<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 September 30, 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 Rd.
Rockford, IL 61107
- ------------------------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(815) 399 - 2060
- ------------------------------------------------------------------------------
(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 13, 1998 the registrant had 13,983,604 Shares of Common Stock,
$.01 par value, outstanding.
<PAGE> 2
HALSEY DRUG CO., & SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page #
Condensed Consolidated Balance Sheets- 3
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations - Three and 5
nine months ended September 30, 1998 and September 30, 1997
Consolidated Statements of Cash 6
Flows - Nine months ended September 30, 1998
and September 30, 1997
Consolidated Statements of Stockholders' 7
Equity - Nine months ended September 30, 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 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in thousands) 1998 1997
September 30 DECEMBER 31
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 589 $ 26
Accounts Receivable - trade, net of
Allowances for doubtful accounts of $50 and
$ 542 at September 30, 1998 and
December 31, 1997, respectively 681 62
Other receivable -- --
Inventories 5,093 2,456
Prepaid insurance and other current assets 210 274
------- -------
Total current assets 6,573 2,818
PROPERTY PLANT & EQUIPMENT, NET 4,599 4,630
OTHER ASSETS 3,554 219
------- -------
Total Assets $14,726 $ 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
September 30 DECEMBER 31
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ -- $ 159
Due to banks -- 2,476
Notes payable 4,500 4,825
Convertible subordinated debentures -- 2,244
Department of justice settlement 300 200
Accounts payable 965 6,086
Accrued expenses 4,791 7,644
Deferred gain -- 1,900
-------- --------
Total current liabilities 10,556 25,534
LONG-TERM DEBT 30,050 1,990
CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized 40,000,000, 142 140
shares; issued and outstanding 14,234,359 shares
at September 30, 1998 and 14,029,713 shares at
December 31, 1997
Additional paid-in capital 28,225 25,489
Accumulated deficit (53,258) (44,497)
-------- --------
(24,891) (18,868)
Less: Treasury stock - at cost -(439,603 shares (989) (989)
at September 30, 1998 and December 31, 1997) -------- --------
Total stockholders' equity (deficit) (25,880) (19,857)
-------- --------
Total Liabilities and Stockholders' Equity $ 14,726 $ 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)
Amounts in thousands except per share data
<TABLE>
<CAPTION>
September 30
For the nine months ended For the three months ended
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ........................................ $ 6,298 $ 7,352 $ 2,182 $ 2,300
Cost of goods sold ............................... 9,901 10,666 3,611 3,311
------------ ------------ ------------ ------------
Gross profit(loss) ............................ (3,603) (3,314) (1,429) (1,011)
Research & development ........................... 789 766 337 283
Selling, general and administrative expenses ..... 4,860 3,876 1,652 1,194
------------ ------------ ------------ ------------
Loss from operations .......................... (9,252) (7,956) (3,418) (2,488)
Other income ..................................... 1,983 -- 15 --
Interest expense, net ............................ 1,492 809 523 272
------------ ------------ ------------ ------------
Loss before income taxes ..................... (8,761) (8,765) (3,926) (2,760)
------------ ------------ ------------ ------------
Provision for income taxes ....................... -- -- -- --
------------ ------------ ------------ ------------
Net loss ......................................... ($ 8,761) ($ 8,765) ($ 3,926) ($ 2,760)
========== ========== ========== ==========
Net loss per common share ........................ (0.64) (0.66) (0.28) (0.20)
========== ========== ========== ==========
Average number of outstanding shares ............. 13,755,343 13,339,942 13,794,568 13,527,198
========== ========== ========== ==========
</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 NINE MONTHS ENDED
September 30
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net loss .................................................. ($ 8,761) ($ 8,767)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ......................... 1,274 1,156
Provision for loss on accounts receivable ............. (492) --
Loss on disposal of assets ............................ (92) --
Changes in assets and liabilities
Accounts receivable ................................ (127) (273)
Other receivable ................................... -- 1,000
Inventories ........................................ (2,637) (352)
Prepaid insurance and other current assets ......... 64 13
Accounts payable ................................... (5,121) 377
Deferred gain ...................................... (1,900) 1,900
Accrued expenses ................................... (2,737) 2,139
-------- --------
Total adjustments .................................. (11,584) 5,960
-------- --------
Net cash used in operating activities ........... (20,345) (2,807)
-------- --------
Cash flows from investing activities
Capital expenditures .................................. (868) (48)
(Decrease) increase in other assets ................... (1,539) 108
-------- --------
Net cash used in investing activities .............. (2,407) 60
-------- --------
Cash flows from financing activities
Increase (decrease) in notes payable .................. (108) 2,500
Decrease in amount due to banks ....................... (2,476) (719)
Issuance of common stock for payment of interest ...... 258 169
Exercise of warrants of convertible debentures ........ -- 72
Exercise of stock options ............................. -- 305
Issuance of convertible subordinated debentures ....... 25,800 --
Proceeds from issuance of treasury stock .............. -- 100
Increase (decrease) in bank overdraft ................. (159) 285
-------- --------
Net cash provided by financing activities .......... 23,315 2,712
-------- --------
Net (decrease) increase in cash and cash equivalents .. 563 (35)
Cash and cash equivalents at beginning of period ........... 26 118
-------- --------
Cash and cash equivalents at end of period .............. $ 583 $ 83
======== ========
</TABLE>
Supplemental disclosure of noncash activities:
<PAGE> 7
For the 9 months ended September 30, 1998
The Company issued 110,653 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 93,988 shares of common stock as payment for $258,136 of
accrued interest.
The accompanying notes are an integral part of these statements
6
<PAGE> 8
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
Nine months ended September 30, 1998
Amounts in thousands except per share data
<TABLE>
<CAPTION>
(UNAUDITED)
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, 1998 14,029,713 $ 140 $ 25,489 ($ 44,497) (439,603) ($ 989) ($ 19,857)
Net Loss for the nine months
ended September 30, 1998 (8,761) (8,761)
Conversion of notes payable 110,658 2 215 217
Issuance of shares as payment 93,988 -- 258 258
of interest
Deferred debt discount on 2,263 2,263
warrants issued with
convertible debentures
---------- ------ --------- --------- -------- ------- ---------
Balance at September 30, 1998 14,234,359 $ 142 $ 28,225 ($ 53,258) (439,603) ($ 989) ($ 25,880)
========== ====== ========= ========= ======== ======= =========
</TABLE>
The accompanying notes are an integral part of this statement
7
<PAGE> 9
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 nine months ended September 30, 1998 have been made. The
results of operations for the nine months period ended September 30, 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 September 30, 1998, the Company had a working capital deficiency
of approximately $4,039,000 and an accumulated deficit of approximately
$53,258,000. The Company incurred a loss of approximately $8,761,000 during the
nine months ended September 30, 1998.
NOTE 2 - Inventories
(Amounts in thousands)
Inventories consists of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Finished Goods $2,749 $ 789
Work in Process 430 263
Raw Materials 1,914 1,404
------ ------
$5,093 $2,456
====== ======
</TABLE>
8
<PAGE> 10
NOTE 3 - Debt
Borrowings under long-term debt consist of the following at September 30, 1998
and December 31, 1997.
<TABLE>
<CAPTION>
(Amounts in thousands)
1998 1997
---- ----
<S> <C> <C>
Convertible debentures $ 28,300 $ 2,500
Subordinated promissory notes -- 1,125
Other 2,050 5,890
-------- --------
30,350 9,515
Less current maturities (300) (7,525)
-------- --------
$ 30,050 $ 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.
The Company is currently a defendant in a lawsuit claiming breach of its
obligations under a joint venture agreement with the plaintiff concerning
development and sale of a single product. The plaintiff is seeking monetary
damages of $20,000,000. The Company believes that the allegations contained in
the lawsuit are without basis in fact although the final outcome of this lawsuit
cannot be determined at this time, and accordingly, no adjustment has been made
to the consolidated financial statements.
9
<PAGE> 11
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 nine months ended September 30, 1998 or 1997.
10
<PAGE> 12
HALSEY DRUG CO., INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended September 30 Three months ended September 30
Percentage Percentage
Percentage of Net Sales Increase Percentage of Net Sales Increase
1998 as 1998 as
1998 1997 1997 1998 1997 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Sales ........................................... 100.0 100.0 (14.3) 100.0 100.0 (5.1)
Cost of goods sold .................................. 157.2 145.1 (7.2) 165.5 144.0 9.1
----- ----- ---- ----- ----- ---
Gross profit(loss) ............................... (57.2) (45.1) 8.7 (65.5) (44.0) 41.3
Research & Development .............................. 12.5 10.4 3.0 15.4 12.3 19.1
Selling, general and administrative expenses ........ 77.2 52.7 25.4 75.7 51.9 38.4
----- ----- ---- ----- ----- ---
Loss from Operations ............................. (146.9) (108.2) 16.3 (156.6) (108.2) 37.4
Other income ........................................ 31.5 -- -- .7 -- --
Interest expense, net ............................... 23.7 11.0 84.4 24.0 11.8 92.3
----- ----- ---- ----- ----- ---
Loss before income taxes ........................ (139.1) (119.2) 0.0 (179.9) (120.0) 42.2
----- ----- ---- ----- ----- ---
Provision for income taxes .......................... -- -- -- -- -- --
----- ----- ---- ----- ----- ---
Net loss ............................................ (139.1) (119.2) 0.0 (179.9) (120.0) 42.2
====== ====== === ====== ====== ====
</TABLE>
11
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS ENDED SEPTEMBER 30, 1997
Net Sales
The Company's net sales for the nine months ended September 30, 1998 of
$6,298,000 represents a decrease of $1,054,000 (14.3%) as compared to net sales
for the nine months ended September 30, 1997 of $7,352,000. This decrease is a
result of a lack of sufficient working capital necessary to purchase raw
materials. Additionally certain raw materials were in short supply and could not
be obtained. Without adequate inventory, the Company was unable to effectively
market its products.
Cost of Goods Sold
For the nine months ended September 30, 1998, cost of goods sold of
$9,901,000 decreased as compared to the nine months ended September 30, 1997 of
$10,666,000. This is attributable to a reduction in sales combined with certain
reductions in manufacturing costs primarily in direct and indirect labor. Gross
margin as a percentage of sales for the nine months ended September 30, 1998 was
(57.2%) as compared to (45.1)% for the nine months ended September 30, 1997.
This is attributable to a reduction in sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the nine months ended September 30, 1998 and 1997 were 77.2% and 52.7%,
respectively. The increase is due to additional personnel costs primarily in
regulatory and sales as well as increased legal expenses.
Research and Development Expenses
Research and development expenses as a percentage of sales for the nine
months ended September 30, 1998 and 1997 were 12.5% and 10.4%, respectively. The
Company's research and development program continues to concentrate its efforts
toward the submission of new products to the FDA. The Company currently has one
Abbreviated New Drug Application (ANDA) on file with the FDA and expects to file
an additional six ANDA's before the year end.
Net Earnings (Loss)
For the nine months ended September 30, 1998, the Company had a net loss
of $8,761,000 as compared to a net loss of $8,765,000 for the nine months ended
September 30, 1997. Included in results for the nine months ended September 30,
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.
12
<PAGE> 14
THREE MONTHS ENDED SEPTEMBER 30, 1998 VS THREE MONTHS ENDED SEPTEMBER 30, 1997
Net Sales
The Company's net sales for the three months ended September 30, 1998 of
$2,182,000 represents a decrease of $118,000 (5.1%) as compared to net sales for
the three months ended September 30, 1997 of $2,300,000. This decrease is as a
result of a lack of sufficient working capital to purchase raw materials and the
limited supply of certain raw materials that could not be obtained by the
Company.
Cost of Goods Sold
For the three months ended September 30, 1998, cost of goods sold
increased by approximately $300,000 as compared to the three months ended
September 30, 1997. The increase for 1998 is attributable to lower gross margins
associated with the Company's private label business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the three months ended September 30, 1998 and 1997 were 75.7% and 51.9%,
respectively. The increase is due to additional personnel costs primarily in
regulatory and sales as well as increased legal expenses.
Research and Development Expenses
Research and development expenses as a percentage of sales for the three
months ended September 30, 1998 and 1997 was 15.4% and 12.3%, respectively. The
Company's research and development program continues to concentrate its efforts
toward the submission of new products to the FDA. The Company currently has one
Abbreviated New Drug Application (ANDA) on file with the FDA and expects to file
an additional six ANDA's before the year end.
Net Earnings (Loss)
For the three months ended September 30, 1998, the Company had a net
loss of $3,926,000 as compared to a net loss of $2,760,000 for the three months
ended September 30, 1997. This increase is attributable to additional selling,
general and administrative costs as well as higher interest costs associated
with the 5% convertible debentures issued in 1998.
Year 2000 Issue
The "Year 2000" date conversion issue is the result of computer
programs being written using two digits rather than four digits to define an
applicable year within a computer system. The Company has recently conducted a
review of its computer systems and in conjunction with a program to perform an
overall upgrade of its management and accounting computer systems, has installed
new hardware and software that will function properly with respect to the Year
2000 Issue. Management has estimated the cost of this overall program to be
approximately $160,000 which is expected to be completed during the fiscal year.
13
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of
$589,000 as compared to $26,000 at December 31, 1997. The Company had a working
capital deficiency at September 30, 1998 of $4,039,000 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 "Offering"). The
net proceeds to the Company from the Offering, after the deduction of related
Offering expenses, was approximately $19.6 million. In addition, in accordance
with the terms of the Debenture and Warrant Purchase Agreement pursuant to which
the Offering was completed, the Company 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"). In June 1998, the Galen Investor Group exercised the Galen
Option.
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.
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. The net proceeds from the exercise of
the Galen Option have been used, in large part, to fund working capital,
including the purchase of raw materials, payroll expenses and other Company
expenses.
In addition to the net proceeds from the exercise of the Galen Option,
the Company secured bridge financing from Galen Partners III, L.P., Galen
Partners International III, L.P., and Galen Employee Fund III, L.P.
(collectively, the "Galen Group") and an investor in the Offering (the
"Investor") in the aggregate amount of $4,400,000 and $100,000, respectively,
funded through six separate bridge loan transactions, one in each of August and
September, 1998, three in October, 1998 and one in November, 1998 (the "Bridge
Loans"). The Bridge Loans bear interest at 10% per annum and are secured by a
first lien on all of the Company's assets. In consideration for the Bridge
Loans, the Company issued seven-year warrants to the Galen Group and the
Investor to purchase an aggregate of 220,000 shares and 5,000 shares,
respectively, of the Company's common stock at exercise prices ranging from
$1.54 to $2.31 per share, representing the average of the closing prices for the
Company's common stock for the 20 trading days preceding the issuance of the
warrants. The Bridge Loan warrants are substantially identical to those issued
in the Offering.
The maturity date of an aggregate of $2,000,000 of the Bridge Loans is
November 10, 1998. The remaining $2,500,000 in principal amount of the Bridge
Loans provide for a term of 90 days from the date of the subject Bridge Loan and
have maturity dates ranging from January 17, 1999 to February 4, 1999. The
Company and the Galen Group have agreed in principle to amend and restate the
Bridge Loans, among other things, to extend the term of all outstanding Bridge
Loans to May 30, 1999. The definitive loan documents required to extend the
maturity dates of the Bridge Loans are in the process of being prepared and the
Company anticipates that the maturity date extension will be completed on or
about December 1, 1998 in conjunction with the new bridge facility described
below. In consideration for the extension of the maturity date of the Bridge
Loans to May 30, 1999 the Company has agreed in principle to issue common stock
purchase warrants to the Galen Group and the Investor to purchase an aggregate
of approximately 365,000 shares of the Company's common stock (representing
warrants to purchase 50,000 shares for each $1,000,000 in principal amount of
Bridge Loan having a term of 90 days from the date of the making of the Bridge
Loan, less an aggregate of 225,000 warrants previously issued in consideration
for the making of the Bridge Loans). In addition, as part of the amendment to
extend the maturity dates of the Bridge Loans, each Bridge Loan will be amended
to substitute the outstanding Bridge Note evidencing each Bridge Loan with a
Bridge Note which will be convertible into the Company's common stock at a
conversion price equal to the average closing price of the Company's common
stock for the 20 trading days prior to the date of issuance of each amended and
restated Bridge Note.
The Bridge Loans were secured by the Company in order to provide
necessary working capital. The Company and Galen have agreed in principle on the
terms of a new bridge facility in a principal amount of $4,000,000 anticipated
to be completed on or about December 1, 1998 (the "New Bridge Facility"). The
New Bridge Facility is anticipated to be identical in all material respects to
the terms of the amended and restated outstanding Bridge Loans described above,
will mature on May 30, 1999 and will include the issuance of warrants to
purchase 50,000 shares for each $1,000,000 in bridge financing having a term of
90 days. Assuming a May 30, 1999 maturity date for the New Bridge Facility (the
anticipated maturity date of the amended and restated Bridge Loans), the Company
will issue warrants to purchase an aggregate of 400,000 shares of the Company's
common stock in consideration
<PAGE> 16
for the extension of the New Bridge Facility. Similar to the amended and
restated outstanding Bridge Loans, the New Bridge Facility will be evidenced by
a note which may be converted into the Company's common stock at an exercise
price equal to the average closing price of the Company's common stock for the
20 trading days prior to the date of issuance of the note.
The additional financing provided by the Galen Group pursuant to the
New Bridge Facility will be sufficient to satisfy a portion of the Company's
working capital requirements over the next twelve months. In order to fund the
balance of its working capital requirements, the Company is actively seeking to
secure a senior revolving line of credit from a banking institution. There can
be no assurance, however, that the Company will be able to obtain such financing
on commercially acceptable terms. In addition, the Company is exploring other
sources of working capital, including the issuance of debt and/or equity
securities as well as joint ventures and marketing alliances. No assurance can
be given that such sources of working capital will be secured on acceptable
terms, if at all. Failure to obtain a line of credit and alternative sources of
financing in the near term will materially adversely affect the Company's
working capital position and financial condition and results of operations.
<PAGE> 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in a complaint filed with the
United States District Court, Eastern District of New York on June 30, 1998 (the
"Complaint") by Quality Products & Services, L.L.C. The Complaint alleges the
existence of a Joint Venture Agreement between the Plaintiff and the Company
concerning the development, manufacturing and marketing of a single product. The
Complaint also alleges that the Company has breached the Agreement by failing to
satisfy its respective obligations defined in the Agreement. The Complaint seeks
monetary damages of approximately $20 million. The Company believes that the
allegations contained in the Complaint are without basis in fact, and that it
has meritorious defenses to each of the allegations. The Company has retained
counsel and intends to vigorously defend this action. To date, the Company has
filed an Answer and Counterclaim to the Complaint and an initial scheduling
conference has been held with the Magistrate to set discovery deadlines.
The Company has filed a third-party complaint against Rosendo Ferran,
the Company's former President, in connection with the Complaint.
Item 2. Changes in Securities and Use of Proceeds
On August 12, 1998, the Company secured a bridge loan from Galen Partners III,
L.P., Galen Partners International III, L.P., and Galen Employee Fund III, L.P.
(collectively, the "Galen Group") in the principal amount of $1,000,000.
Additional bridge loans were also made to the Company by the Galen Group and an
investor in the Company's offering of 5% convertible senior secured debentures
and common stock purchase warrants completed in March 1998 (the "Investor"), in
the aggregate amount of $3,500,000 (inclusive of the August 12, 1998 bridge
loan, collectively the "Bridge Loans"). In consideration for the Bridge Loans,
the Company issued seven-year warrants to the Galen Group and the Investor to
purchase an aggregate of 220,000 shares and 5,000 shares, respectively, of the
Company's common stock at exercise prices ranging from $1.54 to $2.31 per share
(the fair market value of the underlying common stock based on the average
closing price of the common stock as reported by the American Stock Exchange for
the 20 trading days preceding the date of grant of the warrants). The Bridge
Loan warrants are substantially identical to those issued in the Company's March
1998 Debenture and Warrant Offering.
Each of the persons comprising the Galen Group and the Investor re are
accredited investors as defined in Rule 501(a) of Regulation D promulgated under
the Securities Act of 1933, as amended (the "Act"). The Warrants issued in
connection with the Bridge Loans were issued without registration under the Act
in reliance upon Section 4(2) of the Act and Regulation D promulgated
thereunder.
14
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The exhibits required to be filed as part of this
report on form 10-Q are listed in the attached Index.
(b) Reports on Form 8-K. None
15
<PAGE> 19
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 13, 1998 BY:
/s/ Michael K. Reicher
-----------------------------------
Michael K. Reicher
President and Chief
Executive Officer
Date: November 13, 1998 BY:
/s/ Peter A. Clemens
-----------------------------------
Peter A. Clemens
VP & Chief Financial Officer
16
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
No.
<S> <C>
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission
for information only and not filed.
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition At September 30, 1997
(Unaudited) and the Condensed Consolidated Statement of Income for the Nine
Months Ended September 30, 1997 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 589
<SECURITIES> 0
<RECEIVABLES> 731
<ALLOWANCES> 50
<INVENTORY> 5,093
<CURRENT-ASSETS> 6,573
<PP&E> 18,761
<DEPRECIATION> 14,162
<TOTAL-ASSETS> 14,726
<CURRENT-LIABILITIES> 10,556
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> (26,022)
<TOTAL-LIABILITY-AND-EQUITY> 14,726
<SALES> 6,298
<TOTAL-REVENUES> 6,298
<CGS> 9,901
<TOTAL-COSTS> 9,901
<OTHER-EXPENSES> 5,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,492
<INCOME-PRETAX> (8,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,761)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
