<PAGE> 1
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, 1998
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)
695 N. Perryville Road
Rockford, Illinois 61107
- --------------------------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(815) 399-2060
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
1827 Pacific Street, Brooklyn, New York 11233
- --------------------------------------------------------------------------------
(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 90 days.
YES |X| NO |_|
As of May 13,1998 the registrant had 13,777,448 shares of Common Stock, $.01 par
value, outstanding.
<PAGE> 2
HALSEY DRUG CO., Inc. & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page #
Condensed Consolidated Balance Sheets- 3
March 31, 1998 and December 31, 1997
Condensed Consolidated Statements of 5
Operations - Three months ended March 31, 1998
and March 31, 1997
Consolidated Statements of Cash 6
Flows - Three months ended March 31, 1998
and March 31, 1997
Consolidated Statements of Stockholders' 7
Equity - Three months ended March 31, 1998
Notes to Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(Amounts in thousands) 1998 1997
MARCH 31 DECEMBER 31
-------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,054 $ 26
Accounts Receivable - trade, net of
allowances for doubtful accounts of $478
at March 31, 1998 and $542 at
December 31, 1997, respectively 95 62
Other receivable 150 --
Inventories 2,526 2,456
Prepaid insurance and other current assets 187 274
------- -------
Total current assets 11,012 2,818
PROPERTY PLANT & EQUIPMENT, NET 4,594 4,630
OTHER ASSETS 3,925 219
------- -------
TOTAL ASSETS $19,531 $ 7,667
======= =======
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE> 4
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(Amounts in thousands) 1998 1997
MARCH 31 DECEMBER 31
-------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ -- $ 159
Due to Banks -- 2,476
Notes payable 3,800 4,825
Convertible Subordinated Debentures -- 2,244
Department of Justice settlement 250 200
Accounts payable 3,032 6,086
Accrued expenses 6,222 7,644
Deferred gain -- 1,900
-------- --------
Total current liabilities 13,304 25,534
LONG-TERM DEBT 25,240 1,990
CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized
20,000,000, shares; issued and
outstanding 14,199,743 shares at March
31,1998 and 13,590,115 shares at December
31, 1997 142 140
Additional paid-in capital 28,112 25,489
Accumulated deficit (46,278) (44,497)
-------- --------
(18,024) (18,868)
Less: Treasury stock - at cost - (439,603
shares at March 31, 1998 and December 31,
1997) (989) (989)
-------- --------
Total stockholders' equity (deficit) (19,013) (19,857)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,531 $ 7,667
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE> 5
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amounts in thousands except per share data For the Three months ended
--------------------------
March 31
--------
1998 1997
---- ----
<S> <C> <C>
Net Sales ...................................... $ 1,895 $ 2,843
Cost of goods sold ............................. 3,332 4,105
------------ ------------
Gross profit (loss) ......................... (1,437) (1,262)
Research & Development ......................... 221 165
Selling, general and administrative expenses ... 1,587 1,460
------------ ------------
Loss from Operations ........................ (3,245) (2,887)
Other (Income) ................................. (1,902) --
Interest expense, net .......................... 438 260
------------ ------------
Loss before income taxes ................... (1,781) (3,147)
Provision for income taxes ..................... -- --
Net loss ....................................... $ (1,781) $ (3,147)
============ ============
Net loss per common share, basic and diluted ... $ (0.13) $ (0.24)
============ ============
Average number of outstanding shares ........... 13,686,379 12,959,342
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE> 6
HALSEY DRUG CO., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amounts in thousands THREE MONTHS ENDED
MARCH 31
--------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss .............................................. $ (1,781) $ (3,147)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ..................... 290 457
Provision for loss on accounts receivable (64) --
Changes in assets and liabilities
Accounts receivable ............................ 31 (195)
Other receivable ............................... (150) 1,000
Inventories .................................... (70) 59
Prepaid insurance and other current assets ..... 87 57
Accounts payable ............................... (3,004) (359)
Deferred gain .................................. (1,900) --
Accrued expenses ............................... (854) 1,305
-------- --------
Total adjustments .............................. (5,634) 2,324
-------- --------
Net cash used in operating activities ....... (7,415) (823)
-------- --------
Cash flows from investing activities
Capital expenditures .............................. (254) --
(Decrease) increase in other assets ............... (1,443) (1)
-------- --------
Net cash used in investing activities .......... (1,697) (1)
-------- --------
Cash flows from financing activities
Increase in notes payable (decrease) .............. (1,025) 900
Decrease in amount due to banks ................... (2,476) (719)
Issuance of common stock for payment of interest .. -- 112
Exercise of warrants of convertible debentures .... -- 72
Exercise of stock options ......................... -- 254
Issuance of convertible subordinated debentures ... 20,800 --
Proceeds from issuance of treasury stock .......... -- 100
Bank overdraft .................................... (159) 8
-------- --------
Net cash provided by financing activities ...... 17,140 727
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 8,028 (97)
Cash and cash equivalents at beginning of period ....... 26 118
-------- --------
Cash and cash equivalents at end of period ............. $ 8,054 $ 21
======== ========
</TABLE>
Supplemental disclosure of noncash activities:
Quarter ended March 31, 1998
The Company issued 110,658 shares of common stock as payment for an outstanding
note payable in the amount of $214,000 and accrued interest of $1,782.
The Company issued 59,094 shares of common stock as payment for $145,636 of
accrued interest.
The accompanying notes are an integral part of these statements
6
<PAGE> 7
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Three months ended March 31, 1998
Amounts in thousands except per share data
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock, $.01 par value Treasury stock, at cost
---------------------------- -----------------------
Additional
Paid-in Accumulated
Shares Amount Capital Deficit Shares Amount Total
------ ------ --------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1998 14,029,718 $ 140 $ 25,489 $ (44,497) (439,603) $ (989) $ (19,857)
Net Loss for the three
months ended March 31, 1998 (1,781) (1,781)
Conversion of
notes payable 110,658 2 215 217
Issuance of shares as
payment of interest 59,372 -- 145 145
Deferred debt discount on
warrants issued with
convertible debentures 2,263 2,263
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1998 14,199,743 $ 142 $ 28,112 $ (46,278) (439,603) $ (989) $ (19,013)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement
7
<PAGE> 8
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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
to present fairly the financial position, results of operations and changes in
cash flows for the three months ended March 31, 1998 have been made. The results
of operations for the three months period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the full year
ended December 31, 1998. 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, 1997 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
As of March 31, 1998, the Company had a working capital deficiency of
approximately $2,292,000 and an accumulated deficit of approximately
$46,278,000. The Company has incurred a loss of approximately $1,781,000 during
the three months ended March 31, 1998.
Note 2 - Inventories
(Amounts in thousands)
Inventories consists of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Finished Goods $ 832 $ 789
Work in Process 186 263
Raw Materials 1,508 1,404
------- -------
$ 2,526 $ 2,456
======= =======
</TABLE>
8
<PAGE> 9
NOTE 3 - Debt
Borrowings under long-term debt consist of the following at March 31, 1998 and
December 31, 1997.
<TABLE>
<CAPTION>
(Amounts in thousands)
1998 1997
------- ------
<S> <C> <C>
Convertible debentures $23,300 $2,500
Subordinated promissory notes 325 1,125
Other 5,665 5,890
------- ------
29,290 9,515
Less current maturities (4,050) (7,525)
------- ------
$25,240 $1,990
======= ======
</TABLE>
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 - Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income, in the first
quarter of 1998, which requires companies to disclose comprehensive income
separately of net income from operations. Comprehensive income is defined as the
change in equity during the period from transactions and other events and
circumstances from non-ownership sources. It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The adoption of this statement had no effect on the
Company for the quarters ended March 31, 1998 or 1997.
9
<PAGE> 10
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)
- -------------------------------------------------------------------------------------------
1998 as
compared to
1998 1997 1997
---- ---- ----
% % %
- - -
<S> <C> <C> <C>
Net Sales 100.0 100.0 (33.3)
Cost of goods sold 175.8 144.4 (18.8)
----- ------
Gross profit (loss) (75.8) (44.4) (13.9)
Research & Development 11.7 5.8 3.4
Selling, general and administrative expenses 83.7 51.4 8.7
----- ------ -----
Loss from operations (171.2) (101.6) (12.4)
Other (income) (100.4) -- --
Interest expense 23.1 9.1 68.5
----- ------ -----
Loss before income taxes (93.9) (110.7) (43.4)
Provision for income taxes -- -- --
----- ------ -----
Net loss (93.9) (110.7) (43.4)
===== ====== =====
</TABLE>
10
<PAGE> 11
- --------------------------------------------------------------------------------
Three months ended March 31, 1998 vs three months ended March 31, 1997
- --------------------------------------------------------------------------------
Net Sales
The Company's net sales for the three months ended March 31, 1998 of
$1,895,000 represents a decrease of $948,000 (33.3%) as compared to net sales
for the three months ended March 31, 1997 of $2,843,000. This decrease is as a
result of a lack of sufficient working capital necessary to purchase raw
materials. Without adequate inventory, the Company was unable to effectively
market its products.
Cost of Goods Sold
For the three months ended March 31, 1998, cost of goods sold decreased by
approximately $773,000 as compared to the three months ended March 31, 1997, due
primarily to reduced sales versus the same period in the prior year. Gross
margin as a percentage of sales for the three months ended March 31, 1998 was
(75.8%) as compared to (44.4%) for the three months ended March 31, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the three months ended March 31, 1998 and 1997 were 83.7% and 51.4%,
respectively.
Research and Development Expenses
Research and development expenses as a percentage of sales for the three
months ended March 31, 1998 and 1997 was 11.7% and 5.8%, 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, 1998, the Company had a net loss of
$1,781,000 as compared to a net loss of $3,147,000 for the three months ended
March 31, 1997. Included in results for the three months ended March 31, 1998 is
other income of $1,900,000 that had been recorded in September, 1997 as a
deferred gain on the sale of certain assets to Mallinckrodt Chemical Products,
Inc. ("Mallinckrodt"). This transaction contained certain future requirements
that were met in the first quarter of 1998.
11
<PAGE> 12
Liquidity and Capital Resources
At March 31, 1998, the Company had cash and cash equivalents of $8,054,000
as compared to $26,000 at December 31, 1997. The Company had a working capital
deficiency at March 31, 1998 of $2,292,000 and $22,716,000 at December 31,
1997.
On March 10, 1998, the Company completed a private offering of securities.
The securities issued in the Offering consisted of 5% convertible senior secured
debentures and common stock purchase warrants exercisable for an aggregate of
4,202,020 shares of the Company common stock. The net proceeds to the Company
from the Offering, after the deduction of related Offering expenses, was
approximately $19.6 million.
The net proceeds of the Offering have, in large part, been used to satisfy
a substantial portion of the Company's liabilities and accounts payable. Such
liabilities include the full satisfaction of the Company's Bank indebtedness and
related fees, payment to the landlord of the Brooklyn facility and satisfaction
of outstanding judgements and liens. Such repayments have allowed the Company to
avoid the threatened foreclosure sale by its Banks of the Indiana facility
securing such indebtedness. Additionally, pursuant to agreements reached with
other large creditors in anticipation of the completion of the Offering,
including the Company's landlord and the Department of Justice, the Company has
been able to bring these creditors current and is in compliance with installment
payment agreements providing favorable terms to the Company. Satisfaction of the
Company's current obligations to its landlord of the Brooklyn facility for
accrued and unpaid rent, penalties and expenses has allowed the Company to
renegotiate its lease and avoid eviction. The Offering proceeds has also allowed
the Company to satisfy its outstanding state and Federal payroll tax obligations
and meet current payroll tax obligations.
Based upon Management's belief as to the Company's ability to defer a
portion of the Company's remaining notes and accounts payable and certain other
assumptions, the Company believes that it has approximately $3 million in cash
available for working capital derived from the net proceeds of the Offering. The
Company estimates that such working capital will permit the Company to purchase
needed raw materials and fund near term operating losses for approximately three
months. In order to supplement such working capital, the Company is in the
process of negotiating with a banking institution to secure a $5 million line of
credit. In addition, in accordance with the terms of the Debenture and Warrant
Purchase Agreement pursuant to which the Offering was completed, the Company has
granted the Galen Investor Group an option to invest an additional $5 million in
the Company at any time within eighteen months from the date of the closing of
the Offering in exchange for Debentures and Warrants having terms identical to
those issued in the Offering (the "Galen Option"). Galen has expressed an
indication of interest to exercise the Galen Option in the event the Company is
in need of additional capital. No assurance can be given, however, that the
Company will be successful in securing the $5 million line of credit or that the
Galen Option will be exercised. In the event the Company is successful in
securing the line of credit or in the event the Galen Option is exercised, the
Company believes that it will have sufficient working capital to fund operations
for at least the next twelve months.
PART II
Item 2. Changes in Securities and Use of Proceeds
On March 10, 1998, the Company consummated a private offering of
securities for an aggregate purchase price of $20.8 million (the "Offering").
The securities issued in the Offering consisted of 5% convertible senior
secured debentures (the "Debentures") and common stock purchase warrants (the
"Warrants") exercisable for an aggregate of 4,202,020 shares of the Company's
common stock, $.01 par value per share (the "Common Stock"). The Debentures and
Warrants were issued by the Company pursuant to a certain Debenture and Warrant
Purchase Agreement dated March 10, 1998 (the "Purchase Agreement") by and among
the Company, Galen Partners III, L.P., Galen Partners International III, L.P.
Galen Employee Fund III, L.P. (collectively "Galen") and each of the Purchasers
listed on the signature page thereto (inclusive of Galen, collectively, the
"Galen Investor Group").
Each of the Purchasers comprising the Galen Investor Group were
accredited investors as defined in Rule 501(a) of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Act"). The Debentures and
Warrants issued in the Offering were issued without registration under the Act
in reliance upon Section 4(2) of the Act and Regulation D promulgated
thereunder.
HKS & Company, Inc., a registered broker-dealer, acted as placement
agent in connection with the Offering. In consideration for the services of HKS
& Company, Inc., the Company paid $990,000, representing 5% of the gross
proceeds of the Offering. Mr. Hemant K. Shah, the sole shareholder of HKS &
Company, Inc., invested the entire amount of such fee for the purchase of
Debentures and Warrants in the Offering.
Reference is made to the Company's Current Report on Form 8-K as filed
with the Securities Exchange Commission on March 24, 1998 for a description of
the terms and provisions of the Debentures, the Warrants and the Purchase
Agreement.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits required to be filed as part of this Report on form
10-Q are listed in the attached Exhibit Index.
(b) The Company filed a Current Report on form 8-K with the Securities
and Exchange Commission on March 24, 1998 (the "Form 8-K"). The Form 8-K
disclosed under Item 1 of such Form the change of control in the registrant
which occurred on March 10, 1998 in connection with the completion of the
Offering of the Debentures and the Warrants described in Part II, Item 2 above.
12
<PAGE> 13
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 14, 1998 BY: s/s Michael K. Reicher
-------------------------------------
Michael K. Reicher
President and Chief
Executive Officer
Date: May 14, 1998 BY: s/s Peter A. Clemens
-------------------------------------
Peter A. Clemens
VP & Chief Financial Officer
13
<PAGE> 14
EXHIBIT INDEX
Exhibit No. Description Page No.
- ---------- ----------- --------
27.1 Financial Data Schedule (submitted electronically to --
the Securities and Exchange Commision for information
only and not filed).
99.1 Current Report on Form 8-K as filed with the Securities --
and Exchange Commission on March 24, 1998.(1)
- ---------------
(1) Previously filed with the Commission via EDGAR on March 24, 1998.
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,
1997(Unaudited) and the Condensed Consolidated Statement of Income for the Three
Months Ended March 31, 1998(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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,054
<SECURITIES> 0
<RECEIVABLES> 723
<ALLOWANCES> 478
<INVENTORY> 2,526
<CURRENT-ASSETS> 11,012
<PP&E> 18,433
<DEPRECIATION> 13,839
<TOTAL-ASSETS> 19,531
<CURRENT-LIABILITIES> 13,304
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> (19,155)
<TOTAL-LIABILITY-AND-EQUITY> 19,531
<SALES> 1,895
<TOTAL-REVENUES> 1,895
<CGS> 3,332
<TOTAL-COSTS> 3,332
<OTHER-EXPENSES> 1,808
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 438
<INCOME-PRETAX> (1,781)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,781)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,781)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
