<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________TO________________________
COMMISSION FILE NUMBER 1-10113
HALSEY DRUG CO., INC.
---------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-0853640
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
695 N. PERRYVILLE RD.
ROCKFORD, IL 61107
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(815) 399 - 2060
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 50 DAYS.
YES X NO
----- -----
AS OF NOVEMBER 12, 1999 THE REGISTRANT HAD 14,389,908 SHARES OF COMMON STOCK,
$.01 PAR VALUE, OUTSTANDING.
<PAGE> 2
HALSEY DRUG CO., & SUBSIDIARIES
-------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) PAGE #
CONDENSED CONSOLIDATED BALANCE SHEETS- 3
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
CONDENSED CONSOLIDATED STATEMENTS OF 5
OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998
CONSOLIDATED STATEMENTS OF CASH 6
FLOWS - NINE MONTHS ENDED SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' 7
EQUITY - NINE MONTHS ENDED SEPTEMBER 30, 1999
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 8
STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
----------------------------
ITEM 2. CHANGES IN SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(AMOUNTS IN THOUSANDS) 1999 1998
SEPTEMBER 30 DECEMBER 31
------------ -----------
<S> <C> <C>
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 2,391 $ 1,850
ACCOUNTS RECEIVABLE - TRADE, NET OF
ALLOWANCES FOR DOUBTFUL ACCOUNTS OF $79 AND
$ 280 AT SEPTEMBER 30, 1999 AND
DECEMBER 31, 1998, RESPECTIVELY 1,839 1,439
OTHER RECEIVABLES 23 --
INVENTORIES 3,993 6,354
PREPAID INSURANCE AND OTHER CURRENT ASSETS 183 148
------- -------
TOTAL CURRENT ASSETS 8,429 9,791
PROPERTY PLANT & EQUIPMENT, NET 4,299 4,787
OTHER ASSETS 1,235 1,335
------- -------
$13,963 $15,913
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
3
<PAGE> 4
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(AMOUNTS IN THOUSANDS) 1999 1998
SEPTEMBER 30 DECEMBER 31
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
CONVERTIBLE BRIDGE LOANS $ -- $ 7,533
NOTES PAYABLE 2,575 2,817
DEPARTMENT OF JUSTICE SETTLEMENT 300 300
ACCOUNTS PAYABLE 1,215 1,834
ACCRUED EXPENSES 3,436 3,972
-------- --------
TOTAL CURRENT LIABILITIES 7,526 16,456
CONVERTIBLE DEBENTURES 42,801 26,187
OTHER LONG-TERM DEBT 2,039 2,223
CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK - $.01 PAR VALUE; AUTHORIZED 80,000,000
SHARES AT SEPTEMBER 30, 1999 AND 40,000,000
AT DECEMBER 31, 1998; ISSUED AND OUTSTANDING
14,360,490 SHARES AT SEPTEMBER 30,1999 AND
14,003,609 SHARES AT DECEMBER 31, 1998 148 144
ADDITIONAL PAID-IN CAPITAL 31,617 29,113
ACCUMULATED DEFICIT (69,179) (57,221)
-------- --------
(37,414) (27,964)
LESS: TREASURY STOCK - AT COST -(439,603 SHARES
AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998) (989) (989)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (38,403) (28,953)
-------- --------
$ 13,963 $ 15,913
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
4
<PAGE> 5
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30
------------
AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES ...................................... $ 8,259 $ 6,298 $ 2,468 $ 2,182
COST OF GOODS SOLD ............................. 11,210 9,901 3,786 3,611
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) ......................... (2,951) (3,603) (1,318) (1,429)
RESEARCH & DEVELOPMENT ......................... 685 789 330 337
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ... 5,545 4,860 2,021 1,652
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ........................ (9,181) (9,252) (3,669) (3,418)
OTHER INCOME ................................... 66 1,983 12 15
INTEREST EXPENSE, NET .......................... 2,843 1,492 1,015 523
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ................... (11,958) (8,761) (4,672) (3,926)
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES ..................... -- -- -- --
------------ ------------ ------------ ------------
NET LOSS ....................................... ($ 11,958) ($ 8,761) ($ 4,672) ($ 3,926)
============ ============ ============ ============
NET LOSS PER COMMON SHARE ...................... (0.84) (0.64) (0.33) (0.28)
============ ============ ============ ============
AVERAGE NUMBER OF OUTSTANDING SHARES ........... 14,304,301 13,756,600 14,359,855 13,777,258
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
5
<PAGE> 6
HALSEY DRUG CO., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------
AMOUNTS IN THOUSANDS 1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS ....................................................... ($11,958) ($ 8,761)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES
DEPRECIATION AND AMORTIZATION .............................. 970 1,274
PROVISION FOR LOSS ON ACCOUNTS RECEIVABLE .................. (201) (492)
CHANGES IN ASSETS AND LIABILITIES
ACCOUNTS RECEIVABLE ..................................... (199) (127)
OTHER RECEIVABLE ........................................ (23) --
INVENTORIES ............................................. 2,361 (2,637)
PREPAID INSURANCE AND OTHER CURRENT ASSETS .............. (35) 64
ACCOUNTS PAYABLE ........................................ (619) (5,121)
DEFERRED GAIN ........................................... -- (1,900)
ACCRUED EXPENSES ........................................ (720) (2,645)
-------- --------
TOTAL ADJUSTMENTS ....................................... 1,534 (11,584)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ................ (10,424) (20,345)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
CAPITAL EXPENDITURES ....................................... (482) (868)
(DECREASE) INCREASE IN OTHER ASSETS ........................ 100 (1,539)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ................... (382) (2,407)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
INCREASE (DECREASE) IN NOTES PAYABLE ....................... (242) (108)
DECREASE IN AMOUNT DUE TO BANKS ............................ -- (2,476)
ISSUANCE OF COMMON STOCK FOR PAYMENT OF INTEREST AND PAYABLE
AND WARRANT EXERCISE........................................ 565 258
ISSUANCE OF CONVERTIBLE SUBORDINATED DEBENTURES ............ 11,024 25,800
INCREASE (DECREASE) IN BANK OVERDRAFT ...................... -- (159)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............... 11,347 23,315
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ....... 541 563
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 1,850 26
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 2,391 $ 589
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
FOR THE 9 MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------
THE COMPANY ISSUED 328,314 SHARES OF COMMON STOCK AS PAYMENT FOR ACCOUNTS
PAYABLE IN THE AMOUNT OF $54,000 AND ACCRUED INTEREST OF $461,517.
THE COMPANY ISSUED 28,571 SHARES OF COMMON STOCK FOR THE EXERCISE OF A WARRANT.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
6
<PAGE> 7
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 1999
AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK, $.01 PAR VALUE ADDITIONAL ACCUMULATED TREASURY STOCK, AT COST
---------------------------- PAID-IN -----------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
---------- ------ ---------- ----------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1999 14,443,208 $144 $29,113 ($ 57,221) 439,603 ($ 989) ($ 28,953)
NET LOSS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 (11,958) (11,958)
ISSUANCE OF SHARES AS PAYMENT
OF INTEREST 300,562 3 459 462
DEFERRED DEBT DISCOUNT ON
WARRANTS ISSUED WITH
CONVERTIBLE DEBTEDNESS 1,943 1,943
EXERCISE OF WARRANT 28,571 1 48 49
ISSUANCE OF SHARES AS PAYMENT
OF TRADE PAYABLES 27,752 -- 54 54
---------- ---- ------- -------- ------- ------ --------
BALANCE AT SEPTEMBER 30, 1999 14,800,093 $148 $31,617 ($ 69,179) 439,603 ($ 989) ($ 38,403)
========== ==== ======= ========= ======= ====== =========
</TABLE>
The accompanying notes are an integral part of this statement
7
<PAGE> 8
HALSEY DRUG CO., INC. AND SUBSIDIARIES NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Halsey Drug Co., Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
to present fairly the financial position, results of operations and changes in
cash flows for the nine months ended September 30, 1999 have been made. The
results of operations for the Nine months period ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the full year
ended December 31, 1999. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto for the year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
As of September 30, 1999, the Company had working capital of
approximately $903,000 and an accumulated deficit of approximately $69,179,000.
The Company incurred a loss of approximately $11,958,000 during the nine months
ended September 30, 1999.
As of November 15, 1999, the Company had approximately $800,000 in cash
reserves available to fund operations. The Company estimates that such cash
reserves combined with internally generated cash flow will be sufficient to fund
operations for approximately 30 days. In order to fund continued operations, the
Company is actively seeking alternative sources of financing, including a
possible sale or license arrangement relating to a product for which the Company
has filed for approval with the U.S. Food and Drug Administration. No assurance
can be given, however, that the Company will be successful in concluding a sale
or licensing arrangement for this product on acceptable terms. Failure to
complete a sale or licensing transaction as described, or an alternative
financing transaction within the next 30 days will have a material adverse
effect on the Company's working capital position, financial condition and
results of operations. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
NOTE 2 - INVENTORIES
(AMOUNTS IN THOUSANDS)
INVENTORIES CONSISTS OF THE FOLLOWING:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
FINISHED GOODS $ 965 $2,675
WORK IN PROCESS 979 1,166
RAW MATERIALS 2,049 2,513
------ ------
$3,993 $6,354
====== ======
</TABLE>
8
<PAGE> 9
NOTE 3 - DEBT
BORROWINGS UNDER OTHER LONG-TERM DEBT CONSIST OF THE FOLLOWING AT SEPTEMBER 30,
1999 AND DECEMBER 31, 1998.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
1999 1998
------- -------
<S> <C> <C>
DEPARTMENT OF JUSTICE SETTLEMENT $ 1,725 $ 1,975
OTHER 614 548
------- -------
2,339 2,523
LESS CURRENT MATURITIES (300) (300)
------- -------
2,039 2,223
</TABLE>
NOTE 4 - CONTINGENCIES
The Company currently is a defendant in several lawsuits involving
product liability claims. The Company's insurance carriers have assumed the
defense for all product liability and other actions involving the Company. The
final outcome of these lawsuits cannot be determined at this time, and
accordingly, no adjustment has been made to the consolidated financial
statements.
NOTE 5 - COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income, in the
first quarter of 1999, which requires companies to disclose comprehensive income
separately of net income from operations. Comprehensive income is defined as the
change in equity during the period from transactions and other events and
circumstances from non-ownership sources. It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The adoption of this statement had no effect on the
Company for the nine months ended September 30, 1999 or 1998.
9
<PAGE> 10
HALSEY DRUG CO., INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS ENDED SEPTEMBER 30
PERCENTAGE PERCENTAGE
CHANGE YEAR- CHANGE YEAR
TO-YEAR TO-YEAR
PERCENTAGE OF NET SALES INCREASE PERCENTAGE OF NET SALES INCREASE
----------------------- -------- ----------------------- --------
(DECREASE) (DECREASE)
---------- ----------
1999 AS 1999 AS
------- -------
COMPARED TO COMPARED TO
----------- -----------
1999 1998 1998 1999 1998 1998
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
NET SALES 100.0 100.0 31.1 100.0 100.0 13.1
COST OF GOODS SOLD 135.7 157.2 13.2 153.4 165.5 4.8
------ ------ ------ ------ ------ ------
GROSS PROFIT (LOSS) (35.7) (57.2) (18.1) (53.4) (65.5) (7.8)
RESEARCH & DEVELOPMENT 8.3 12.5 (13.2) 13.4 15.4 (2.1)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 67.2 77.2 14.1 81.9 75.7 22.3
------ ------ ------ ------ ------ ------
LOSS FROM OPERATIONS (111.2) (146.9) (.8) (148.7) (156.6) 7.3
OTHER INCOME .8 31.5 (96.7) .5 .7 (20.0)
INTEREST EXPENSE, NET 34.4 23.7 90.5 41.1 24.0 94.1
------ ------ ------ ------ ------ ------
LOSS BEFORE INCOME TAXES (144.8) (139.1) 36.5 (189.3) (179.9) 19.0
------ ------ ------ ------ ------ ------
PROVISION FOR INCOME TAXES -- -- -- -- -- --
------ ------ ------ ------ ------ ------
NET LOSS (144.8) (139.1) 36.5 (189.3) (179.9) 19.0
====== ====== ====== ====== ====== ======
</TABLE>
10
<PAGE> 11
- --------------------------------------------------------------------------------
Nine months ended September 30, 1999 vs. Nine months ended September 30, 1998
- --------------------------------------------------------------------------------
Net Sales
The Company's net sales for the nine months ended September 30, 1999 of
$8,259,000 represents an increase of $1,961,000 (31.1%) as compared to net sales
for the nine months ended September 30, 1998 of $6,298,000. This increase is a
result of recapturing market share that had been lost in the prior year because
the Company lacked working capital in the first quarter of 1998 to maintain
sufficient inventories for sale. Further, the sales increase reflects aggressive
selling efforts by the Company's sales force.
Cost of Goods Sold
For the nine months ended September 30, 1999, cost of goods sold of
$11,210,000 increased as compared to the nine months ended September 30, 1998 of
$9,901,000. This is attributable to greater manufacturing activity associated
with the sales increase as well as the addition of manufacturing overhead costs
from the March, 1999 acquisition of the Congers manufacturing facility. Gross
margin as a percentage of sales for the nine months ended September 30, 1999 was
(35.7)% as compared to (57.2)% for the nine months ended September 30, 1998.
This is attributable to the leverage of the Company's fixed overhead costs from
increased sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the nine months ended September 30, 1999 and 1998 were 67.2% and 77.2%,
respectively. Overall these expenses in the first nine months of 1999 increased
$685,000 over the same period in 1998. The increase is primarily attributable to
the increased costs of litigation ($180,000), professional services ($65,000),
selling expenses ($325,000) and general and administrative expenses associated
with the Congers manufacturing facility ($115,000).
Research and Development Expenses
Research and development expenses as a percentage of sales for the nine
months ended September 30, 1999 and 1998 were 8.3% and 12.5%, respectively. The
Company's research and development program is concentrating its efforts in three
areas.
First, the Company is performing the necessary regulatory steps to effect the
transfer of the products obtained from Barr Laboratories in April 1999 to the
Company. The Company expects to have completed the process for one of these
products by the end of 1999 with additional six products expected to be
submitted to the FDA for approval in 2000.
Second, the Company is continuing development efforts relating to certain active
pharmaceutical ingredients (API's). The Company currently manufactures two API's
and has a third under development.
Finally, the Company is proceeding with the development of products, apart from
those obtained from Barr Laboratories, for submission to the FDA. The Company
currently has one Abbreviated New Drug Application (ANDA) on file with the FDA
and expects to file an additional seven within the next twelve months.
Net Earnings (Loss)
For the nine months ended September 30, 1999, the Company had net loss
of $11,958,000 as compared to a net loss of $8,761,000 for the nine months ended
September 30, 1998. Included in results for the nine months ended September 30,
1998 was a one time gain of $1,900,000 that had been recorded in September, 1997
as a deferred gain on the sale of certain assets to Mallinckrodt Chemical
Products, Inc. ("Mallinckrodt"). This transaction contained certain future
requirements that were met in the first quarter of 1998. Also, the 1999 results
include additional interest expense of $1,351,000 resulting from the issuance of
debentures during 1998 and 1999.
11
<PAGE> 12
- --------------------------------------------------------------------------------
Three months ended September 30, 1999 vs. Three months ended September 30, 1998
- --------------------------------------------------------------------------------
Net Sales
The Company's net sales for the three months ended September 30, 1999 of
$2,468,000 represents a increase of $286,000 (13.1%) as compared to net sales
for the three months ended September 30, 1998 of $2,182,000. The increase
resulted from greater market penetration due to aggressive selling efforts in
1999.
Cost of Goods Sold
For the three months ended September 30, 1999, cost of goods sold
increased by approximately $175,000 as compared to the three months ended
September 30, 1998. The increase for 1999 is attributable to greater
manufacturing activity associated with the sales increase. Gross margin as a
percentage of net sales for the three months ended September 30, 1999 was
(53.4)% compared to (65.5)% for the three months ended September 30, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the three months ended September 30, 1999 and 1998 were 81.9% and 75.7%,
respectively. The increase of $369,000 is due primarily to increased costs of
litigation ($204,000), professional services ($75,000) and general and
administrative expenses associated with the Congers manufacturing facility
($90,000).
Research and Development Expenses
Research and development expenses as a percentage of sales for the three
months ended September 30, 1999 and 1998 was 13.4% and 15.4%, respectively. The
Company's research and development program is concentrating its efforts in three
areas.
First, the Company is performing the necessary regulatory steps to effect the
transfer of the products obtained from Barr Laboratories in April 1999 to the
Company. The Company expects to have completed the process for one of these
products by the end of 1999 with additional six products expected to be
submitted to the FDA for approval in 2000.
Second, the Company is continuing development efforts relating to certain active
pharmaceutical ingredients (API's). The Company currently manufactures two API's
and has a third under development.
Finally, the Company is proceeding with the development of products, apart from
those obtained from Barr Laboratories, for submission to the FDA. The Company
currently has one Abbreviated New Drug Application (ANDA) on file with the FDA
and expects to file an additional seven within the next twelve months.
Net Earnings (Loss)
For the three months ended September 30, 1999, the Company had a net
loss of $4,672,000 as compared to a net loss of $3,926,000 for the three months
ended September 30, 1998. This increase is attributable to lower gross margins
as well as higher interest costs associated with the 5% convertible debentures
issued in 1998 ($492,000).
12
<PAGE> 13
Liquidity and Capital Resources
- -------------------------------
At September 30, 1999, the Company had cash and cash equivalents of
$2,391,000 as compared to $1,850,000 at December 31, 1998. The Company had
working capital of $903,000 at September 30, 1999 and a working capital
deficiency of ($6,665,000)at December 31, 1998.
On May 26, 1999, the Company consummated a private offering of securities for an
aggregate purchase price of up to $22.8 million (the "Oracle Offering"). The
securities issued in the Offering consisted of 5% convertible senior secured
debentures (the "1999 Debentures") and common stock purchase warrants (the "1999
Warrants"). The 1999 Debentures and 1999 Warrants were issued by the Company
pursuant to a certain Debenture and Warrant Purchase Agreement dated May 26,
1999 (the "Oracle Purchase Agreement") by and among the Company, Oracle
Strategic Partners, L.P. ("Oracle") and such other investors in the Company's
March 10, 1998 offering electing to participate in the Oracle Offering
(inclusive of Oracle, collectively, the "Oracle Investor Group").
The 1999 Debentures were issued at par and will become due and payable
as to principal on March 15, 2003. Approximately $12.8 million in principal
amount of the 1999 Debentures were issued on May 26, 1999. Interest on the
principal amount of the 1999 Debentures, at the rate of 5% per annum, will be
payable on a quarterly basis.
The 1999 Debentures are convertible into shares of the Company's common
stock at a conversion price of $1.404 per share, for an aggregate of up to
approximately 16,283,694 shares of the Company's common stock. The 1999 Warrants
are exercisable for an aggregate of approximately 4,618,702 shares of the
Company's common stock. Of such warrants, 2,309,351 warrants are exercisable at
$1.404 per share and the remaining 2,309,351 warrants are exercisable at $2.285
per share. The 1999 Debentures are 1999 Warrants are convertible and
exercisable, respectively, for an aggregate of approximately 20,902,396 of the
Company's common stock.
Of the $22.8 million to be invested pursuant to the Oracle Purchase
Agreement, $5 million was funded by Oracle on May 26, 1999, the closing date of
the Oracle Purchase Agreement, with an additional $10 million to be funded by
Oracle in two (2) installments of $5 million each. The first installment of the
additional $10 million Oracle investment was funded on July 27, 1999. The
remaining $5 million Oracle investment to be made pursuant to the Oracle
Purchase Agreement is required to be funded upon the receipt of approval from
the U.S. Food and Drug Administration for a product for which an abbreviated new
drug application has been filed with the FDA. The Company anticipates that this
condition will be satisfied during the first quarter of 2000. In the event the
Company does not receive FDA approval for such product on or before March 31,
2000, Oracle is under no obligation to fund the final $5 million investment.
In addition to the $10 million investment made by Oracle to date,
approximately $7,037,000 of the 1999 Debentures issued pursuant to the Oracle
Purchase Agreement were issued in exchange for the surrender of a like amount of
principal and accrued interest outstanding under the Company's convertible
promissory notes issues pursuant to various bridge loan transactions with Galen
Partners III, L.P., Galen Partners International III, L.P., Galen Employee Fund
III, L.P. (collectively, "Galen") and certain other investors in the aggregate
amount of $10,104,110 during the period from August, 1998 through and including
May, 1999 (the "Galen Bridge Loans"). The remaining balance of the Galen Bridge
Loans in the principal amount of $3,495,001 plus accrued and unpaid interest was
satisfied with a portion of the proceeds of the second $5 million installment of
Oracle's investment funded on July 27, 1999.
13
<PAGE> 14
On November 15, 1999 the Company received a commitment from Galen to
extend bridge financing of $500,000 (the "1999 Bridge Loan"). The 1999 Bridge
Loan will have a 30 day term and bear interest at the fixed rate of 18% per
annum, payable at maturity. The 1999 Bridge Loan commitment provides that if the
1999 Bridge Loan is not paid in full at maturity, the Company is obligated to
issue common stock purchase warrants exercisable for 25,000 shares of common
stock having an exercise price of $1.47 per share.
As of November 15, 1999, after giving effect to the 1999 Bridge
Loan, the Company had approximately $800,000 in cash reserves available to fund
operations. The Company estimates that such cash reserves combined with
internally generated cash flow will be sufficient to fund operations for
approximately 30 days. The final $5 million installment to be funded by Oracle
pursuant to the Oracle Purchase Agreement is not required to be funded until the
receipt of approval from the FDA for a designated product for which an
abbreviated new drug application has been filed. Based on recent correspondence
from the FDA relating to such product, the Company does not anticipate receipt
of approval for the product until later in the first quarter of 2000. In order
to fund operations prior to the receipt of the final $5 million investment by
Oracle, of which there can be no assurance, the Company is actively seeking
alternative sources of financing, including a possible sale or license
arrangement relating to a product for which the Company has filed for FDA
approval. No assurance can be given, however, that the Company will be
successful in concluding a sale or licensing arrangement for this product on
acceptable teams. Failure to complete a sale or licensing transaction as
described, or an alternative financing transaction within the next 30 days will
have a material adverse effect on the Company's working capital position and
financial condition and on the Company's ability to continue operations.
YEAR 2000 COMPLIANCE
The Company is aware of issues associated with the programming code in
existing computer system 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 complaint.
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
locate 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
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.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 27, 1999, the Company issued securities in a private offering
to Oracle pursuant to the Oracle Purchaser Agreement. The securities issued
consisted of 5% convertible senior secured debentures (the "1999 Debentures") in
the principal amount of $5 million and common stock purchase warrants (the "1999
Warrants"). The 1999 Debentures and the 1999 Warrants are convertible and
exercisable, respectively, for an aggregate of 4,571,354 shares of the Company's
common stock, $.01 par value per share (the "Common Stock").
During the quarter ended September 30, 1999, the Company issued an
aggregate of 328,314 shares of Common Stock in satisfaction of accounts payable
in the amount of $54,000 and accrued interest on the Company's outstanding 5%
convertible senior secured debentures issued in March and June 1998, and May
1999 (the "Convertible Debentures"). The Company also issued 28,571 shares of
Common Stock upon exercise of an outstanding common stock purchases warrant (the
"Warrant").
Each of the Oracle, the holders of the account payable, the holders of
the Convertible Debentures for which interest payments were made in Common Stock
and the holder of the Warrant are accredited investors as defined in Rule 501(a)
of Regulation D promulgated under the Securities Act of 1933, as amended (the
"Act"). The 1999 Debentures and 1999 Warrants, and the Common Stock issued in
satisfaction of the account payable and interest payments under the Convertible
Debentures and upon exercise of the Warrant were issued without registration
under the Act in reliance upon Section 4(2) of the Act and Regulation D
promulgated thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Shareholders was held on Thursday,
August 19, 1999 for the following purposes:
1. To elect nine directors to the Company's Board of
Directors to hold office until the 2000 Annual
Meeting of Shareholders ("Proposal 1");
2. To authorize an amendment to the Company's
Certificate of Incorporation (the "Charter") to
increase the number of authorized shares of the
common stock from 40,000,000 shares to 80,000,000
shares ("Proposal 2");
3. To authorize an amendment to the Company's Charter to
increase the size of the Company's Board of Directors
from a maximum of eight (8) to a maximum of eleven
(11) directors ("Proposal 3");
4. To authorize an amendment to the Company's Charter to
entitle the holders of the Company's 5% convertible
senior secured debentures due March 15,2003, issued
pursuant to the Oracle Purchase Agreement to vote on
all matters submitted to a vote of shareholders of
the Company, voting together with holders of common
stock as one class ("Proposal 4");
5. To authorize the issuance of up to 20,902,396 shares
common stock upon conversion of the convertible
debentures and warrants issued pursuant to the Oracle
Purchase Agreement to the extent the issuance of such
shares of common stock exceeds 19.9% of the Company's
issued and outstanding common stock on May 26, 1999
("Proposal 5");
6. To adopt an amendment to the Company's 1998 Stock
Option Plan to increase the number of shares
available for issuance under the plan ("Proposal 6");
and
15
<PAGE> 16
7. To ratify the appointment of Grant Thornton LLP as
independent auditors of the Company for the fiscal
year ending December 31, 1999 ("Proposal 7").
The voting as to each Proposal was as follows:
Proposal 1
----------
<TABLE>
<CAPTION>
Name For Withheld
---- --- --------
<S> <C> <C>
William Skelly 27,977,774 376,862
Michael Reicher 27,979,324 375,312
Alan Smith, Ph.D. 27,977,574 377,062
William Sumner 27,977,574 377,062
Bruce Wesson 27,977,274 377,362
Srini Conjeevaram 27,977,274 377,362
Zubeen Shroff 27,977,274 376,362
Peter A. Clemens 27,977,774 376,862
Joel Liffman 27,977,774 376,862
Proposal 2
----------
For Against Abstain
--- ------- -------
28,097,272 246,621 10,743
Proposal 3
----------
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
27,996,447 139,526 14,309 204,354
Proposal 4
----------
For Against Abstain Broker Non-Voters
--- ------- ------- -----------------
21,423,179 380,686 31,486 6,519,285
Proposal 5
----------
For Against Abstain Broker Non-Voters
--- ------- ------- -----------------
21,271,909 311,497 47,951 6,723,639
Proposal 6
----------
For Against Abstain Broker Non-Voters
--- ------- ------- -----------------
27,159,324 932,549 58,409 204,354
</TABLE>
16
<PAGE> 17
Proposal 7
----------
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
28,265,947 44,164 44,525
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits required to be filed as part of this
report on form 10-Q are listed in the attached Index.
(b) Reports on Form 8-K. None.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1999 HALSEY DRUG CO., INC.
By: /s/ Michael K. Reicher
-------------------------------------
Michael K. Reicher
President and Chief
Executive Officer
By: /s/ Peter A. Clemens
-------------------------------------
Peter A. Clemens
VP & Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NO. -----------
- ---
27 FINANCIAL DATA SCHEDULE, WHICH IS SUBMITTED
ELECTRONICALLY TO THE SECURITIES AND EXCHANGE COMMISSION
FOR INFORMATION ONLY AND NOT FILED.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition At September 30, 1998
(Unaudited) and the Condensed Consolidated Statement of Income for the Nine
Months Ended September 30, 1998 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,391
<SECURITIES> 0
<RECEIVABLES> 1,918
<ALLOWANCES> 79
<INVENTORY> 3,993
<CURRENT-ASSETS> 8,429
<PP&E> 19,654
<DEPRECIATION> 15,355
<TOTAL-ASSETS> 13,963
<CURRENT-LIABILITIES> 7,526
<BONDS> 0
0
0
<COMMON> 148
<OTHER-SE> (38,551)
<TOTAL-LIABILITY-AND-EQUITY> 13,963
<SALES> 8,259
<TOTAL-REVENUES> 8,259
<CGS> 11,210
<TOTAL-COSTS> 11,210
<OTHER-EXPENSES> 6,230
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,843
<INCOME-PRETAX> (11,958)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,958)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,958)
<EPS-BASIC> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
