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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-2
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION 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)
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NEW YORK 11-0853640
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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695 NORTH PERRYVILLE ROAD, CRIMSON BUILDING NO. 2, ROCKFORD, ILLINOIS 61107
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (815) 399-2060
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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COMMON STOCK, PAR VALUE $0.01 THE AMERICAN STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
NONE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 1999, the registrant had 14,260,711 Common Stock, par value
$0.01, outstanding. Based on the closing price of the Common Stock on March 15,
1999 ($1 3/16), the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $16,890,000.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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CONTENTS
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PART II
Item
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 4
Item
8. Financial Statements and Supplementary Data................. 7
PART IV
Item
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 7
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report under the captions Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," Item
1, "Business", Item 3, "Legal Proceedings" and elsewhere in this Report
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Halsey Drug Co., Inc. ("Halsey" or the "Company"), or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: changes in general economic and business
conditions; loss of market share through competition; introduction of competing
products by other companies; the timing of regulatory approval and the
introduction of new products by the Company; changes in industry capacity;
pressure on prices from competition or from purchasers of the Company's
products; regulatory changes in the generic pharmaceutical manufacturing
industry; regulatory obstacles to the introduction of new products that are
important to the Company's growth; availability of qualified personnel; the loss
of any significant customers; and other factors both referenced and not
referenced in this Report. When used in this Report, the words "estimate,"
"project," "anticipate," "expect," "intend," "believe," and similar expressions
are intended to identify forward-looking statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements set forth under this caption constitute "forward-looking
statements" within the meaning of the Reform Act. See "Special Note Regarding
Forward-Looking Statements " on page 1 of this Report for additional factors
relating to such Statements.
OVERVIEW
The Company reported a net loss of $12,724,000 or $.92 per share for the
year ended December 31, 1998 as compared with the net loss of $15,015,000 or
$1.12 per share for 1997. Sales for the year ended December 31, 1998 were
approximately $8,841,000 as compared to sales of approximately $9,088,000 for
1997. Notwithstanding these results, the Company had the following achievements
in 1998:
- Received infusion of capital enabling the Company to settle past
obligations and provide for future opportunities.
- Reestablished itself in the marketplace as a dependable supplier of
quality products, expanded its customer base and reduced reliance upon a
single customer.
- Reestablished relationships with suppliers.
- Received approval from the FDA of two ANDA's, submitted five others for
approval and continued development on additional products for submission
in 1999.
- Discontinued certain non-core operations and reduced the workforce by
approximately 25%.
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RESULTS OF OPERATIONS
The following chart reflects expenses, earnings, income, losses and profits
expressed as a percentage of net sales for the years 1998, 1997 and 1996.
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PERCENTAGE CHANGE
YEAR-TO-YEAR
INCREASE (DECREASE)
PERCENTAGE OF NET SALES YEARS ENDED
YEAR ENDED DECEMBER DECEMBER 31,
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1998 1997 1996 1997 TO 1998 1996 TO 1997
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Net sales.............................. 100% 100% 100.0% (2.7) (26.6)
Cost of Goods.......................... 143.8 169.5 135.9 (17.5) (8.47)
Gross Profit........................... (43.8) (69.5) (35.9) (38.7) 42.1
Research & Development................. 7.4 10.8 15.0 (33.5) 47.2
Selling, general and administrative
expense.............................. 91.4 69.4 60.5 29.5 (15.7)
(Loss) from operations................. (142.5) (149.7) (111.4) (6.7) (1.3)
Interest expense....................... 22.0 12.6 13.9 70.1 (33.0)
Other (income) expenses................ (20.6) 2.9 (8.2) -- (126.4)
(Loss) before income taxes............. (143.9) (165.2) (117.1) (14.6) 3.6
Net (loss)............................. (143.9)% (165.2)% (117.1)% (14.6)% 3.6%
====== ====== ======
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NET SALES
Net sales for 1998 of $8,841,000 represents a decrease of $247,000 as
compared to net sales for 1997. The decrease is attributable in part to a
reduction in toll manufacturing revenue from Mallinckrodt of approximately
$878,000 from the prior year. Additionally, the Company was unable to market
successfully to the retail pharmacy marketplace until the third quarter of 1998
because during fiscal 1996 and 1997, the Company had failed to pay required
rebates to state Medicaid agencies. This caused those states to deny medicaid
reimbursement to the retail pharmacies on their sales of the Company's products.
Commensurate with the infusion of new capital and management in March, 1998, the
Company began reestablishing itself in good standing with all states. In April
1998, the Company entered into a new contract with the Health Care Finance
Authority ("HCFA") and paid outstanding rebates due to various states. The
states completed the reinstatement of the Company on their medicaid
reimbursement by July, 1998. The Company has been in good standing with HCFA and
the individual states since July 1998 and expects this past non-compliance will
have no impact on future results of operations or liquidity. Also during much of
1998, the Company experienced difficulty in obtaining certain raw materials
which reduced sales. These shortages were remedied by December 31, 1998.
Net sales for 1997 of $9,088,000 represents a decreased of $3,291,000 as
compared to net sales for 1996. This decrease is primarily attributable to a
lack of sufficient working capital necessary to purchase raw materials. Without
adequate inventory, the Company was unable to satisfy customer orders in a
timely fashion and caused customers to procure products from competitors.
The manufacturing and record keeping problems of the Company that led to
its being placed on the FDA's Application Integrity Policy List in 1991 were
rectified in 1993 and have no ongoing adverse effect on the Company's current or
future expected results of operations or liquidity.
GROSS MARGINS
The Company's gross margin for 1998 of (43.8)% is a 38.7% improvement over
gross margin for 1997. This improvement is due, in part, to the elimination of
non-core manufacturing operations in California, tighter inventory controls and
a general reduction in manufacturing labor. Additionally, the Company's revenues
in 1998 from sales to Mallinckrodt under a toll manufacturing agreement
decreased by approximately $878,000. The gross margins on these products were
substantially less than on the Company's other products.
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The Company's gross margin for 1997 of (69.5)% is a 42.1% reduction over
gross margin for 1996. This deterioration occurred because the Company failed to
react quickly enough to falling sales by decreasing manufacturing expenses.
Additionally, the Company incurred approximately $1,572,000 of manufacturing
costs in operating non-core facilities that generated sales of only $495,000.
RESEARCH & DEVELOPMENT EXPENSES
For 1998, research and development expenses amounted to $651,000 as
compared to $979,000 for 1997. The decrease primarily reflects the costs of
biostudies performed in 1997 that were not duplicated in 1998.
For 1997, research and development expenses amounted to $979,000 as
compared to $1,854,000 for 1996. This decrease was a result of reductions in
personnel necessitated by the Company's liquidity crisis.
The Company expects research and development expenses to increase
significantly in 1999 consistent with its plans to increase the number of ANDA
submissions as compared to 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative costs were $8,078,000 (91.4% of net
sales) for 1998 compared to $6,308,000 (69.4% of net sales) for 1997. This
increase is primarily due to costs associated with capital financing ($350,000),
legal expenses and settlement costs of certain litigation ($550,000), severance
costs associated with personnel reductions ($250,000), installation of a new
information system ($100,000) and costs associated with expanded regulatory and
compliance departments ($300,000).
Selling, general and administrative costs were $6,308,000 (69.4% of net
sales) for 1997 compared to $7,486,000 (60.5% of net sales) for 1996. This
decrease is due primarily to a reduction in legal expenses and litigation
settlements as compared to 1996.
INTEREST EXPENSE
Interest expense for 1998 increased by 62% over that of 1997 reflecting the
substantial new debt in the form of $25,800,000 of convertible debentures that
was added in 1998. Interest expense for 1997 decreased 33.0% as compared to 1996
due primarily to the conversion in the latter part of 1996 of $7,740,000 of
convertible debentures bearing interest at 10% into common stock. Interest
expense for 1996 increased 77.8% as compared to 1995 as a result of a higher
level of borrowings due to the issuance of convertible subordinated debentures,
as well as fees payable to the Company's banks.
OTHER INCOME
Included in other income for 1998 is $1,900,000 realized from the sale of
certain assets to Mallinckrodt. This transaction was entered into in 1997 but
the conditions for realization of the gain from the sale were not met until
1998.
PROVISION FOR INCOME TAXES
The Company had no tax (benefit) provision for 1998, 1997 and 1996 since
the available loss carry back to prior years was completely utilized by the net
operating loss for 1993 carry back to the prior three years. At December 31,
1998, the Company has a Federal tax refund claim of approximately $1,000,000
pending before the tax authorities. In the meantime, the IRS is holding up
action to collect approximately $1,300,000 of past due payroll taxes.
Additionally, the Company has negotiated payment plans for approximately
$500,000 of past due state and local taxes. The Company has net operating loss
carryforwards of approximately $45,600,000 which expire in the years 2011
through 2018.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of
$1,850,000 as compared to $26,000 at December 31, 1997. The Company had a
working capital deficit at December 31, 1998 of $(6,665,000).
On March 10, 1998, the Company completed the Offering to Galen Partners
III, L.P., Galen Partners International III, L.P., Galen Employee Fund III, L.P.
(collectively, "Galen") and each of the Purchasers (along with Galen,
collectively the "Galen Investor Group") listed on the signature page to a
certain Debenture and Warrant Purchase Agreement dated March 10, 1998 (the
"Purchase Agreement"). The net proceeds to the Company from the Offering, after
deduction of related Offering expenses, were approximately $19.3 million. 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. In addition, in accordance with the terms of the Purchase
Agreement, the Company granted the Galen Investor Group an option to invest an
additional $5 million in the Company at any time within 18 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 "Option"). In June 1998,
the Galen Investor Group exercised the Option.
The net proceeds of the Offering were, in large part, 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 of arrearages in rent to the landlord of the Brooklyn
facility and satisfaction of outstanding judgments and liens. Additionally,
pursuant to agreements reached with other large creditors in anticipation of the
completion of the Offering, including the Department of Justice, the Company has
been able to bring these creditors current and bring the Company into compliance
with installment payment agreements providing more favorable terms to the
Company. The Offering proceeds also allowed the Company to satisfy its
outstanding state and Federal payroll tax obligations and meet current payroll
tax obligations. The net proceeds from the exercise of the Option were used to
fund working capital, including the purchase of raw materials, payroll expenses
and other Company expenses.
Prior to the completion of the Offering, the Company was in negotiations
with the DOJ to restructure the payment of the $2,500,000 fine that had been
levied under the Plea Agreement in order to address the Company's failure to
satisfy the $125,000 quarterly installments provided for under the Plea
Agreement. On March 30, 1998, the Company and the DOJ signed a Letter Agreement
serving to amend the Plea Agreement relating to the terms of the Company's
satisfaction of the fine assessed under the Plea Agreement. Specifically, the
Letter Agreement provides that the Company will satisfy the remaining $2,150,000
of the fine through the payment of $25,000 on a monthly basis commencing June 1,
1998, plus interest on such outstanding balance (at the rate calculated pursuant
to 28 U.S.C. Section 1961)(currently 5.319%). Such payment schedule would result
in the full satisfaction of the DOJ fine in January, 2006. The Letter Agreement
also provides certain restrictions on the payment of salary or compensation to
any individual in excess of $150,000 without the written consent of the United
States District Court for the District of Maryland, subject to certain
exceptions. In addition, the Letter Agreement requires the prepayment of the
outstanding fine to the extent of 25% of the Company's after tax profit and 25%
of the net proceeds received by the Company on any sale of a capital asset for a
sum in excess of $10,000.
During the period from May 1997 through July 1997, the Company borrowed
approximately $3 million from Mylan Laboratories, Inc. pursuant to five
unsecured, demand promissory notes. The advances made by Mylan Laboratories,
Inc. were part of a proposed investment by Mylan Laboratories, Inc. in the
Company, including the proposed purchase of the Company's Houba Indiana facility
as well as a partial tender offer for the Company's common stock. The Company
used the proceeds of these borrowings for working capital. To date, $236,000 has
been paid by the Company to Mylan against such indebtedness in the form of
product deliveries to Mylan. Pursuant to an agreement reached between the
parties, the Company is required to satisfy interest on the outstanding
indebtedness on an annual basis while the indebtedness remains outstanding and
to satisfy the principal amount of such indebtedness in the form of product
deliveries to Mylan until such time as the indebtedness is satisfied in full.
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The Company secured bridge financing from Galen and certain investors in
the Offering in the aggregate amount of $9,504,111, funded through seven
separate bridge loan transactions between the period from August through and
including December, 1998, as well as an additional bridge loan in March, 1999
(collectively, the "Bridge Loans"). The Bridge Loans were consolidated on
December 2, 1998 pursuant to an Amended, Restated and Consolidated Bridge Loan
Agreement, as amended to permit the March, 1999 bridge loan (the "Consolidated
Bridge Loan"). The Consolidated Bridge Loan bears interest at 10% per annum, is
secured by a first lien on all of the Company's assets and has a maturity date
of May 30, 1999. Approximately $9,120,000 in the principal amount of the
Consolidated Bridge Loan was advanced by Galen with the balance of approximately
$384,000 advanced by certain investors in the Offering. The Consolidated Bridge
Loan is evidenced by 10% convertible senior secured promissory notes which are
convertible at any time prior to maturity into shares of the Company's Common
Stock at a conversion price of approximately $1.368 per share with respect to
approximately $7,820,000 of such indebtedness, $1.331 per share with respect to
approximately $284,000 of such indebtedness, and $1.197 per share with respect
to approximately $1,400,000 of such indebtedness, for an aggregate of 7,099,338
shares of common stock (such conversion prices equal the fair market value of
the Common Stock at the date of issuance of the convertible promissory notes).
In addition, in consideration for the initial extension of the Bridge Loans and
the extension of the maturity dates of the Bridge Loans pursuant to the
consolidation of such loans on December 2, 1998, as amended to permit the March,
1999 bridge loan, the Company issued common stock purchase warrants to Galen and
the other investors in the Consolidated Bridge Loan, to purchase an aggregate of
approximately 1,009,909 shares of the Company's common stock (representing
warrants to purchase 50,000 shares of Common Stock 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). The Bridge Loan warrants are substantially identical
to those issued by the Company in its Debenture and Warrant Offering completed
on March 10, 1998.
The Consolidated Bridge Loan was obtained by the Company in order to
provide necessary working capital. In view of the Company's current cash
reserves and projections for revenues through May 30, 1999, the Company will be
unable to satisfy the Consolidated Bridge Loan in full at the stated maturity
date of May 30, 1999. Galen, the holder of approximately 96% of such
indebtedness, has indicated to the Company a willingness to cooperate in the
restructuring of the indebtedness evidenced by the Consolidated Bridge Loan to
extend the maturity date of such debt and/or convert the debt into common stock
or longer-term convertible indebtedness. The terms of such restructuring will
depend, to a large extent, on the terms and timing of any third-party
investment, as described below. Accordingly, the terms of any such restructuring
have yet to be agreed to by the parties and will be subject to the negotiation
and preparation of definitive agreements.
The Company is in preliminary discussions with an unaffiliated third party
concerning the terms of a proposed investment in the Company in an amount of up
to $15 million, to be funded in three equal increments based on the achievement
of certain milestones. The structure of the investment will likely take the form
of convertible debentures and common stock purchase warrants, similar in many
respects to the debentures and warrants issued by the Company in its March 10,
1998 offering. The discussions with this third party investor are in the
preliminary stages and no assurance can be given that final terms acceptable to
the Company will result and/or that if consummated, that the Company will be
successful in achieving the milestones necessary to fund all or any portion of
the proposed investment.
In the event the Company is successful in restructuring the Consolidated
Bridge Loan and completing a third party investment of the type and size
described above, the Company will have sufficient cash reserves to satisfy its
working capital requirements for at least the next 12 months. The Company is
also 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 third party investment or a bank facility. If the Company is
unable to complete the third party investment described above or obtain other
sources of working capital, including a bank line of credit or proceeds from the
issuance of debt and/or equity securities, the Company's cash reserves will be
sufficient to satisfy the Company's working capital requirements for
approximately two to three months. Failure to obtain a third party investment of
the type described above, a bank line of credit or alternative sources of
financing of a comparable amount in the near term will materially adversely
affect the Company's working capital position and financial condition and
results of operations.
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CAPITAL EXPENDITURES
The Company's capital expenditures during 1998, 1997 and 1996 were
$1,545,000, $85,000 and $390,000. The increase in capital expenditures in 1998
as compared to prior years is attributable to the implementation of certain
equipment and facility upgrades that had been delayed in prior years due to the
Company's cash conservation measures in those years.
YEAR 2000 COMPLIANCE
The Company is aware of issues associated with the programming code in
existing computer systems as the Year 2000 approaches and has undertaken a
compliance program to assess the Company's potential exposure to business
interruptions due to the possible Year 2000 computer software failures,
including necessary remediation and testing. In 1999, the Company installed a
new information system, including hardware and software, which the Company
believes, based on its testing, is Year 2000 compliant.
The Company is dependent upon its customers and suppliers in meeting its
ongoing business needs. The Company's Year 2000 program includes identifying
these third parties and determining, based on both written and verbal
communication, that they are either in compliance or expect to be in compliance.
Lack of compliance by a third party on whom the Company depends for critical
goods or services could have a material adverse effect on the Company's
operations in the absence of the third party's ability to meet the Company's
needs through a contingency plan or the Company's ability to obtain the goods or
services elsewhere.
Currently, the Company believes the largest area of exposure concerning the
Year 2000 lies with third party suppliers of raw materials especially those
located in foreign countries. The contingency plan to mitigate the disruption
among these suppliers includes the buildup of critical raw material inventories.
However, the extent to which this may be required has not yet been determined
and therefore the cost and ability to accumulate such inventories cannot be
estimated at this time.
In the event the Year 2000 issues were to disrupt the Company and its
operations, such disruption may have a material impact on the Company and its
results of operations. Given that no significant issues have arisen based on the
assessments to date, the Company has identified a preliminary contingency plan
and is prepared to make necessary corrections to its systems in the event a
problem should occur. The Company will continue to assess the Year 2000
compliance issue on an on-going basis in an effort to resolve any Year 2000
issues in a timely manner.
IMPACT OF INFLATION
The Company believes that inflation did not have a material impact on its
operations for the periods reported. Significant increases in labor, employee
benefits and other expenses could have a material adverse effect on the
Company's performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted as a separate section of this Report
commencing on page F-1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements -- See Index to Financial Statements.
(b) Reports on Form 8-K
No reports on Form 8 K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K.
(c) Exhibits
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The following exhibits are included as a part of this Annual Report on Form
10-K or incorporated herein by reference.
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EXHIBIT
NUMBER DOCUMENT
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*3.1 Certificate of Incorporation and amendments.
3.2 Restated Bylaws (incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993).
*3.3 Restated By-Laws
10.1 Credit Agreement, dated as of December 22, 1992, among the
Registrant and The Chase Manhattan Bank, N.A. (incorporated
by reference to Exhibit 10.1 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992
(the "1992 Form 10-K")).
10.2 Amendment Two, dated as of January 12, 1994, to Credit
Agreement among the Registrant and The Chase Manhattan Bank,
N.A., together with forms of Stock Warrant and Registration
Rights Agreement (incorporated by reference to Exhibit 10.1.
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 Form 10-K")).
10.3 Amendment Three, dated as of May 31, 1994, to Credit
Agreement among the Registrant and The Chase Manhattan Bank,
N.A. (incorporated by reference to Exhibit 6(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994).
10.4 Amendment Four, dated as of July 1994, to Credit Agreement
among the Registrant and The Chase Manhattan Bank, N.A.
(incorporated by reference to Exhibit 6(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
10.5 Amendment Five, dated as of March 21, 1995, to Credit
Agreement among the Registrant and The Chase Manhattan Bank,
N.A. (incorporated by reference to Exhibit 10.7 to the
Registrant's Current Report on Form 8-K dated March 21, 1995
(the "March 8-K")).
10.5(l) Form of Warrants issued to The Bank of New York, The Chase
Manhattan Bank, N.A. and the Israel Discount Bank
(incorporated by reference to Exhibit 10.5(i) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 Form 10-K")).
10.5(2) Letter Agreement, dated July 10, 1995, among Halsey Drug
Co., Inc., The Chase Manhattan Bank, N.A., The Bank of New
York and Israel Discount Bank of New York (incorporated by
reference to Exhibit 6(a) to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 (the
"June 10-Q")).
10.5(3) Letter Agreement, dated November 16, 1995, among Halsey Drug
Co., Inc., The Chase Manhattan Bank, N.A., The Bank of New
York and Israel Discount Bank of New York (incorporated by
reference to Exhibit 10.25(iv) to the 1995 10-K).
10.5(4) Amendment 6, dated as of August 6, 1996, to Credit Agreement
among Halsey Drug Co., Inc., The Chase Manhattan Bank, N.A.,
The Bank of New York and Israel Discount Bank of New York
(incorporated by reference to Exhibit 10.1 to Amendment No.
1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (the "June 1996 10-Q").
10.5(5) Letter Agreement, dated March 25, 1997 among Halsey Drug
Co., Inc., The Chase Manhattan Bank, as successor in
interest to The Chase Manhattan Bank (National Association),
The Bank of New York and Israel Discount Bank.
10.6 Agreement Regarding Release of Security Interests dated as
of March 21, 1995 by and among the Company, Mallinckrodt
Chemical Acquisition, Inc. and The Chase Manhattan Bank,
N.A. (incorporated by reference to Exhibit 10.9 of the March
8-K).
10.7 Consulting Agreement dated as of September, 1993 between the
Registrant and Joseph F. Limongelli (incorporated by
reference to Exhibit 10.6 to the 1993 Form 10-K).
10.8 Employment Agreement, dated as of January 1, 1993, between
the Registrant and Rosendo Ferran (incorporated by reference
to Exhibit 10.2 to the 1992 Form 10-K).
10.10(1) Halsey Drug Co., Inc. 1984 Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.3 to the 1992 Form
10-K).
10.10(2) Halsey Drug Co., Inc. 1995 Stock Option and Restricted Stock
Purchase Plan (incorporated by reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form S-8, File
No. 33-98396).
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NUMBER DOCUMENT
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10.10(3) Halsey Drug Co., Inc. Non-Employee Director Stock Option
Plan.
10.11 Leases, effective February 13, 1989 and January 1, 1990,
respectively, among the Registrant and Milton J. Ackerman,
Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and
Marilyn Weiss (incorporated by reference to Exhibits 10.6
and 10.7, respectively, to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1989).
10.12 Lease, effective as of April 15, 1988, among the Registrant
and Milton J. Ackerman, Sue Ackerman, Lee Hinderstein,
Thelma Hinderstein and Marilyn Weiss, and Rider thereto
(incorporated by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
10.12(l) Lease, as of October 31, 1994, among Registrant and Milton
J. Ackerman, Sue Ackerman, Lee Hinderstein, Thelma
Hinderstein and Marilyn Weiss, together with Modification,
Consolidation and Extension Agreement (incorporated by
reference to Exhibit 10. 12(i) to the 1995 Form 10-K).
10.13 Asset Purchase Agreement dated as of March 21, 1995 among
Mallinckrodt Chemical Acquisition, Inc. ("Acquisition"),
Mallinckrodt Chemical, Inc., as guarantor and the Registrant
(incorporated by reference to Exhibit 10.1 to the March
8-K).
10.14 Toll Manufacturing Agreement for APAP/Oxycodone Tablets
dated as of March 21, 1995 between Acquisition and the
Registrant (incorporated by reference to Exhibit 10.2 to the
March 8-K).
10.15 Capsule ANDA Option Agreement dated as of March 21, 1995
between Acquisition and the Registrant (incorporated by
reference to Exhibit 10.3 to the March 8-K).
10.16 Tablet ANDA Noncompetition Agreement dated as of March 21,
1995 between the Registrant and Acquisition (incorporated by
reference to Exhibit 10.4 to the March 8-K).
10.17 Subordinated Non-Negotiable Promissory Term Note in the
amount of $1,200,00 dated March 21, 1995 issued by the
Registrant to Acquisition (incorporated by reference to
Exhibit 10.5 to the March 8-K).
10.18 Term Note Security Agreement dated as of March 21, 1995
among the Company, Houba, Inc. and Acquisition (incorporated
by reference to Exhibit 10.6 to the March 8-K).
10.19 Amendment dated March 21, 1995 to Subordination Agreement
dated as of July 21, 1994 between Mallinckrodt Chemical,
Inc., Mallinckrodt Chemical Acquisition, Inc., the
Registrant, The Chase Manhattan Bank (National Association),
Israel Discount Bank of New York, The Bank of New York, and
The Chase Manhattan Bank (National Association)
(incorporated by reference to Exhibit 10.8 to the March
8-K).
10.20 Agreement dated as of March 30, 1995 between the Registrant
and Zatpack, Inc. (incorporated by reference to Exhibit
10.10 to the March 8-K).
10.21 Waiver and Termination Agreement dated as of March 30, 1995
between Zuellig Group, W.A., Inc. and Indiana Fine Chemicals
Corporation (incorporated by reference to Exhibit 10.11 to
the March 8-K).
10.22 Convertible Subordinated Note of the Registrant dated
December 1, 1994 issued to Zatpack, Inc. (incorporated by
reference to Exhibit 10.12 to the March 8-K).
10.23 Agreement dated as of March 30, 1995 among the Registrant,
Indiana Fine Chemicals Corporation, Zuellig Group, N.A.,
Inc., Houba Inc., Zetapharm, Inc. and Zuellig Botanical,
Inc. (incorporated by reference to Exhibit 10.13 to the
March 8-K).
10.24 Supply Agreement dated as of March 30, 1995 between Houba,
Inc. and ZetaPharm, Inc. (incorporated by reference to
Exhibit 10.14 to the March 8-K).
10.25 Form of 10% Convertible Subordinated Debenture (incorporated
by reference to Exhibit 6(a) to the June 10-Q).
10.26 Form of Redeemable Common Stock Purchase Warrant
(incorporated by reference to Exhibit 6(a) to the June
10-Q).
10.27 Form of 10% Convertible Subordinated Debenture (incorporated
by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated December 4, 1995 (the "December
8-K")).
10.28 Form of Redeemable Common Stock Purchase Warrant
(incorporated by reference to Exhibit 4.2 to the December
8-K).
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S>
10.29 Form of 10% Convertible Subordinated Debenture (incorporated
by reference to Exhibit 99 to the June 1996 10-Q).
10.30 Form of Redeemable Common Stock Purchase Warrant
(incorporated by reference to Exhibit 4.1 to Amendment No. 1
to the June 1996 10-Q).
10.31 Form of 5% Convertible Senior Secured Debenture
(incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated March 24, 1998
(the "March 1998 8-K")).
10.32 Form of Common Stock Purchase Warrant (incorporated by
reference to Exhibit 4.2 to the March 1998 8-K).
10.33 Debenture and Warrant Purchase Agreement dated March 10,
1998, by and among the Registrant, Galen Partners III, L.P.
and the other Purchasers listed on the Signature Page
thereto (incorporated by reference to Exhibit 10.1 to the
March 1998 8-K).
10.34 Form of General Security Agreement of Halsey Drug Co., Inc.
dated March 10, 1998 (incorporated by reference to Exhibit
10.2 to the March 1998 8-K).
10.35 Form of Agreement of Guaranty of Subsidiaries of Halsey Drug
Co., Inc. dated March 10, 1998 (incorporated by reference to
Exhibit 10.3 to the March 1998 8-K).
10.36 Form of Guarantor General Security Agreement dated March 10,
1998 (incorporated by reference to Exhibit 10.4 to the March
1998 8-K).
10.37 Stock Pledge Agreement dated March 10, 1998 by and between
the Registrant and Galen Partners III, L.P., as agent
(incorporated by reference to Exhibit 10.5 to the March 1998
8-K).
10.38 Form of Irrevocable Proxy Agreement (incorporated by
reference to Exhibit 10.6 to the March 1998 8-K).
10.39 Agency Letter Agreement dated March 10, 1998 by and among
the Purchasers a party to the Debenture and Warrant Purchase
Agreement, dated March 10, 1998 (incorporated by reference
to Exhibit 10.7 to the March 1998 8-K).
10.40 Press Release of Registrant dated March 13, 1998
(incorporated by reference to Exhibit 99.1 to the March 1998
8-K).
10.41 Current Report on Form 8-K as filed by the Registrant with
the Securities and Exchange Commission on March 24, 1998.
10.42 Letter Agreement between the Registrant and the U.S.
Department of Justice dated March 27, 1998 relating to the
restructuring of the fine assessed by the Department of
Justice under the Plea Agreement dated June 21, 1993.
10.43 Employment Agreement dated as of March 10, 1998 between the
Registrant and Michael K. Reicher.
10.44 Employment Agreement dated as of March 10, 1998 between the
Registrant and Peter Clemens.
*10.45 Amended, Restated and Consolidated Bridge Loan Agreement
dated as of December 2, 1998 between the Company, Galen
Partners III, L.P., Galen Partners International III, L.P.,
Galen Employee Fund III, L.P. and the other signatures
thereto.
*10.46 First Amendment to Amended, Restated and Consolidated Bridge
Loan Agreement dated December 7, 1998 between the Company
and the lenders listed on the signature page thereto.
*10.47 Second Amendment to Amended, Restated and Consolidated
Bridge Loan Agreement dated March 8, 1999 between the
Company and the lenders listed on the signature page
thereto.
*10.48 Form of 10% Convertible Secured Note due May 30, 1999.
*10.49 Form of Common Stock Purchase Warrant issued pursuant to be
Amended, Restated and Consolidated Bridge Loan Agreement.
*10.50 Amended and Restated General Security Agreement dated
December 2, 1998 between the Company and Galen Partners III,
L.P., as Agent.
*10.51 Subordination Agreement dated December 2, 1998 between the
Registrant and Galen Partners III, L.P., as Agent.
*10.52 Agency Letter Agreement dated December 2, 1998 by and among
the lenders a party to the Amended, Restated and
Consolidated Bridge Loan Agreement, as amended.
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S>
*10.53 Lease Agreement dated March 17, 1999 between the Registrant
and Par Pharmaceuticals, Inc.
*10.54 Lease Agreement dated September 1, 1998 between the
Registrant and Crimson Ridge Partners.
*10.55 Manufacturing and Supply Agreement dated March 17, 1999
between the Registrant and Par Pharmaceuticals, Inc.
*10.56 Halsey Drug Co., Inc. 1998 Stock Option Plan.
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 22 to the 1993 Form 10-K).
*23.1 Consent of Grant Thornton LLP, independent certified public
accountants.
*27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for informational
purposes only and not filed.
</TABLE>
- ---------------
* Filed herewith.
11
<PAGE> 13
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Stockholders' Equity.............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8 - F-25
</TABLE>
F-1
<PAGE> 14
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Halsey Drug Co., Inc.
We have audited the accompanying consolidated balance sheets of Halsey Drug
Co., Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Halsey Drug
Co., Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
GRANT THORNTON LLP
New York, New York
March 5, 1999
F-2
<PAGE> 15
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 1,850 $ 26
Accounts receivable -- trade, net of allowances for
doubtful accounts of $280 and $542 in 1998 and 1997,
respectively........................................... 1,439 62
Inventories............................................... 6,354 2,456
Prepaid insurance and other current assets................ 148 274
-------- --------
Total current assets.............................. 9,791 2,818
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 4,787 4,630
DEFERRED PRIVATE OFFERING COSTS............................. 1,335 219
-------- --------
$ 15,913 $ 7,667
======== ========
CURRENT LIABILITIES
Convertible bridge loans.................................. $ 7,533 $ --
Notes payable............................................. 2,817 4,825
Bank overdraft............................................ 159
Due to banks.............................................. 2,476
Convertible subordinated debentures....................... 2,244
Accounts payable.......................................... 1,834 6,086
Accrued expenses.......................................... 3,972 7,232
Deferred gain............................................. 1,900
Other current liabilities................................. 300 200
-------- --------
Total current liabilities.............................. 16,456 25,122
LONG-TERM DEBT, NET......................................... 26,186
OTHER LIABILITIES........................................... 2,224 2,402
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock -- $.01 par value; authorized, 40,000,000
shares; issued 14,443,212 shares and 14,029,718 shares
in 1998 and 1997, respectively......................... 144 140
Additional paid-in capital................................ 29,113 25,489
Accumulated deficit....................................... (57,221) (44,497)
-------- --------
(27,964) (18,868)
Less treasury stock -- at cost (439,603 shares in 1998 and
1997, respectively).................................... (989) (989)
-------- --------
(28,953) (19,857)
-------- --------
$ 15,913 $ 7,667
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 16
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.................................................. $ 8,841 $ 9,088 $ 12,379
Cost of goods sold......................................... 12,712 15,406 16,826
-------- -------- --------
Gross margin.......................................... (3,871) (6,318) (4,447)
Research and development................................... 651 979 1,854
Selling, general and administrative expenses............... 8,078 6,308 7,486
-------- -------- --------
Loss from operations.................................. (12,600) (13,605) (13,787)
Interest expense........................................... (1,946) (1,144) (1,708)
Other income (expense)..................................... 1,802 (264) 1,000
-------- -------- --------
NET LOSS.............................................. $(12,724) $(15,013) $(14,495)
======== ======== ========
Basic loss per common share................................ $ (.92) $ (1.12) $ (1.49)
======== ======== ========
Weighted average number of outstanding shares.............. 13,813 13,434 9,724
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 17
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK, TREASURY STOCK,
$.01 PAR VALUE ADDITIONAL AT COST
--------------- PAID-IN ACCUMULATED ----------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ---------- ----------- ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995............. 8,974 $ 90 $14,459 $(14,989) (500) $(1,100) $ (1,540)
Issuance of common stock conversion of
debentures........................... 3,504 35 6,724 6,759
Issuance of shares as settlement....... 60 262 25 56 318
Issuance of warrants with convertible
subordinated debentures.............. 355 355
Exercise of warrants of convertible
debentures........................... 589 6 1,363 1,369
Stock options exercised................ 49 153 153
Net loss for the year ended December
31, 1996............................. (14,495) (14,495)
------ ---- ------- -------- ------ ------- --------
Balance at December 31, 1996........... 13,176 131 23,316 (29,484) (475) (1,044) (7,081)
Issuance of common stock -- conversion
of debentures........................ 643 7 1,529 1,536
Issuance of shares as payment of
interest............................. 69 1 224 225
Sale of treasury stock................. 25 45 35 55 100
Exercise of warrants of convertible
debentures........................... 22 72 72
Stock options exercised................ 95 1 303 304
Net loss for the year ended December
31, 1997............................. (15,013) (15,013)
------ ---- ------- -------- ------ ------- --------
Balance at December 31, 1997........... 14,030 140 25,489 (44,497) (440) (989) (19,857)
Issuance of common stock -- conversion
of notes payable..................... 110 1 213 214
Issuance of shares as payment of
interest............................. 263 3 592 595
Issuance of common stock -- settlement
of trade payables.................... 40 55 55
Deferred debt discount on warrants
issued with convertible debentures... 2,264 2,264
Net loss for the year ended December
31, 1998............................. (12,724) (12,724)
------ ---- ------- -------- ------ ------- --------
Balance at December 31, 1998........... 14,443 $144 $28,613 $(57,221) (440) $ (989) $(29,453)
====== ==== ======= ======== ====== ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE> 18
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss................................................. $(12,724) $(15,013) $(14,495)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization......................... 1,774 1,733 1,906
Provision for losses on accounts receivable........... (262) 118 144
Provision for loss on investment...................... 500
(Gain) loss on disposal of assets..................... 170 38 (1,000)
Changes in assets and liabilities
Accounts receivable................................. (1,115) 45 1,319
Inventories......................................... (3,898) 1,302 3,958
Prepaid insurance and other current assets.......... 126 165 (96)
Accounts payable.................................... (4,197) 1,851 1,029
Deferred gain....................................... (1,900)
Accrued expenses.................................... (2,665) 4,553 2,913
-------- -------- --------
Total adjustments..................................... (11,967) 9,805 10,673
-------- -------- --------
Net cash used in operating activities................. (24,691) (5,208) (3,822)
-------- -------- --------
Cash flows from investing activities
Capital expenditures..................................... (1,545) (85) (390)
Net proceeds from sale of assets......................... 96
Collection of notes receivable........................... 1,000
-------- -------- --------
Net cash (used in) provided by investing activities... (1,449) 915 (390)
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of notes payable.................. $ 6,495 $ 3,881 $ 25
Proceeds from issuance of common stock................... 318
Reissuance of treasury stock............................. 70
Payments to Department of Justice........................ (178)
Bank overdraft........................................... (159) (127) 73
Due to banks............................................. (2,476)
Payments to minority stockholders........................ (206)
Proceeds from issuance of convertible subordinated
debentures............................................ 25,800 2,500
Proceeds from exercise of stock options and warrants..... 305 153
Proceeds from exercise of warrants....................... 72 1,369
Deferred private offering costs.......................... (1,518) (255)
-------- -------- --------
Net cash provided by financing activities............. 27,964 4,201 3,977
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS......................................... 1,824 (92) (235)
Cash and cash equivalents at beginning of year............. 26 118 353
-------- -------- --------
Cash and cash equivalents at end of year................... $ 1,850 $ 26 $ 118
======== ======== ========
</TABLE>
F-6
<PAGE> 19
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED DECEMBER 31,
(IN THOUSANDS)
Supplemental disclosures of noncash activities:
Year ended December 31, 1998
1. The Company issued 262,836 shares of common stock as payment for
$593,313 in accrued interest.
2. The Company reissued 20,000 shares of common stock as payment for
$25,000 in legal fees and 20,000 shares of common stock as payment for
$30,000 in trade payables.
3. The Company issued 110,658 shares of common stock as payment of
outstanding notes payable in amounts of $214,000 and $1,782 in accrued
interest.
4. The Company issued approximately 4,202,020 warrants (Note A) and
1,009,909 warrants (Note A) valued and recorded in aggregate as
$3,118,000 of unamortized debt discount and a reduction in the related
amount of the obligation.
Year ended December 31, 1997
1. The Company issued 642,407 shares of common stock to Zatpack, Inc. as
payment for an outstanding note payable in the amount of $1,536,000.
2. The Company reissued 25,000 shares of treasury stock as payment for
$30,000 in consulting fees and the receipt of $70,000 in cash.
3. The Company issued 25,000 shares of common stock as payment for
$225,452 in accrued interest.
4. The Company recorded the satisfaction of $1,400,000 of subordinated
promissory notes, related accrued interest of $200,000 and accounts
payable of $300,000 due to Mallinckrodt, in lieu of Mallinckrodt paying
$1,900,000 owed to the Company as described in Note E.
Year ended December 31, 1996
1. The issuance of 3,504,000 shares of the Company's common stock upon
conversion of $6,759,000 of convertible subordinated debentures is
included in common stock and additional paid-in capital.
2. The valuation of the warrants issued in 1996 of $355,000 with
convertible subordinated debentures is included in additional paid-in
capital.
3. The issuance in 1996 of 59,550 shares of the Company's common stock is
valued at $318,000 in connection with litigation settlements.
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 20
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
Halsey Drug Co., Inc. (the "Company"), a New York-based corporation
established in 1935, and its subsidiaries are engaged in the manufacture, sale
and distribution of generic drugs. The Company sells its generic drug products
under its Halsey label and under private-label arrangements with drug store
chains and drug wholesalers throughout the United States.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements follows.
1. Principles of Consolidation and Basis of Presentation
The consolidated financial statements include 100% of the accounts of the
Company and its wholly-owned subsidiaries, Blue Cross Products Co., Inc., Houba,
Inc., Halsey Pharmaceuticals, Inc., and Indiana Fine Chemicals Corporation, The
Medi-Gum Corporation (100% owned). The Medi-Gum Corporation and Halsey
Pharmaceuticals have not commenced operations. All material intercompany
accounts and transactions have been eliminated.
2. Liquidity Matters
As of December 31, 1998, the Company has a working capital deficiency of
approximately $6,665,000, has an accumulated deficit of approximately
$57,221,000 and has incurred a loss of approximately $12,724,000 for the year
then ended.
On March 10, 1998, the Company completed a private offering (the
"Offering") of securities to an investor group ("Galen") consisting of 5%
convertible senior secured debentures due March 15, 2003, and common stock
purchase warrants (with a 5 year life) exercisable for 2,101,010 shares of the
Company's common stock at an exercise price of $1.50 and 2,101,010 shares at an
exercise price of $2.375. The unamortized discount resulting from the issuance
of such warrants ($2,618,000) has been recorded as a reduction of the related
obligation. The net proceeds to the Company from the Offering, after the
deduction of related offering expenses of $1,518,000 for legal fees and
investment banker fees, was approximately $19.3 million. These related offering
costs will be amortized over the remaining five (5) year life of the related
debentures. In addition, in accordance with the terms of the private offering,
during June 1998, Galen invested an additional $5 million in the Company in
exchange for debentures and warrants having terms identical to those issued in
the Offering.
The net proceeds from the Offering and the additional investment have
primarily 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 judgments and liens.
Further, 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 ("DOJ"), the Company has been able to bring these
creditors current and bring the Company in compliance with installment payment
agreements providing more favorable terms to the Company. The offering proceeds
also allowed the Company to satisfy its outstanding state and Federal payroll
tax obligations and meet current payroll tax obligations. The net proceeds from
the exercise of the option were used to fund working capital, including the
purchase of raw materials, payroll expenses and other Company expenses.
The Company secured bridge financing from Galen and certain investors in
the Offering in the aggregate amount of $9,504,111, funded through seven
separate bridge loan transactions between the period from August through and
including December 1998, as well as an additional bridge loan in March 1999
(collectively, the "Bridge Loans"). The Bridge Loans were consolidated on
December 2, 1998 pursuant to an
F-8
<PAGE> 21
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amended, Restated and Consolidated Bridge Loan Agreement, as amended to permit
the March 1999 bridge loan (the "Consolidated Bridge Loan"). The Consolidated
Bridge Loan bears interest at 10% per annum, is secured by a first lien on all
of the Company's assets and has a maturity date of May 30, 1999. Approximately
$9,120,000 in the principal amount of the Consolidated Bridge Loan was advanced
by Galen with the balance of approximately $384,000 advanced by certain
investors in the Offering. The Consolidated Bridge Loan is evidenced by 10%
convertible senior secured promissory notes which are convertible at any time
prior to maturity into shares of the Company's Common Stock at a conversion
price of approximately $1.368 per share with respect to approximately $7,820,000
of such indebtedness, $1.331 per share with respect to approximately $284,000 of
such indebtedness, and $1.197 per share with respect to approximately $1,400,000
of such indebtedness, for an aggregate of 7,099,338 shares of common stock (such
conversion prices equal the fair market value of the Common Stock at the date of
issuance of the convertible promissory notes). In addition, in consideration for
the initial extension of the Bridge Loans and the extension of the maturity
dates of the Bridge Loans pursuant to the consolidation of such loans on
December 2, 1998, as amended to permit the March 1999 bridge loan, the Company
issued common stock purchase warrants to Galen and the other investors in the
Consolidated Bridge Loan, to purchase an aggregate of approximately 1,009,909
shares of the Company's common stock (representing warrants to purchase 50,000
shares of Common Stock 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). The
unamortized discount resulting form the issuance of such warrants ($500,000) has
been recorded as a reduction of the related obligation. The Bridge Loan warrants
are substantially identical to those issued by the Company in its Debenture and
Warrant Offering completed on March 10, 1998.
The Consolidated Bridge Loan was obtained by the Company in order to
provide necessary working capital. In view of the Company's current cash
reserves and projections for revenues through May 30, 1999, the Company will be
unable to satisfy the Consolidated Bridge Loan in full at the stated maturity
date of May 30, 1999. Galen, the holder of approximately 96% of such
indebtedness, has indicated to the Company a willingness to cooperate in the
restructuring of the indebtedness evidenced by the Consolidated Bridge Loan to
extend the maturity date of such debt and/or convert the debt into common stock
or longer-term convertible indebtedness. The terms of such restructuring will
depend, to a large extent, on the terms and timing of any third-party
investment, as described below. Accordingly, the terms of any such restructuring
have yet to be agreed to by the parties and will be subject to the negotiation
and preparation of definitive agreements.
The Company is in preliminary discussions with an unaffiliated third party
concerning the terms of a proposed investment in the Company in an amount of up
to $15 million, to be funded in three equal increments based on the achievement
of certain milestones. The structure of the investment will likely take the form
of convertible debentures and common stock purchase warrants, similar in many
respects to the debentures and warrants issued by the Company in its March 10,
1998 offering. The discussions with this third-party investor are in the
preliminary stages and no assurance can be given that final terms acceptable to
the Company will result and/or that if consummated, that the Company will be
successful in achieving the milestones necessary to fund all or any portion of
the proposed investment.
In the event the Company is successful in restructuring the Consolidated
Bridge Loan and completing the third-party investment of the type and size
described above, the Company will have sufficient cash reserves to satisfy its
working capital requirements for at least the next twelve months. The Company is
also 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 third-party investment or a bank facility. If the Company is
unable to complete the third-party investment described above or obtain other
sources of working capital, including a bank line of credit or proceeds from the
issuance of debt and/or equity securities, the Company's cash reserves will be
sufficient to satisfy the Company's working capital requirements for
approximately two to three months. Failure to obtain a third-party investment of
the type described above, a bank line of credit or alternative sources of
financing of a comparable amount in the near term will materially adversely
affect the Company's working capital position and financial condition and
results of operations.
F-9
<PAGE> 22
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. Inventories
Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
4. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided for in
amounts sufficient to relate the cost of depreciable assets to operations over
their estimated service lives, principally on a straight-line basis. The
estimated lives used in determining depreciation and amortization are:
<TABLE>
<S> <C>
Buildings................................................... 25 years
Machinery and equipment..................................... 5-10 years
Leasehold improvements...................................... 5-10 years
</TABLE>
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
5. Revenue Recognition
Revenues are recognized when products are shipped to customers. Provisions
are recorded for uncollectable accounts receivable.
6. Income Taxes
The Company accounts for income taxes utilizing an asset liability method
for financial accounting and reporting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
7. Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. The Company paid no substantial income
taxes for the years ended December 31, 1998, 1997 and 1996. In addition, the
Company paid interest of approximately $1,946,000, $1,113,000, $1,173,000,
respectively, for the years ended December 31, 1998, 1997 and 1996.
8. Use of Estimates in Consolidated Financial Statements
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
9. Research and Development Costs
All research and development costs, including payments related to licensing
agreements on products under development and research consulting agreements are
expensed when incurred.
F-10
<PAGE> 23
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable (Note I).
11. Stock-Based Compensation
The Company accounts for stock-based compensation under Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation," and continues to apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted stock (Note K).
Equity instruments issued to nonemployees in exchange for goods and/or
services are accounted for under the fair value method of SFAS No. 123.
12. New Pronouncements
Earnings (Loss) Per Share
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128 ("SFAS No. 128"), "Earnings Per Share," which requires public companies
to present basic earnings (loss) per share and, if applicable, diluted earnings
per share. All comparative periods have been restated in accordance with SFAS
No. 128.
The computation of basic earnings (loss) per share of common stock is based
upon the weighted average number of common shares outstanding during the period.
Diluted earnings per share is equal to basic earnings per share for all years
presented as the effect of other potentially dilutive securities would be
antidilutive.
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," which is effective for the Company's year ended December
31, 1998. The statement addresses the reporting and displaying of comprehensive
income and its components. Earnings per share is only reported for net income
and not for comprehensive income and its components. At December 31, 1998, 1997
and 1996, the Company had no items of other comprehensive income.
13. Reclassifications
Certain reclassifications have been made to the 1997 and 1996 presentations
to conform to the 1998 presentation.
NOTE B -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Long-term and Short-term Debt and Convertible Subordinated Debentures
The fair value of the Company's long-term and short-term debt and
convertible subordinated debentures is estimated based upon the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same outstanding maturities. Accordingly, the carrying
amount of these financial instruments approximates their fair value at December
31, 1998 and 1997.
F-11
<PAGE> 24
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.............................................. $2,675 $ 789
Work-in-process............................................. 1,166 263
Raw materials............................................... 2,513 1,404
------ ------
$6,354 $2,456
====== ======
</TABLE>
NOTE D -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment..................................... $12,278 $11,478
Leasehold improvements...................................... 6,103 5,967
Building.................................................... 747 997
Land........................................................ 44 265
------- -------
19,172 18,707
Less accumulated depreciation and amortization.............. 14,385 14,077
------- -------
$ 4,787 $ 4,630
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was approximately $1,122,000, $1,640,000, and $1,562,000, respectively.
NOTE E -- DEBT
Due to Banks
At December 31, 1997 the Company had $2,476,000 under a line of credit
agreement with three participating banks for which the average borrowing rate
for the year then ended was 11.9 %. The agreement contained certain financial
covenants, for which the Company was not in compliance at December 31, 1997.
During March 1998, the Company completely satisfied its bank indebtedness and
terminated the line of credit agreement with its banks.
Notes Payable
At December 31, 1998 and 1997, notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Unsecured promissory demand notes........................... $ 2,817
Subordinated promissory notes............................... $4,825
Bridge Loans (Note A)....................................... 7,533
------- ------
$10,350 $4,825
======= ======
</TABLE>
F-12
<PAGE> 25
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, the Company borrowed from and issued to several debenture
holders and shareholders unsecured, demand promissory notes in the amount of
$1,125,000, bearing interest at 12% per annum, with interest payable quarterly.
These notes were paid in full in 1998.
During the period from May 1997 through July 1997, the Company borrowed
approximately $3 million from Mylan Laboratories, Inc. ("Mylan") pursuant to
five unsecured, demand promissory notes. The advances made by Mylan
Laboratories, Inc. were part of a proposed investment by Mylan in the Company,
including the proposed purchase of the Company's Houba Indiana facility as well
as a partial tender offer for the Company's common stock. The Company used the
proceeds of these borrowings for working capital. To date, $236,000 has been
paid by the Company to Mylan against such indebtedness in the form of product
deliveries to Mylan. Pursuant to an agreement reached between the parties, the
Company is required to satisfy interest on the outstanding indebtedness on an
annual basis while the indebtedness remains outstanding and to satisfy the
principal amount of such indebtedness in the form of product deliveries to Mylan
until such time as the indebtedness is satisfied in full. In 1998, the Company,
in exchange for extending the loan, agreed to grant a warrant to purchase 50,000
shares of the Company's common stock at a price of $1.94 per share. The
estimated fair value of these warrants (using the Black Scholes Pricing Model)
was approximately $56,000 and will be amortized as a charge to operations over
the extension period of the loan. Additionally, the Company began reducing the
loan by supplying product to Mylan. At December 31, 1998, the loan balance was
$2,817,000.
During the fourth quarter of 1997, the Company received $500,000 from an
investor of a proposed joint venture, a demand promissory note bearing interest
at 10% per annum which was secured by the property of Houba. In addition, as
part of a proposed financing agreement, the Company received $200,000 as a
promissory note bearing interest at 8% per annum during the fourth quarter of
1997. Both of these promissory notes were paid in full in 1998.
NOTE F -- CONVERTIBLE SUBORDINATED DEBENTURES AND STOCK WARRANTS
In connection with certain 1995 amendments to the line of credit agreement
described in Note E, the Company issued stock warrants to the bank, expiring
July 17, 2000, to purchase up to 699,696 shares of the Company's common stock at
exercise prices ranging from $1.98 to $2.07 per share. The fair value of the
warrants, $200,000, as determined by the Company's Board of Directors, was
recorded by the Company in 1994 as additional paid-in capital and a discount to
bank debt which was fully amortized through the maturity date, August 31, 1995.
On July 18, 1995, the Company issued 408 units, at $10,000 per unit, in a
private placement of its securities ("July Private Placement"). Each unit
consisted of: (i) a 10% convertible subordinated debenture due July 18, 2000 in
the principal amount of $10,000, interest payable quarterly, and convertible
into shares of the Company's common stock at a conversion price of $2.00 per
share, subject to antidilution provisions, and (ii) 750 redeemable common stock
purchase warrants ("warrants"). Each warrant entitled the holder to purchase one
share of common stock for $2.00, subject to adjustment during the five-year
period commencing July 18, 1995. The warrants were redeemable by the Company at
a price of $.01 per warrant at any time commencing July 18, 1996, provided that
at July 18, 1996, the fair market value of the Company's common stock equals or
exceeds $2.00 per share for the 20 consecutive trading days ending on the third
day prior to the notice of redemption to the holders of the warrant. The
debentures were converted into 2,040,000 shares of common stock in August 1996.
On November 29, 1995, the Company issued 366 units, at $10,000 per unit, in
a private placement of its securities ("November Private Placement"). Each unit
consisted of (i) a 10% convertible subordinated debenture due November 29, 2000
in the principal amount of $10,000, interest payable quarterly, and convertible
into shares of the common stock, at a conversion price of $2.50 per share,
subject to dilution, and (ii) 600 redeemable common stock purchase warrants. The
terms and conditions of the warrants issued in
F-13
<PAGE> 26
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with the November Private Placement are similar to those issued in
the July Private Placement, except that the exercise price of the warrant
pursuant to the November Private Placement is $2.50 per share. These debentures
were converted into 1,464,000 shares of common stock in December 1996.
On August 6, 1996, the Company issued 250 units, at $10,000 per unit, in a
private placement of its securities ("August Private Placement"). Each unit
consisted of: (i) a 10% convertible subordinated debenture due August 6, 2001 in
the principal amount of $10,000, interest payable quarterly, and convertible
into shares of the Company's common stock at a conversion price of $3.25 per
share, subject to dilution, and (ii) 750 redeemable common stock purchase
warrants ("warrants"). Each warrant entitled the holder to purchase one share of
common stock for $3.25, subject to adjustment during the five-year period
commencing August 6, 1996. Pursuant to the agreement, the Company was required
to establish an escrow account to repay interest in the outstanding convertible
debenture, which was fully paid during 1997.
NOTE G -- ACCRUED EXPENSES
Accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Payroll taxes payable (Note H).............................. $1,714 $3,290
Interest.................................................... 619 1,018
Professional fees........................................... 539 537
Accrued pension and welfare................................. 15 501
Medicaid rebates payable.................................... 169 481
Accrued payroll............................................. 92 420
Directors' fees............................................. 126 90
New York State Department of Education...................... 140 134
Medical claims.............................................. 149
Commissions................................................. 30 42
Property taxes.............................................. 94
Accrued chargeback liability................................ 40
Accrued equipment purchase.................................. 56
Other....................................................... 189 719
------ ------
$3,972 $7,232
====== ======
</TABLE>
At December 31, 1998, payroll taxes payable include approximately
$1,373,000 and $275,000 of delinquent payroll taxes (including penalties and
interest) due to the Internal Revenue Service and the State of New York,
respectively, all of which liability was incurred in 1997 and 1996. The Company
expects that the Federal liability will be substantially offset by income tax
refund claims which were filed and are pending before the IRS. Until such time
as the IRS completes its review, the Company has not recorded any expected tax
refund claims. The Company has negotiated a payment plan with the State of New
York and the balance will be paid by the end of 1999.
F-14
<PAGE> 27
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- INCOME TAXES
The actual income tax expense varies from the Federal statutory rate
applied to consolidated operations as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate............... $(4,326) (34.0)% $(5,105) (34.0)% $(4,928) (34.0)%
Loss for which no tax benefit was
provided........................... 4,247 33.8 4,924 32.8 4,233 29.1
Losses of subsidiaries with no tax
benefit............................ 424 3.0
Amortization of Warrants............. 24 .2 32 .2
Goodwill amortization................ 12 .1 73 .5
Department of Justice settlement..... 42 .1 57 .4
Other................................ 37 .1 145 .9 109 .8
------- ----- ------- ----- ------- -----
Actual tax expense................... $ -- --% $ -- --% $ -- --%
======= ===== ======= ===== ======= =====
</TABLE>
The Company has net operating loss carryforwards aggregating approximately
$45,572,700, expiring during the years 2011 through 2018. In addition, certain
of the Company's subsidiaries filed separate Federal income tax returns in prior
years and have separate net operating loss carryforwards aggregating
approximately $4,062,758 expiring during the years 1999 through 2018.
The tax loss carryforwards of the Company and its subsidiaries are subject
to limitation by Section 382 of the Internal Revenue Code with respect to the
amount utilizable each year. This limitation reduces the Company's ability to
utilize net operating loss carryforwards included above each year. The amount of
the limitation has not been quantified by the Company.
F-15
<PAGE> 28
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax assets (liabilities), pursuant
to SFAS No. 109, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards.......................... $ 21,831 $ 15,125
Allowance for doubtful accounts........................... 75 304
Research and development tax credit....................... 212 212
Reserve for inventory..................................... 169 886
Litigation settlement..................................... 73 195
Rent...................................................... 231 172
Reserve for Medicaid...................................... 71 209
Capital loss carryforwards................................ 210
Reserve for property, plant and equipment................. 111
Other..................................................... 15 24
-------- --------
Gross deferred tax assets.............................. 22,677 17,448
-------- --------
Deferred tax liabilities
Depreciation.............................................. (332) (828)
Installment sale gain..................................... (798)
Other..................................................... (42) (42)
-------- --------
(374) (1,668)
-------- --------
Net deferred tax assets before valuation allowance..... 22,303 15,780
Valuation allowance......................................... (22,303) (15,780)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
</TABLE>
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets may not be realized. The valuation allowance
at December 31, 1998 primarily pertains to uncertainties with respect to future
utilization of net operating loss carryforwards.
NOTE I -- OTHER INCOME (EXPENSE)
Cessation of California Operations
During 1997, management decided to shut down its California operations
which comprised two of its subsidiaries, Cenci Powder Products, Inc. and H.R.
Cenci Laboratories, Inc. The Company had not incurred any significant costs to
exit these operations other than minimal vacation compensation and salary paid
to a former plant employee to manage the exit process. Continuing operating
losses and the inability to leverage the manufacturing capacity were among
factors considered by the Board and Management in their determination to cease
such operations.
At December 31, 1997, the net assets of H.R. Cenci Laboratories, Inc.,
consisted primarily of building, equipment and land with a net carrying value of
$528,000 and inventory with a total net carrying value of $93,000. Accordingly,
during 1997 the Company recorded a charge of $264,000 to reduce the fixed assets
to their then estimated net realizable value, and a $93,000 charge to write off
the remaining inventory. In 1998, the Company disposed of the remaining assets
and recorded a charge of $191,000. For the years ended
F-16
<PAGE> 29
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, 1997 and 1996, these subsidiaries, in aggregate, accounted
for revenues of approximately $160,000, $495,000, and $290,000, respectively.
On March 30, 1998, the Company completed the sale of substantially all of
the non-real property assets of Cenci Powder Products to Zuellig Botanical. The
purchase price for the assets consisted of the forgiveness by Zuellig Botanical
of approximately $262,000 in indebtedness owed by Cenci Powder to Zuellig
Botanical related to the purchase of raw materials. The Agreement provided
further that Zuellig Botanical would satisfy the manufacture and delivery
requirements of Cenci Powder at its facility located at Fresno, California,
under an existing third party supply contract.
Sale of Assets
On March 21, 1995, the Company sold its Abbreviated New Drug Application
("ANDA") for 5mg Oxycodone HCL/325mg Acetaminophen Tablets ("Tablets") and
certain equipment used in the production of the Tablets for up to $5.4 million
to Mallinckrodt. The Company received $500,000 of the proceeds in July 1994,
which was recorded as deferred income on the Company's 1994 consolidated balance
sheet. Mallinckrodt also paid the Company $2,000,000 on March 21, 1995 and the
remainder was to be payable as follows: (i) $1,000,000 upon the Company
receiving general clearance from the FDA for unrestricted operations at its
Brooklyn facility and written notice from the FDA that it is in compliance with
certain provisions of the consent degree dated June 29, 1993 and (ii) $1,900,000
at the earlier of (a) Mallinckrodt receiving certain authorizations from the FDA
or (b) September 21, 1997. Mallinckrodt also agreed to defer $1,200,000 of the
Company's trade debt due to an affiliate of Mallinckrodt (Note E). Pursuant to
the release of the Company from the FDA's Application Integrity Policy list and
its Restrictions (collectively, the "AIP") by the FDA on December 19, 1996, the
Company recorded a gain of $1,000,000. On January 9, 1997, Mallinckrodt tendered
this amount to the Bank Group. Pursuant to the agreement of September 21, 1997,
the Company recorded $1,900,000 as a deferred gain which was recognized on March
21, 1998.
In connection with the agreement, the Company agreed to manufacture Tablets
for Mallinckrodt for a period of three years and Mallinckrodt agreed to order a
minimum number of Tablets from the Company for two years ending March 21, 1997.
The Company and Mallinckrodt entered into a noncompetition agreement pursuant to
which the Company agreed not to compete with Mallinckrodt and its affiliates
with respect to the Tablets until March 21, 2000.
NOTE J -- PENSION EXPENSE
1. Management Pension Plan
The Company had maintained a defined benefit plan covering substantially
all nonunion employees which was terminated in November 1996. Subsequently, all
Plan assets were converted to cash and held in a money market fund (to continue
the Trust) from which all vested participant interests were to be paid. Based on
information provided by the Company's actuary, the total liability of the Plan
as of the plan year ended November 30, 1997 was $398, 281. The actuary
determined that this amount was sufficient to pay the vested interests of all of
the participants who were in the Plan as of November 30, 1996, and for any
participants who had terminated with previously vested interests that had not
yet been paid. Included in the Plan's assets as of November 30, 1997, were
receivables from the Company and the Insurer for $54,631 and $57,468,
respectively, which were subsequently paid in March 1998. No additional
contributions were required to be paid to the Trust for the period ended
November 30, 1997.
In 1998 the Company received approval to terminate the Plan by the Pension
Benefit Guarantee Corporation, all assets were distributed to the vested
participants, the Trust was terminated and a final filing was made with the
Internal Revenue Service.
F-17
<PAGE> 30
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. Employees' Pension Plan
The Company contributed approximately $421,000, $407,000, and $492,000 in
1998, 1997 and 1996, respectively, to a multiemployer pension plan for employees
covered by collective bargaining agreements. This plan is not administered by
the Company and contributions are determined in accordance with provisions of
negotiated labor contracts. Information with respect to the Company's
proportionate share of the excess, if any, of the actuarially computed value of
vested benefits over the total of the pension plan's net assets is not available
from the plan's administrator.
The Multiemployer Pension Plan Amendments Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating employers.
Under the provision of the Act, if the plans terminate or the Company withdraws,
the Company could be subject to a "withdrawal liability."
NOTE K -- STOCK OPTION PLAN
In June 1998, the stockholders of the Company approved the adoption of a
stock option and restricted stock purchase plan (the "1998 Option Plan"). The
1998 Option Plan replaces the 1995 Option Plan which was terminated in 1998. The
1998 Option Plan provides for the granting of (i) nonqualified options to
purchase the Company's common stock at not less than the fair market value on
the date of the option grant, (ii) incentive stock options to purchase the
Company's common stock at not less than the fair market value on the date of the
option grant and (iii) rights to purchase the Company's common stock on a
"Restricted Stock" basis, as defined, at not less than the fair market value on
the date the right is granted. As of December 31, 1998, there was no exercise of
rights to purchase any common stock on a restricted stock basis. The total
number of shares which may be sold pursuant to options and rights granted under
the 1998 Option Plan is 2,600,000. No option can be granted under the 1998
Option Plan after April, 2008 and no option can be outstanding for more than ten
years after its grant.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation." It applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans and does not
recognize compensation expense for its stock-based compensation plans other than
for restricted stock. Under APB No. 25, because the exercise price of employee
stock options has historically been greater than or equal to the market price of
the underlying stock on the date of grant, no compensation expense has been
recorded. If the Company had elected to recognize compensation expense based
upon the fair value at the grant date for awards under these plans consistent
with the methodology prescribed by SFAS No. 123, the Company's net income and
earnings per share would be reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net loss
As reported...................................... $(12,724) $(15,013) $(14,495)
Pro forma........................................ (13,663) (15,323) (14,180)
Loss per share
As reported...................................... $ (.92) $ (1.12) $ (1.49)
Pro forma........................................ (.98) (1.14) (1.46)
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expenses related to
grants made before 1995. The fair value of these options was estimated at the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for the years ended December 31, 1998, 1997 and
1996, respectively: expected volatility
F-18
<PAGE> 31
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of 67%, 65%, and 82%; risk-free interest rates of 5.6%, 6.0%, and 6.6%; and
expected lives of 10 years, 4 years and 4.6 years. At the date of grant, all
exercise prices equaled the market value of the stock.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
STOCK AVERAGE AVERAGE
OPTIONS EXERCISE FAIR
OUTSTANDING PRICE VALUE
----------- -------- --------
<S> <C> <C> <C>
Balance at January 1, 1996........................... 600,500 $3.49
Granted.............................................. 126,000 4.77
Exercised............................................ (49,159) 3.12
Cancelled............................................ (21,334) 4.39
---------
Balance at December 31, 1996......................... 656,007 3.53
Exercised............................................ (89,300) 3.22 $3.39
Cancelled............................................ (84,968) 5.16 3.39
---------
Balance at December 31, 1997......................... 481,739 3.60
=========
Granted.............................................. 2,254,850 2.37 1.71
Cancelled............................................ (511,303) 3.16 2.08
---------
Balance at December 31, 1998......................... 2,225,286 2.46
=========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGES OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
- --------------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.19 - $2.00 70,000 8.10 $1.55 20,000 $1.97
2.01 - 3.00 2,025,350 9.19 2.40 348,750 2.38
3.01 - 4.88 129,936 7.32 3.86 80,036 3.74
--------- -------
2,225,286 448,786
========= =======
</TABLE>
NOTE L -- COMMITMENTS
The Company occupies plant and office facilities under noncancellable
operating leases which expire in December 2005. These operating leases provide
for scheduled base rent increases over the term of the lease, however, the total
amount of the base rent payments will be charged to operations using the
straight-line method over the term of the lease. The leases provide for payment
of real estate taxes based upon a percentage of the annual increase. In
addition, the Company rents certain equipment under operating leases, generally
for terms of four years. Total rent expense for the years ended December 31,
1998, 1997 and 1996 was approximately $1,243,000, $884,000 and $659,000,
respectively.
F-19
<PAGE> 32
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31,1998, the approximate minimum rental commitments under
these operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Twelve months ending December 31,
1999......................................... $1,023
2000......................................... 1,075
2001......................................... 1,128
2002......................................... 1,186
2003 and thereafter.......................... 3,921
------
Total minimum payments required........... $8,333
======
</TABLE>
Employment Contracts
During March 1998, the Company entered into employment contracts with each
of two new officers/employees of the Company which cover a five-year and a
three-year period, respectively. The contracts provide for, among other things:
(i) annual salaries of $170,000 and $140,000 to be paid over the five-year and
three-year periods, respectively and (ii) an aggregate of 1,300,000 options
(included in the 1998 grants -- Note K) to purchase the Company's stock at an
exercise price of $2.38 per common share that vest evenly over a
three-to-five-year service period and expire in ten years.
NOTE M -- CONTINGENCIES
The Company currently is a defendant in several lawsuits involving product
liability and other claims. The Company's insurance carriers have assumed the
defense for all product liability and other actions involving the Company. None
of the lawsuits is brought as a class action. The ultimate outcome of these
lawsuits cannot be determined at this time, and accordingly, no adjustment has
been made to the consolidated financial statements. The Company does not believe
these actions will have a material adverse effect on the Company's financial
condition or results of operations.
On October 23, 1996, the Company withdrew four of its Abbreviated New Drug
Applications ("ANDAs") including its ANDA for acetaminophen/oxycodone capsules
(the "Capsule ANDA"), and halted sales of the affected products. The Company
instituted the withdrawal at the suggestion of the FDA and in anticipation of
its release from the FDA's Application Integrity Policy ("AIP"). The FDA has
placed the Company on the AIP, in October 1991, in connection with its
investigation of the Company's operations which culminated in the 1993 consent
decree. Under the AIP, the FDA suspended all of the parent company's (i.e.,
Halsey Drug Co.'s) applications for new drug approvals, including ANDAs and
supplements to ANDAs. At the FDA's suggestion, the Company retained outside
consultants to perform validity assessments of its drug applications.
Thereafter, in October 1996, the FDA recommended that several applications,
including the Capsule ANDA, be withdrawn. As a basis of its decision, the FDA
cited questionable and incomplete data submitted in connection with the
applications. The FDA indicated that withdrawal of the four ANDAs was necessary
for the release of the Company from the AIP. The FDA further required submission
by the Company of a Corrective Action Plan. Said Plan was prepared and submitted
by the Company and accepted by the FDA during 1997.
On December 19, 1996, the FDA released the Company from the AIP. As a
consequence, for the first time since October 1991, the Company was permitted to
submit ANDAs to the FDA for review. Since its release from the AIP in December
1996, through the fiscal year ended December 31, 1998, the Company submitted
thirteen ANDAs for review by the FDA, including a new ANDA with respect to the
Capsules. During the period from the Company's release from the AIP to March 15,
1999, the Company received six ANDA approvals, all of which relate to ANDA
filings made with the FDA subsequent to the Company's release from the AIP.
F-20
<PAGE> 33
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of March 15, 1999, the Company had submitted one additional ANDA for
review by the FDA in fiscal 1999 and anticipates the submission of five
additional ANDAs during the balance of fiscal 1999. Although the Company has
been successful in receiving the ANDA approvals described above since its
release from the AIP in December 1996, there can be no assurance that any of its
newly submitted ANDAs, or those contemplated to be submitted, will be approved
by the FDA. The Company will not be permitted to market any new product unless
and until the FDA approves the ANDA relating to such product. Failure to obtain
FDA approval for the Company's pending ANDAs, or a significant delay in
obtaining such approval, would adversely affect the Company's business
operations and financial condition.
On June 21, 1993, the Company entered into a Plea Agreement with the DOJ to
resolve the DOJ's investigation into the manufacturing and record keeping
practices of the Company's Brooklyn plant. Under the terms of the Plea
Agreement, the Company agreed to plead guilty to five counts of adulteration of
drug products shipped in interstate commerce. Each count involved product
adulteration, and record keeping deficiencies relating to a single drug product,
Quinidine Gluconate (324mg tablets), manufactured at the Brooklyn plant. The
Plea Agreement also required the Company to pay a fine of $2,500,000 over five
years in quarterly installments of $125,000, commencing on or about September
15, 1993. The Company's plea was entered and the terms of the Plea Agreement
were approved by the United States District Court for the District of Maryland
on July 13, 1993. As of February 28, 1998, the Company was in default of the
payment terms of the Plea Agreement and had made payments aggregating $350,000.
On March 27, 1998, the Company and the DOJ signed the Letter Agreement serving
to amend the Plea Agreement relating to the terms of the Company's satisfaction
of the fine assessed under the Plea Agreement Specifically, the Letter Agreement
provided that the Company will satisfy the remaining $2,150,000 of the fine
through the payment of $25,000 on a monthly basis commencing June 1, 1998, plus
interest on such outstanding balance (at the rate calculated pursuant to 28
U.S.C Section 1961)(currently 5.319%). Such payment schedule will result in the
full satisfaction of the DOJ fine in December, 2005. The Letter Agreement also
provides certain restrictions on the payment of salary or compensation to any
individual in excess of $150,000 without the written consent of the United
States District Court for the District of Maryland, subject to certain
exceptions. In addition, the Letter Agreement requires the repayment of the
outstanding fine to the extent of 25% of the Company's after-tax profit or the
remaining balance owed and 25% of the net proceeds received by the Company on
any sale of a capital asset for a sum in excess of $10,000. If, at any time, the
Company does not make the payments required under the Letter Agreement in a
timely fashion, the United States will be free to declare that the fine is
delinquent and/or in default, and exercise all legal process to immediately
collect the full amount of the fine, interest and applicable penalties. At
December 31, 1998 the remaining amount due the DOJ was $1,975,000. The current
portion of this debt amounting to $300,000 is shown as "Other current
liabilities." The remainder of $1,675,000 is included in "Other liabilities."
By letter dated October 23, 1995, the Company was notified by the New York
State Education Department (the "Department") that the Professional Conduct
Officer of the Office of Professional Discipline had determined that there was
sufficient evidence of professional misconduct on the Company's part to warrant
a disciplinary proceeding pursuant to New York law. Upon contacting the Deputy
Director of the Office of Professional Discipline, counsel for the Company was
advised that the alleged misconduct related to the same activities that were the
subject of the DOJ investigation, indictment and plea. The Company submitted a
written response on November 16, 1995. The Company and the Department have
agreed to the entry of a Consent Order concluding any disciplinary proceedings.
The Company will pay $175,000 in fines over five years. In addition, the
Company's registration as a manufacturer of drugs in New York State is revoked,
but such revocation is stayed and the Company has been placed on probation for a
maximum of five years. The Company has the right to apply for removal from
probation after two years. At December 31, 1998, the Company is current in its
payment obligations with a remaining obligation of $140,000.
The Company's Common Stock is listed on the American Stock Exchange (the
"Exchange") under the symbol "HDG."
F-21
<PAGE> 34
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company does not meet certain of the Exchange's criteria for continued
listing. Accordingly, there can be no assurance that the Company's common stock
will remain listed on the Exchange or that the Exchange will not commence a
review of the Company's continued listing eligibility. If the Common Stock
should become delisted from the Exchange, trading, if any, in the Common Stock
would continue on the OTC Bulletin Board, an NASD-sponsored inter-dealer
quotation system, or in what is commonly referred to as the "Pink Sheets." In
such event, a shareholder may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of the Common Stock.
Immediately prior to the completion of the Offering, the Company was in
default under the consent order with the Department for failure to satisfy two
of the monthly installments of the fine as provided in the consent order. Prior
to the completion of the Offering, the Company advised the Department as to the
existence of the default and that such deficiencies would be corrected upon the
completion of the Offering. The Company has satisfied these outstanding amounts
and is now current under the consent order with the Department. Based on
discussions between representatives of the Department and the Company's outside
counsel handling this matter, the Company has been advised that the revocation
of the Company's registration as a manufacturer of drugs in the State of New
York will remain stayed and that the Company continues to have the right to
apply for removal from probation after two years from the effective date of the
consent order.
Other Legal Proceedings
Beginning in 1992, actions were commenced against the Company and numerous
other pharmaceutical manufacturers in the Pennsylvania Court of Common Pleas,
Philadelphia Division, in connection with the alleged exposure to
diethylstilbestrol ("DES"). The defense of all of such matters was assumed by
the Company's insurance carrier, and a substantial number have been settled by
the carrier. Currently, five actions remain pending with the Company as a
defendant, and the insurance carrier is defending each action. Similar actions
were brought in Ohio, and have been dismissed based on Ohio law. The Company and
its legal counsel do not believe any of such actions will have a material impact
on the Company's financial condition or results of operations.
The Company has been named as a defendant in four additional actions, each
of which has been referred to the Company's carrier and has been accepted for
defense. The first action, Alonzo v. Halsey Drug Co., Inc. and K-Mart Corp., No.
64DOT-95111-CT-2736 (Indiana Superior Court, Porter County), was commenced on
November 5, 1995 and involves a claim for unspecified damages relating to the
alleged ingestion of "Doxycycline 100." At this early stage of the proceedings,
the Company is unable to predict with any degree of certainty the likely outcome
of these claims and whether they will have a material adverse effect on the
Company's financial condition. The second action, Files v. Halsey Drug Co.,
Index No. 198787193 (New York Supreme Court, Suffolk County), commenced on
September 16, 1993, seeking $10,000,000 in damages for wrongful death allegedly
caused by the ingestion of Isoniazid. Halsey has been dismissed from this action
on motion for summary judgment. The third and fourth actions, entitled Hunt v.
Halsey Drug Co., Inc., and McCray v. Halsey Drug Co., Inc. (New York State
Supreme Court, Kings County), were commenced on October 21, 1993, seeking the
recovery of $8,000,000 for alleged personal injuries suffered by two Wells Fargo
security guards who responded to an alarm and were shot, resulting in the death
of one and the injury to the other. The Company's insurance carrier and the
plaintiffs in these matters have agreed in principle to a settlement providing
for the payment by the Company's insurance carrier of the sum of $600,000 to the
estate of John McCray and the sum of $150,000 to Joseph Hunt in full and final
settlement of all their respective claims against the Company.
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 and Services, L.L.C. The Complaint alleges
the existence of a Joint Venture Agreement between the Plaintiff and the Company
concerning the development, manufacture 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
F-22
<PAGE> 35
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. This matter is
currently in discovery. The Company has filed a third-party complaint against
Rosendo Ferran, the Company's former President, in connection with the
Complaint. The ultimate outcome of this action cannot be determined at this
time, although the Company does not believe this action will have a material
adverse effect on the Company's financial condition or results of operations.
The Company has been named as a defendant in an action in Suffolk County,
New York, by Designed Laboratories, Inc., for construction work allegedly
performed at the Company's facilities in Brooklyn. Plaintiff is seeking
approximately $148,000. The Company has no records of work being performed by
this entity, and is therefore defending the action. The Company does not believe
this claim will have a material adverse effect on the Company's financial
condition or results of operations.
The Company's former President, Rosendo Ferran, has instituted an
arbitration against the Company, seeking sums alleged due under his employment
contract in the amount of $225,000, deferred salary in the approximate amount of
$100,000, and unspecified damages upon allegations of age, ethnic and religious
discrimination. The Company believes it has meritorious defenses to the
allegations claimed in the arbitration. The Company and its legal counsel do not
believe this claim will have a material adverse effect on the Company's
financial condition or results of operations.
NOTE N -- SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Company sells its products to a large number of customers who are
primarily drug distributors, drugstore chains and wholesalers and are not
concentrated in any specific region. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. During
1998, the Company had net sales to one customer in excess of 10% of total sales,
aggregating 11.5% of total sales. During 1997, the Company had net sales to two
customers in excess of 10% of total sales. One customer (Mallinckrodt) accounted
for 22.1% of total sales and another customer (Warner Chilcott) accounted for
10% of total sales. During 1996, the Company had net sales to one customer
aggregating 10% of total sales.
During 1998 and 1997, the Company purchases approximated $2,583,000 and
$1,187,000, respectively, representing approximately 29% and 25%, respectively,
of total purchases for those years.
NOTE O -- SUBSEQUENT EVENTS
Lease of Congers, New York Facility
Effective March 22, 1999, the Company leased, as sole tenant, a
pharmaceutical manufacturing facility located in Congers, New York (the "Congers
Facility") from Par Pharmaecutical, Inc. ("Par") pursuant to an Agreement to
Lease (the "Lease"). The Congers Facility contains office, warehouse and
manufacturing space and is approximately 35,000 square feet. The Lease provides
for a term of three years, with a two-year renewal option and provides for
annual fixed rent of $500,000 per year during the primary term of the Lease and
$600,000 per year during the option period. The Lease also covers certain
manufacturing and related equipment previously used by Par in its operations at
the Congers Facility (the "Leased Equipment"). In connection with the execution
of the Lease, the Company and Par entered into a certain Option Agreement
pursuant to which the Company may purchase the Congers Facility and the Lease
Equipment at any time during the lease term for $5 million.
As part of the execution of the Lease, the Company and Par entered into a
certain Manufacturing and Supply Agreement (the "M&S Agreement") having a term
of two years. The M&S Agreement provides for the Company's contract manufacture
of certain designated products manufactured by Par at the Congers Facility prior
to the effective date of the Lease. The M&S Agreement also provides that Par
will purchase a minimum of $1,150,000 in product during the initial 18 months of
the Agreement. The M&S Agreement further provides that the Company will not
manufacture, supply, develop or distribute the designated products to be
supplied by the Company to Par under the M&S Agreement to or for any other
person for a period of three years.
F-23
<PAGE> 36
HALSEY DRUG CO., INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AMOUNTS IN 000'S
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS - END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE(A)(B) OF PERIOD
----------- ------------ ---------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Accounts receivable
reserves................... 280 144 424
Inventory reserves........... 155 105 50
YEAR ENDED DECEMBER 31, 1997
Accounts receivable
reserves................... 424 118 542
Inventory reserves........... 50 625 675
YEAR ENDED DECEMBER 31, 1998
Accounts receivable
reserves................... 542 262 280
Inventory reserves........... 675 361 314
</TABLE>
- ---------------
(a) Amounts written off as uncollectible accounts receivable and recoveries.
F-24
<PAGE> 37
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 5, 1999, accompanying the
consolidated financial statements included in the Annual Report of Halsey Drug
Co., Inc. on Form 10-K for the year ended December 31, 1998. We hereby consent
to the incorporation by reference of said report in the Registration Statements
of Halsey Drug Co., Inc. on Form S-8 (File No. 33-98396, effective October 19,
1995).
GRANT THORNTON LLP
New York, New York
March 5, 1999
F-25
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ MICHAEL REICHER
------------------------------------
Michael Reicher, President and Chief
Executive
Officer (Principal Executive
Officer)
Date: June 11, 1999
F-26
