<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, 2000
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 October 31, 2000 the registrant had 14,961,316 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, 2000 and December 31, 1999
Condensed Consolidated Statements of 5
Operations - Three and nine months ended
September 30, 2000 and September 30, 1999
Consolidated Statements of Cash 6
Flows - Nine months ended September 30, 2000
and September 30, 1999
Consolidated Statements of Stockholders' 7
Equity - Nine months ended September 30, 2000
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 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in thousands) 2000 1999
SEPTEMBER 30 DECEMBER 31
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,333 $ 786
Accounts Receivable - trade, net of
Allowances for doubtful accounts of $171 and
$425 at September 30, 2000 and
December 31, 1999, respectively 5,467 2,710
Other receivables 63 6
Inventories 3,112 3,502
Prepaid insurance and other current assets 635 213
------- --------
Total current assets 12,610 7,217
PROPERTY PLANT & EQUIPMENT, NET 4,009 3,013
DEFERRED PRIVATE OFFERING COSTS 1,291 1,623
OTHER ASSETS AND DEPOSITS 622 642
------- --------
$18,532 $ 12,495
======= ========
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE> 4
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
(Amounts in thousands) 2000 1999
SEPTEMBER 30 DECEMBER 31
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable 2,004 4,038
Accounts payable 2,371 2,283
Accrued expenses 6,157 5,777
Department of Justice Settlement 300 300
-------- --------
Total current liabilities 10,832 12,398
CONVERTIBLE DEBENTURES, NET 43,814 41,096
DEPARTMENT OF JUSTICE SETTLEMENT 1,150 1,375
NOTES PAYABLE, LONG TERM 12,000 --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized 80,000,000 shares; issued 149 148
14,944,008 shares at September 30,2000 and 14,829,511 shares
at December 31, 1999
Additional paid-in capital 36,121 35,751
Accumulated deficit (84,545) (77,284)
-------- --------
(48,275) (41,385)
Less: Treasury stock - at cost -(439,603 shares at September (989) (989)
30, 2000 and December 31, 1999) -------- --------
Total stockholders' equity (deficit) (49,264) (42,374)
-------- --------
$ 18,532 $ 12,495
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE> 5
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Amounts in thousands except per share data
<TABLE>
<CAPTION>
September 30
---------------------------------------------------------------------
For the nine months ended For the three months ended
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Product sales ......................................... $ 11,903 $ 8,259 $ 4,686 $ 2,468
Product development revenues .......................... 5,000 -- -- --
------------ ------------ ------------ ------------
Net product revenues ............................. 16,903 8,259 4,686 2,468
Cost of manufacturing ................................. 13,965 11,210 5,173 3,786
Research & development ................................ 1,243 685 573 330
Selling, general and administrative expenses .......... 4,614 5,545 1,414 2,021
------------ ------------ ------------ ------------
Income (Loss) from operations ...................... (2,919) (9,181) (2,474) (3,669)
Amortization of deferred debt discount and
Private offering costs ............................. 1,834 1,144 612 479
Interest expense, net ................................. 2,860 1,699 966 536
Other income (expense) ................................ 56 66 (72) 12
------------ ------------ ------------ ------------
Income (Loss) before income taxes ................. (7,557) (11,958) (4,124) (4,672)
------------ ------------ ------------ ------------
Income tax benefit .................................... 296 -- -- --
------------ ------------ ------------ ------------
Net Income (Loss) ................................. ($ 7,261) ($ 11,958) ($ 4,124) ($ 4,672)
============ ============ ============ ============
Net Income (Loss) per share (basic and diluted) ....... (0.50) (0.84) (0.28) (0.33)
============ ============ ============ ============
Average number of outstanding shares 14,469,121 14,304,301 14,503,985 14,359,855
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE> 6
HALSEY DRUG CO., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Amounts in thousands NINE MONTHS ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss ............................................................ ($ 7,261) ($11,958)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ................................... 558 970
Provision for loss on accounts receivable ....................... (255) (201)
Amortization of deferred debt discount and private offering costs 1,835 1,143
Gain on sale of equipment ....................................... (93) (31)
Issuance of Common Stock for payment of interest................. 196 565
Issuance of Convertible Subordinated debentures for payment of
Interest ........................................................ 1,340 548
(Increase) decrease in operating assets and liabilities
Accounts receivable .......................................... (2,502) (199)
Other receivable ............................................. (57) (23)
Inventories .................................................. 390 2,361
Prepaid insurance and other current assets ................... (421) (35)
Deferred private offering costs .............................. (124) --
Other assets ................................................. 20 (100)
Accounts payable ............................................. 88 (619)
Accrued expenses ............................................. 750 (536)
-------- --------
Total adjustments ............................................ 1,725 3,843
-------- --------
Net cash used in operating activities ........................ (5,536) (8,115)
-------- --------
Cash flows from investing activities
Capital expenditures ............................................ (1,554) (482)
Proceeds from the sale of equipment ............................. 93 31
(Decrease) in other assets ...................................... -- 100
-------- --------
Net cash used in investing activities ........................ (1,461) (351)
-------- --------
Cash flows from financing activities
Increase (decrease) in notes payable ............................ 9,769 (7,533)
Payments to Department of Justice ............................... (225) (250)
Issuance of convertible subordinated debentures, net ............ -- 16,790
-------- --------
Net cash provided by financing activities .................... 9,544 9,007
-------- --------
Net increase in cash and cash equivalents ....................... 2,547 541
Cash and cash equivalents at beginning of period ..................... 786 1,850
-------- --------
Cash and cash equivalents at end of period ........................... $ 3,333 $ 2,391
======== ========
</TABLE>
Supplemental disclosure of noncash activities
For the 9 months ended September 30, 2000:
The Company issued 72,330 shares of common stock as payment for $195,863 in
accrued interest.
The Company issued 33,333 shares of common stock as payment for $39,000 in
accounts payable.
The Company issued $1,340,000 debentures as payment for like amount of accrued
debenture interest.
The accompanying notes are an integral part of these statements
<PAGE> 7
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Nine months ended September 30, 2000
Amounts in thousands except per share data
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock, $.01 par value Additional Treasury stock, at cost
---------------------------- Paid-in Accumulated -----------------------
Shares Amount Capital Deficit Shares Amount Total
---------- ------ ---------- ------------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 14,829,511 $ 148 $35,751 ($ 77,284) 439,603 ($ 989) ($ 42,374)
Net Loss for the nine months ended
September 30, 2000 (7,261) (7,261)
Issuance of common stock -
Conversion of debentures 8,834 -- 12 12
Payment of interest 72,330 1 195 196
Payment of trade payables 33,333 -- 38 38
Deferred debt discount on
warrants and private issuance costs 125 125
---------- ------ ------- ---------- ------- ------- ---------
Balance at September 30, 2000 14,944,008 $ 149 $36,121 ($ 84,545) 439,603 ($ 989) ($ 49,264)
========== ====== ======= ========== ======= ======= =========
</TABLE>
The accompanying notes are an integral part of this statement
<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, 2000 have been made. The
results of operations for the nine months period ended September 30, 2000 are
not necessarily indicative of the results that may be expected for the full year
ended December 31, 2000. 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, 1999 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
As of September 30, 2000, the Company had working capital of
approximately $1,778,000 and an accumulated deficit of approximately
$84,545,000. The Company incurred a loss of approximately $7,261,000 during the
nine months ended September 30, 2000.
Note 2 - Inventories
(Amounts in thousands)
Inventories consists of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Finished Goods $ 246 $ 725
Work in Process 1,104 720
Raw Materials 1,762 2,057
------- -------
$ 3,112 $ 3,502
======= =======
</TABLE>
<PAGE> 9
Note 3 - Convertible Subordinated Debentures
Convertible Subordinated Debentures consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Debentures - 5.0% $ 45,942 $ 44,601
Debentures - 10.0% 2,500 2,500
-------- --------
48,442 47,101
Less unamortized debt discount (4,628) (6,005)
-------- --------
$ 43,814 $ 41,096
======== ========
</TABLE>
Note 4 - Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Unsecured promissory demand notes $ 2,004 $ 2,529
Bridge loans -- 1,509
-------- --------
$ 2,004 $ 4,038
======== ========
</TABLE>
As of September 30, 2000, Watson Pharmaceuticals, Inc. had advanced $12,000,000
to the Company under a term loan. The loan is secured by a first lien on all of
the Company's assets, senior to the lien securing all other Company
indebtedness, carries a floating rate of interest equal to prime plus two
percent and matures on March 31, 2003.
NOTE 5 - Contingencies
The Company currently is a defendant in several lawsuits involving
product liability claims. The Company's insurance carriers have assumed the
defense for all product liability and other actions involving the Company. The
final outcome of these lawsuits cannot be determined at this time, and
accordingly, no adjustment has been made to the consolidated financial
statements.
<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 Change
Year-to-Year Year-to-Year
Increase Increase
(decrease) (decrease)
Percentage of Net Sales 2000 as Percentage of Net Sales 2000 as
----------------------- compared to ----------------------- compared to
2000 1999 1999 2000 1999 1999
------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Product Sales ................................ 70.4 100.0 44.1 100.0 100.0 89.9
Product Development Revenues ................. 29.6 -- N/A -- -- N/A
------ ------ ------ ------ ------ ------
Net Product Revenues ...................... 100.0 100.0 104.7 100.0 100.0 89.9
Cost of Manufacturing ........................ 82.6 135.7 24.6 110.4 153.4 36.6
Research & development ....................... 7.4 8.3 81.5 12.2 13.4 73.6
Selling, general and administrative expenses . 27.3 67.1 (16.8) 30.2 81.9 (30.0)
------ ------ ------ ------ ------ ------
Income (Loss) from operations ............. (17.3) (111.2) (68.2) (52.8) (148.7) (32.6)
Amortization of deferred debt discount and
private offering costs .................... 10.9 13.9 60.3 13.1 19.4 27.8
Interest expense, net ........................ 16.9 20.6 68.3 20.6 21.7 80.2
Other (income) ............................... 0.3 0.8 (15.2) (1.5) 0.5 (700.0)
------ ------ ------ ------ ------ ------
Income (Loss) before income taxes ........ (44.7) (144.8) (36.8) (88.0) (189.3) (11.7)
------ ------ ------ ------ ------ ------
Income tax benefit ........................... 1.8 -- -- -- -- --
------ ------ ------ ------ ------
Net Income (Loss) ............................ (43.0) (144.8) (39.3) (88.0) (189.3) (11.7)
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE> 11
Nine months ended September 30, 2000 vs nine months ended September 30, 1999
Net Product Revenues
The Company's net product revenues for the nine months ended September
30, 2000 of $16,903,000 represents an increase of $8,644,000 (104.7%) as
compared to net product revenues for the nine months ended September 30, 1999 of
$8,259,000. This increase is primarily a result of both the recognition of
$5,000,000 of product development revenues associated with the sale of certain
product rights to Watson Pharmaceuticals, Inc. and the revenues from the Core
Products Supply Agreement with Watson Pharmaceuticals, Inc. On an ongoing basis,
the Company expects to generate revenues from the development and manufacture of
both finished dosage and active pharmaceutical ingredients ("API's"), and then
partnering with others for the marketing and distribution of these products.
Cost of Manufacturing
For the nine months ended September 30, 2000, cost of manufacturing
increased $2,755,000 to $13,965,000 as compared to the nine months ended
September 30, 1999 of $11,210,000. This is primarily attributable to the
addition of manufacturing overhead costs from the March, 1999 acquisition of the
Congers manufacturing facility as well as the additional costs associated with
increased sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales
for the nine months ended September 30, 2000 and 1999 were 27.3% and 67.1%,
respectively. Overall these expenses in the first nine months of 2000 decreased
$931,000 over the same period in 1999. The decrease is primarily attributable to
the decreased costs of litigation, professional services, and wages and
benefits.
Research and Development Expenses
Research and development expenses as a percentage of sales for the nine
months ended September 30, 2000 and 1999 were 7.4% and 8.3%, respectively. The
Company's research and development program is concentrating its efforts in three
areas.
First, the Company is continuing development efforts relating to certain API's.
The Company currently manufactures two API's and has seven others under
development.
Second, the Company is proceeding with the development of products, apart from
those obtained from Barr Laboratories, for submission to the FDA. The Company
expects to file an additional three ANDAs with the FDA within the next twelve
months.
Third, 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 2000 with an additional six products expected to be
submitted to the FDA for approval in 2001.
Net Income (Loss)
For the nine months ended September 30, 2000, the Company had net loss
of $7,261,000 as compared to a net loss of $11,958,000 for the nine months ended
September 30, 1999. Included in the results for the nine months ended September
30, 2000 was interest expense of $2,860,000 and amortization of deferred debt
discount and private offering costs of $1,834,000 as compared to $1,699,000 and
$1,143,000, respectively, for the year earlier period. Also, included in results
for the nine months ended September 30, 2000 was a tax benefit of $296,000 from
the settlement of a income tax refund claim originally submitted in 1996.
Additionally, the Company recorded a gain on the sale of equipment of $93,000 in
2000 compared to a gain of $31,000 in 1999.
<PAGE> 12
Three months ended September 30, 2000 vs Three months ended September 30, 1999
Net Product Revenues
The Company's net product revenues for the three months ended September
30, 2000 of $4,686,000 represents a increase of $2,218,000 (89.9%) as compared
to net product revenues for the three months ended September 30, 1999 of
$2,468,000. This increase is primarily a result of the recognition of revenues
from the Core Products Supply Agreement with Watson Pharmaceuticals, Inc. On an
ongoing basis, the Company expects to generate revenues from the development and
manufacture of both finished dosage and active pharmaceutical ingredients
("API's"), and then partnering with others for the marketing and distribution of
these products.
Cost of Manufacturing
For the three months ended September 30, 2000, cost of manufacturing
increased by approximately $1,387,000 as compared to the three months ended
September 30, 1999. The increase for 2000 is attributable to additional costs
associated with increased sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales
for the three months ended September 30, 2000 and 1999 were 30.2% and 81.9%,
respectively. The decrease of $607,000 is due primarily to decreased costs of
litigation and professional services, and wages and benefits.
Research and Development Expenses
Research and development expenses as a percentage of sales for the
three months ended September 30, 2000 and 1999 was 12.2% and 13.4%,
respectively. The Company's research and development program is concentrating
its efforts in three areas.
First, the Company is continuing development efforts relating to certain API's.
The Company currently manufactures two API's and has seven others under
development.
Second, the Company is proceeding with the development of products, apart from
those obtained from Barr Laboratories, for submission to the FDA. The Company
expects to file an additional three ANDA with the FDA within the next twelve
months.
Third, 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 2000 with an additional six products expected to be
submitted to the FDA for approval in 2001.
Net Income (Loss)
For the three months ended September 30, 2000, the Company had a net
loss of $4,124,000 as compared to a net loss of $4,672,000 for the three months
ended September 30, 1999. Included in the results for the three months ended
September 30, 2000 was interest expense of $966,000 and amortization of deferred
debt discount and private offering costs of $612,000 as compared to $536,000 and
$479,000, respectively, for the year earlier period.
<PAGE> 13
Liquidity and Capital Resources
At September 30, 2000, the Company had cash and cash equivalents of
$3,333,000 as compared to $786,000 at December 31, 1999. The Company had working
capital at September 30, 2000 of $1,778,000 as compared to a working capital
deficiency of $5,181,000 at December 31, 1999.
On March 29, 2000, the Company completed various strategic alliance
transactions with Watson Pharmaceuticals, Inc. ("Watson"). The transactions with
Watson provided for Watson's purchase of a certain pending ANDA from the
Company, for Watson's rights to negotiate for Halsey to manufacture and supply
certain identified future products to be developed by Halsey, for Watson's
marketing and sale of the Company's core products and for Watson's extension of
a $17,500,000 term loan to the Company.
The product acquisition portion of the transactions with Watson
provided for Halsey's sale of a pending ANDA and related rights (the "Product")
to Watson for aggregate consideration of $13,500,000 (the "Product Acquisition
Agreement"). As part of the execution of the Product Acquisition Agreement, the
Company and Watson executed ten year supply agreements covering the active
pharmaceutical ingredient ("API") and finished dosage form of the Product
pursuant to which Halsey, at Watson's discretion, will manufacture and supply
Watson's requirements for the Product API and, where the Product API is sourced
from the Company, finish dosage forms of the Product. The purchase price for the
Product is payable in three approximately equal installments as certain
milestones are achieved. The first of those milestones is the receipt of FDA
approval to manufacture the Product. On April 28, 2000 the Company received this
approval and Watson paid the first milestone payment of $5,000,000 to the
Company.
The Company and Watson also executed a right of first negotiation
agreement providing Watson with a first right to negotiate the terms under which
the Company would manufacture and supply certain specified APIs and finished
dosage products to be developed by the Company. The right of first negotiation
agreement provides that upon Watson's exercise of its right to negotiate for the
supply of a particular product, the parties will negotiate the specific terms of
the manufacturing and supply arrangement, including price, minimum purchase
requirements, if any, territory and term. In the event Watson does not exercise
its right of first negotiation upon receipt of written notice from the Company
as to its receipt of applicable governmental approval relating to a covered
product, or in the event the parties are unable to reach agreement on the
material terms of a supply arrangement relating to such product within sixty
(60) days of Watson's exercise of its right to negotiate for such product, the
Company may negotiate with third parties for the supply, marketing and sale of
the applicable product. The right of first negotiation agreement has a term of
ten years, subject to extension in the absence of written notice from either
party for two additional periods of five years each. The right of first
negotiation agreement applies only to API and finished dosage products
identified in the agreement and does not otherwise prohibit the Company from
developing APIs or finished dosage products for itself or third parties.
The Company and Watson also completed a manufacturing and supply
agreement providing for Watson's marketing and sale of the Company's existing
core products portfolio (the "Core Products Supply Agreement"). The Core
Products Supply Agreement obligates Watson to purchase a minimum amount of
approximately $18,363,000 (the "Minimum Purchase Agreement") in core products
from the Company, in equal quarterly installments over a period of 18 months
(the "Minimum Purchase Period"). At the expiration of the Minimum Purchase
Period if Watson does not continue to satisfy the Minimum Purchase Amount, the
Company may market and sell the core products on its own or through a third
party. Pending the Company's development and receipt of regulatory approval for
its APIs and finished dosage products currently under development, including,
without limitation, the Product sold to Watson, and the marketing and sale of
same, of which there can be no assurance, substantially all the Company's
revenues will be derived from the Core Products Supply Agreement with Watson and
the purchase price installments relating to the Product purchased by Watson as
described above.
<PAGE> 14
The final component of the Company's strategic alliance with Watson
provided for Watson's extension of a $17,500,000 term loan to the Company. The
loan will be funded in installments upon the Company's request for advances and
the provision to Watson of a supporting use of proceeds relating to each such
advance. As of September 30, 2000, Watson had advanced $12,000,000 to the
Company under the Watson term loan. The loan is secured by a first lien on all
of the Company's assets, senior to the lien securing all other Company
indebtedness, carries a floating rate of interest equal to prime plus two
percent and matures on March 31, 2003. At September 30, 2000, a portion of the
net proceeds of the Watson term loan were used to satisfy in full the
approximately $3,300,000 in bridge financing provided by Galen Partners, to
satisfy payment obligations under the Settlement Agreement with the landlord of
its Brooklyn, New York facility, to begin upgrades and equip the Company's
Congers, New York facility, to begin upgrades and equip the API manufacturing
facility of Houba, Inc., the Company's wholly-owned subsidiary and for working
capital. The remaining net proceeds from the term loan will, in large part, be
used to continue the upgrades and equipment at both the API manufacturing
facility of Houba, Inc. and the Company's Congers, New York facility, and for
working capital to fund continued operations.
The remaining net proceeds from the Watson term loan combined with the payments
to be received by the Company from Watson under each of the Product Acquisition
Agreement and the Core Products Supply Agreement will provide the Company with
sufficient working capital to fund operations for at least the next twelve
months.
<PAGE> 15
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2000, the Company issued an
aggregate of 17,308 shares of Common Stock and 5% Convertible Senior Secured
Debenture in the principal amount of $499,388 in satisfaction of accrued
interest on the Company's outstanding 5% convertible senior secured debentures
issued in March and June 1998, and May and July 1999 (the "Convertible
Debentures"). The Company also issued 21,333 shares of Common Stock in
satisfaction of $24,000 in trade payables.
Each of the holders of the Convertible Debentures for which interest
payments were made in Common Stock and 5% Convertible Senior Secured Debentures
are accredited investors as defined in Rule 501(a) of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Act"). The Common Stock and
5% Convertible Senior Secured Debentures issued in satisfaction of the interest
payments under the Convertible Debentures were issued without registration under
the Act in reliance upon Section 4(2) of the Act and Regulation D promulgated
thereunder.
<PAGE> 16
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. A Form 8-K was filed on August 30, 2000, which
stated that on August 29, 2000 the Company was informed by the
Adjudicatory Counsel American Stock Exchange ("Amex") that the Amex had
determined to delist the Common Stock of the Company from trading on
the Amex as it did not meet the Amex's criteria for continued listing.
The last day of trading of the Company's Common Stock on the Amex was
September 7, 2000. The Company's Common Stock is currently traded on
the Over the Counter Bulletin Board under the symbol "HDGC".
<PAGE> 17
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 10, 2000 HALSEY DRUG CO., INC.
By: /s/ Michael K. Reicher
--------------------------------
Michael K. Reicher
Chairman, President
and Chief Executive Officer
By: /s/ Peter A. Clemens
--------------------------------
Peter A. Clemens
VP & Chief Financial Officer
<PAGE> 18
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.
