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 September 30, 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
(Address of Principal executive offices) (Zip Code)
(718) 467-7500
(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 X NO
----- ------
As of November 12, 1997 the registrant had 14,012,410 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
September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of 5
Operations - Three and Nine months ended
September 30, 1997 and September 30, 1996
Consolidated Statements of Cash 6
Flows - Nine months ended September 30, 1997
and September 30, 1996
Consolidated Statements of Stockholders' 7
Equity - Nine months ended September 30, 1997
Notes to Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 11
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
SEPTEMBER 30 DECEMBER 31
------------ -----------
CURRENT ASSETS
Cash and cash equivalents $ 83 $ 118
Accounts Receivable - trade, net of
Allowances for doubtful accounts of $427
and $424 at September 30, 1997 and
December 31, 1996, respectively 499 226
Other receivable 1,000
Inventories 4,110 3,758
Prepaid insurance and other current assets 239 252
------- -------
Total current assets 4,931 5,354
PROPERTY PLANT & EQUIPMENT, NET 5,218 6,222
OTHER ASSETS 298 406
------- -------
$10,447 $11,982
======= =======
The accompanying notes are an integral part of these statements
3
<PAGE>
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(UNAUDITED)
(Amounts in thousands) 1997 1996
SEPTEMBER 30 DECEMBER 31
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ 571 $ 286
Due to Banks 2,476 3,195
Notes payable 4,125 1,625
Convertible Subordinated Debentures 2,227 2,173
Department of Justice settlement 2,190 2,168
Accounts payable 4,910 4,533
Accrued expenses and other liabilities 5,714 3,575
-------- --------
Total current liabilities 22,213 17,555
LONG-TERM DEBT 1,508
DEFERRED GAIN ON SALE OF ASSETS 1,900
CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized 20,000,000, 140 131
shares; issued and outstanding 14,012,410 shares
at September 30,1997 and 13,175,708 shares at
December 31, 1996
Additional paid-in capital 25,434 23,316
Accumulated deficit (38,251) (29,484)
-------- --------
(12,677) (6,037)
Less: Treasury stock - at cost -(449,603 shares at (989) (1,044)
September 30, 1997 and 474,603 shares at December
31, 1996)
-------- --------
Total stockholders' equity(deficit) (13,666) (7,081)
-------- --------
$ 10,447 $ 11,982
======== ========
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
<TABLE>
<CAPTION>
September 30
------------
For the Nine months ended For the three months ended
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales ............................................ $ 7,352 $ 10,580 2,300 $ 2,937
Cost of goods sold ................................... 10,666 12,094 3,311 4,354
------------ ------------ ------------ ------------
Gross profit(loss) ................................ (3,314) (1,514) (1,011) (1,417)
Research & Development ............................... 766 820 283 191
Selling, general and administrative expenses ......... 3,876 4,678 1,194 1,534
------------ ------------ ------------ ------------
Loss from Operations .............................. (7,956) (7,012) (2,488) (3,142)
Interest expense ..................................... 809 1,321 272 442
------------ ------------ ------------ ------------
Loss before income taxes ......................... (8,765) (8,333 (2,760) (3,584)
------------ ------------ ------------ ------------
Provision for income taxes ........................... -- -- -- --
------------ ------------ ------------ ------------
Net loss ............................................. ($ 8,765) ($ 8,333) ($ 2,760) ($ 3,584)
============ ============ ============ ============
Net loss per common share ............................ ($ 0.66) ($ 0.89 ($ 0.20) ($ 0.37)
============ ============ ============ ============
Average number of outstanding shares ................. 13,339,942 9,390,613 13,527,198 9,650,652
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
HALSEY DRUG CO., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
For the Nine months ended
1997 1996
------- -------
Cash flows from operating activities
Net loss ................................................. $ 8,767 $ 8,333
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ........................ 1,156 1,722
Deferred gain on sale of asset ....................... 1,900
Accrued Department of Justicce Interest .............. 129
Changes in assets and liabilities
Accounts receivable ............................... (273) 534
Other receivable .................................. 1,000
Inventories ....................................... (352) 1,738
Prepaid insurance and other current assets ........ 13 126
Accounts payable .................................. 377 268
Accrued expenses and other liabilities ............ 2,139 787
------- -------
Total adjustments ................................. 5,960 5,304
------- -------
Net cash used in operating activities .......... (2,807) (3,029)
------- -------
Cash flows from investing activities
Capital expenditures ................................. (48) (405)
Decrease(increase) in other assets ................... 108 (594)
------- -------
Net cash used in investing activities ............. 60 (999)
------- -------
Cash flows from financing activities
Increase in notes payable ............................ 3,900
Reduction in notes payable ........................... (1,400) (4,111)
Proceeds from issuance of convertible debentures ..... 2,145
Issuance of common stock from conversion of debentures 3,613
Decrease in due to banks ............................. (719)
Issuance of common stock ............................. 169 318
Exercise of warrants of convertible debentures ....... 72 1,514
Exercise of stock options ............................ 305 136
Payment to Department of Justice
Proceeds from issuance of treasury stock ............. 100
Bank overdraft ....................................... 285 567
------- -------
Net cash provided by financing activities ......... 2,712 4,182
------- -------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS .. (35) 154
Cash and cash equivalents at beginning of period .......... 118 353
------- -------
Cash and cash equivalents at end of period ................ 83 507
======= =======
The accompanying notes are an integral part of these statements
6
<PAGE>
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
Nine months ended September 30, 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 Nine months (8,767) (8,767)
ended September 30, 1997
Conversion of convertible 642,407 7 1,529 1,536
subordinated promissory note
Issuance of shares as payment 52,062 1 168 169
of interest
Sale of treasury stock 25,000 45 25,000 55 100
Exercise of warrants of 22,267 72 72
convertible debentures
Stock options exercised 94,966 1 304 305
---------- ------ --------- ---------- ---------- ------- ---------
Balance at September 30, 1997 14,012,410 $ 140 $ 25,434 ($ 38,251) ( 449,603) ($ 989) ($ 13,666)
========== ====== ========= ========== ========== ======= =========
</TABLE>
The accompanying notes are an integral part of this statement
7
<PAGE>
HALSEY DRUG CO., INC. AND SUBSIDIARIES
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 Nine months ended September 30, 1997 have been made, but the financial
results for the six month period ended September 30, 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 September 30, 1997, the Company has a working capital (deficiency) of
approximately ($17,282,000) has a stockholders' equity (deficit) of
approximately ($13,666,000) and has incurred a loss of approximately
($8,765,000) during the Nine months ended September 30, 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 expired 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 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. The
Company has submitted Abbreviated New Drug Applications ("ANDA"), for seven
products, for approval by the Food and Drug Administration ("FDA") and has
received approval on one ANDA for two products on September 25, 1997. 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:
September 30, 1997 December 31, 1996
------------------ -----------------
Finished Goods $ 1,702 $ 2,121
Work In Process 1,319 1,018
Raw Materials 1,089 619
------- -------
$ 4,110 $ 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.
Pursuant to a Letter Agreement with Mallinckrodt, dated September 21, 1997,
debt to Mallinckrodt, in the amount of $1,900,000, relating to certain
subordinated Notes, accrued interest and accounts payable, has been offset by
$1,900,000 due to the Company as part of the Agreement for the sale of certain
assets, dated March 25, 1995.
During the first quarter of 1997, the Company borrowed from and issued to
certain debenture holders and shareholders, unsecured, demand promissory notes
in the amount of $900,000, bearing interest at 12% per annum, with interest
payable quarterly.
Borrowings under long-term debt consist of the following at:
(In thousands) September 30, December 31,
1997 1996
---- ----
Convertible subordinated promissory note -- $ 1,508
Subordinated promissory notes -- 1,400
Other 4,125 225
----- ---
4,125 3,133
Less: current maturities of long-term debt (4,125) (1,625)
------- -------
-- $ 1,508
======= =======
Note 4 - Deferred Gain on Sale of Assets
As per the Agreement with Mallinckrodt, dated March 21, 1995, for the sale
of assets, the Company was to receive payment in the amount of $1,900,000 at the
earliest date of Mallinckrodt receiving certain authorizations from the FDA, or
September 21, 1997. Pursuant to a letter agreement with Mallinckrodt, dated
September 21, 1997, it was agreed between the parties to offset this amount due
to the Company against outstanding Notes (subordinated), accrued interest and
accounts payable due to Mallinckrodt. As a result of this Letter Agreement, the
amount of $1,900,000 has been recorded as a deferred gain on the sale of assets.
This gain will not be realized until March 21, 1998.
NOTE 5 - 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.
A lawsuit was filed against the Company seeking payment of $164,000 in past due
invoices. On August 6, 1997, a Stipulation of Settlement was entered into by the
parties, specifying a fifteen month pay-out.
The Company was named as Defendant in a lawsuit filed on June 5, 1997. The
Complaint seeks payment, in the amount of $35,000, for past due invoices. A
Settlement Agreement reached between the parties on June 18, 1997. The debt was
retired and the matter dismissed on October 10, 1997.
On August 5, 1997, a Stipulation of Dismissal was filed by the Plaintiff in the
matter of Lexington Insurance Company vs. Halsey Drug Co., Inc. 95 CIV 3403.
A lawsuit was filed against the Company, on July 20, 1997, seeking payment of
$9,750 in past due invoices. A Settlement Agreement was reached, specifying
satisfaction of the debt on or before December 31, 1997.
A Landlord-Tenant action was commenced against the Company on March 11, 1997,
for back rent and other charges allegedly due to the Plaintiff. Pursuant to a
Stipulation of Settlement entered into by the parties, all arrearages will be
retired on, or before February 10, 1998.
9
<PAGE>
NOTE 6 - 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.
10
<PAGE>
HALSEY DRUG CO.,INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------
Nine months ended September 30 Three months ended September 30
Percentage Percentage
Change Change
Year-to-Year Year-to-Year
Increase Increase
(decrease) (decrease)
1997 as Percentage of 1997 as
compared to Net Sales compared to
1997 1996 1996 1997 1996 1996
------ ----- ----------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales ................................................... 100.0 100.0 (30.5) 100.0 100.0 (21.7)
Cost of goods sold .......................................... 145.1 114.3 (11.8) 144.0 148.2 (24.0)
------ ----- ------ ------
Gross profit(loss) ....................................... (45.1) (14.3) (118.9) (44.0) (48.2) 28.7
Research & Development ...................................... 10.4 7.8 (6.6) 12.3 6.5 48.2
Selling, general and administrative expenses ................ 52.7 44.2 (17.1) 51.9 52.2 (22.2)
------ ----- ------ ------
Loss from Operations ..................................... (108.2) (66.3) 13.5 (108.2) (106.9) 20.8
Interest expense ............................................ 11.0 12.5 (38.7) 11.8 15.1 (33.4)
------ ----- ------ ------
Loss before income taxes ................................ (119.2) (78.8) 5.2 (120.0) (122.0) 23.0
------ ----- ------ ------
Provision for income taxes .................................. -- -- -- -- -- --
------ ----- ------ ------
Net loss .................................................... (119.2) (78.8) 5.2 (120.0) (122.0) 23.0
====== ===== ====== ======
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
Nine months ended September 30, 1997 vs Nine months ended September 30, 1996
- --------------------------------------------------------------------------------
Net Sales
The Company's net sales for the Nine months ended September 30, 1997 of
$7,352,000 represents a decrease of $3,228,000 (21.7%) as compared to net sales
for the Nine months ended September 30, 1996 of $10,580,000. 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 in October
1996.
Cost of Goods Sold
For the Nine months ended September 30, 1997, cost of goods sold of $
10,666,000 decreased as compared to the Nine months ended September 30, 1996 of
$12,094,000. This is attributable a reduction in sales combined with 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 Nine months ended
September 30, 1997 was (45.1%) as compared to (14.3%) for the Nine months ended
September 30, 1996. This is attributable to a reduction in sales combined with
the unabsorbed manufacturing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the Nine months ended September 30, 1997 and 1996 were 52.8% and 44.2%,
respectively. Selling, general and administrative expenses for 1997 are
$3,876,000 as compared to 1996 of $ 1,534,000. This decrease of $ 802,000 is due
to a reduction in staff as well as other cost reduction methods implemented by
the Company.
Research and Development Expenses
Research and development expenses as a percentage of sales for the Nine
months ended September 30, 1997 and 1996 were 10.4% and 7.8%, respectively. The
Company's research and development program continues to concentrate its efforts
toward the submission of new products to the FDA. The Company has submitted five
Abbreviated New Drug Applications(ANDA's) for seven new products.
On September 25, 1997, the Company received FDA approval for two ANDA's
submitted during 1997. These approvals represent the first ANDA's approved for
the Company, by the FDA, since the Company's release from the FDA's Application
Integrity Policy on December 19, 1996.
Currently, the Company is working on twenty-five additional products which
include six submissions scheduled for this year and twelve submissions scheduled
for 1998.
Net Earnings (Loss)
For the Nine months ended September 30, 1997, the Company had net loss of
$8,765,000 as compared to a net loss of $8,333,000 for the Nine months ended
September 30, 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.
Except for historical matters contained herein, the statements in this
Report are looking forward and are made pursuant to the safe harbor provisions
of the Securities involve risks and uncertainties which may affect Halsey's
business and prospects, including economic, competitive, governmental
technological and other factors discussed in filings with the Securities and
Exchange Commission. No assurance can be given concerning the timing of the
FDA's review of the Company's ANDA's submitted, that the FDA will grant
marketing clearance with respect to such submissions, or that, if such clearance
is obtained, Halsey will be able to successfully commercialize the launching of
Halsey's products.
12
<PAGE>
- --------------------------------------------------------------------------------
Three months ended September 30, 1997 vs Three months ended September 30, 1996
- --------------------------------------------------------------------------------
Net Sales
The Company's net sales for the three months ended September 30, 1997 of
$2,300,000 represents a decrease of ($637,000) (21.7%) as compared to net sales
for the three months ended September 30, 1996 of $2,937,000. 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 in October
1996.
Cost of Goods Sold
For the three months ended September 30, 1997, cost of goods sold were
$3,311,000 as compared to $4,354,000 for 1996. This represents a decrease of
approximately $1,043,000(24.0%). The decrease for 1997 is attributable to the
reduction in shipments 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 September 30, 1997 was (44.00%) as compared to (48.25%) for the three
months ended September 30, 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the three months ended September 30, 1997 and 1996 are 51.9% and 52.2%,
respectively. Selling, general and administrative expenses of $1,194,000
decreased by approximately $340,000 or 22.2% as compared to 1996, which were $
1,534,000. This decrease is due to a reduction in staff as well as other cost
reduction methods implemented by the Company.
Research and Development Expenses
Research and development expenses as a percentage of sales for the three
months ended September 30, 1997 and 1996 are 12.3% and 6.5%, respectively. The
Company's research and development program continues to concentrate its efforts
toward the submission of new products to the FDA. The Company has submitted five
Abbreviated New Drug Applications (ANDA's) for seven new products as of this
date.
On September 25, 1997, the Company received FDA approval for two ANDA's
submitted during 1997. These approvals represent the first ANDA's approved for
the Company, by the FDA, since the Company's release from the FDA's Application
Integrity Policy on December 19, 1996.
Currently, the Company is working on twenty-five additional products which
include six submissions scheduled for this year and twelve submissions scheduled
for 1998.
Net Earnings (Loss)
For the three months ended September 30, 1997, the Company had net loss of
$2,760,000 as compared to a net loss of $3,584,000 for the three months ended
September 30, 1996. This loss 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.
Except for historical matters contained herein, the statements in this
Report are forward looking and are made pursuant to the safe harbor provisions
of the Securities Litigation Reform Act of 1995. Investors are cautioned that
forward looking statements involve risks and uncertainties which may affect
Halsey's business and prospects, including economic, competitive, governmental,
technological and other factors discussed in filings with the Securities and
Exchange Commission. No assurance can be given concerning the timing of the
FDA's review of the Company's ANDA's submitted, that the FDA will grant
marketing clearance with respect to such submissions, or that, if such clearance
is obtained, Halsey will be able to successfully commercialize the launching of
Halsey products.
13
<PAGE>
Liquidity and Capital Resources
At September 30, 1997, the Company had cash and cash equivalents of $83,000
as compared to $118,000 at December 31, 1996. The Company had a working capital
deficiency at September 30, 1997 of $17,282,000 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 has a working capital deficiency of
approximately $17,282,000, a stockholders' equity (deficit) of approximately
$13,666,000, has incurred a loss of approximately $8,765,000 during the Nine
months ended September 30, 1997 and $14,495,000 during the year ended December
31, 1996 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 expired June 30, 1997. The Company has
insufficient resources to meet both its current and long-term obligations. 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. 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 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"). On September 25, 1997, the Company received FDA approval
for two ANDA's submitted during 1997. These approvals represent the first ANDA's
approved for the Company, by the FDA, since the Company's release from the FDA's
Application Integrity Policy on December 19, 1996. There can be no assurance
that management can obtain alternative sources of financing or obtain approvals
for the ANDA's. Failure to obtain alternative sources of financing or infusion
of capital in the near term will have a material adverse effect on the Company's
operations and financial condition.
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 that reduced the
principal balance outstanding to approximately $2,476,000.
Debt
During the second quarter of 1997, the Company received funds, in the
amount of $3,000,000, from the proposed purchaser of the Company's Indiana
facility. These funds were tendered during the due diligence period, as an
unsecured advance against anticipated payment, by the proposed purchaser, at the
consummation of the transaction. In the event that the transaction is not
realized, the funds convert to a non-collaterized, one year loan to the Company.
As per an Agreement with Mallinckrodt, dated March 21, 1995, for the sale of
assets, the Company was to receive payment in the amount of $1,900,000 at the
earliest date of Mallinckrodt receiving certain authorizations from the FDA, or
September 21, 1997. During the third quarter of 1997, pursuant to a letter
agreement with Mallinckrodt, dated September 21, 1997, it was agreed between the
parties to offset the amount due to the Company against outstanding Notes
(subordinated), accrued interest and accounts payable due to Mallinckrodt.
14
<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: November 14, 1997 BY:s/s Rosendo Ferran
--- ------- -----
Rosendo Ferran
President and Chief
Executive Officer
Date: November 14, 1997 BY:s/s Robert J. Mellage
--- ------ -- -------
Robert J. Mellage
Corporate Controller
15
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission
for information only and not filed.
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at September 30, 1996
(Unaudited) and the Condensed Consolidated Statement of Income for the Three
Months Ended September 30, 1996 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 83
<SECURITIES> 0
<RECEIVABLES> 926
<ALLOWANCES> 427
<INVENTORY> 4,110
<CURRENT-ASSETS> 4,931
<PP&E> 18,723
<DEPRECIATION> 13,505
<TOTAL-ASSETS> 10,447
<CURRENT-LIABILITIES> 22,213
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 25,434
<TOTAL-LIABILITY-AND-EQUITY> 10,447
<SALES> 7,352
<TOTAL-REVENUES> 0
<CGS> 10,666
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 809
<INCOME-PRETAX> (8,765)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,765)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> 0.00
</TABLE>
