased by
approximately $356,000 as compared to the three months ended March 31, 1996. The
increase for 1997 is attributable to the reduction in shipments and unabsorbed
manufacturing costs which directly impact upon the Company's cost of sales and
gross margin. Gross margin as a percentage of sales for the three months ended
March 31, 1997 was (44.4%) as compared to 10.0% for the three months ended March
31, 1996.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses as a percentage of sales for
the three months ended March 31, 1997 and 1996 were 51.4% and 33.0%,
respectively.
Research and Development Expenses
- ---------------------------------
Research and development expenses as a percentage of sales for the three
months ended March 31, 1997 and 1996 was 54.9% and 33.1%, respectively. The
Company's research and development program continues to concentrate its efforts
toward the submission of new products to the FDA.
Net Earnings (Loss)
- -------------------
For the three months ended March 31, 1997, the Company had net loss of
$3,147,000 as compared to a net loss of $1,753,000 for the three months ended
March 31, 1996. This decrease is as a result of unabsorbed manufacturing costs
and the removal from the marketplace of four products and the withdrawal of four
ANDA's by the Company, pursuant to a requirement by the FDA, as a pre-condition
to release of the Company from the AIP.
11
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At March 31, 1997, the Company had cash and cash equivalents of $21,000 as
compared to $118,000 at December 31, 1996. The Company had a working capital
deficiency at March 31, 1997 of $14,344,000 and $12,201,000 at December 31,
1996.
The removal from the marketplace of four products and the withdrawal of our
ANDA's pursuant to a requirement by the FDA, as a pre-condition to the release
of the Company from the AIP on December 19, 1996 combined with the lack of
available borrowing under the Company's credit agreement, materially, and
adversely affected the Company cash position and has severely limited the
Company's capital resources.
The Company's Credit Agreement with its banks which expired on December 31,
1996, was extended to June 30, 1997. As per the agreement with Mallinckrodt, on
January 9, 1997, the Bank Group received payment of $1,000,000, towards
principal reduction, interest payments and legal expenses which reduced the
principal balance outstanding to approximately $2,476,000.
12
<PAGE>
SIGNATURES
- -----------
Pursuant to the requirements 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.
HALSEY DRUG CO., INC.
Date: May 20, 1996 BY:s/s Rosendo Ferran
----------------------
Rosendo Ferran
President and Chief
Executive Officer
Date: May 20, 1996 BY:s/s Robert J. Mellage
----------------------
Robert J. Mellage
Corporate Controller
13
<PAGE>
EXHIBIT INDEX
Exhibit Description
No.
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission
for information only and not filed.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition At March 31, 1996
(Unaudited) and the Condensed Consolidated Statement of Income for the Three
Months Ended March 31, 1996 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 21
<SECURITIES> 0
<RECEIVABLES> 875
<ALLOWANCES> 454
<INVENTORY> 3,699
<CURRENT-ASSETS> 4,336
<PP&E> 18,902
<DEPRECIATION> 13,104
<TOTAL-ASSETS> 10,526
<CURRENT-LIABILITIES> 18,680
<BONDS> 0
0
0
<COMMON> 139
<OTHER-SE> 25,327
<TOTAL-LIABILITY-AND-EQUITY> 10,526
<SALES> 2,843
<TOTAL-REVENUES> 0
<CGS> 4,005
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 260
<INCOME-PRETAX> (3,147)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,147)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> 0
</TABLE>
