SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q/A
Amendment No. 1
(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, 1995
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.
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(Exact name of registrant as specified in its charter)
New York 11-0853640
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(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1827 Pacific Street
Brooklyn, New York 11233
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(Address of Principal executive officer) (Zip Code)
(718) 467-7500
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(Registrants telephone number, including area code)
Not Applicable
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(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. (Form 10-K for the year ended December 31,
1994, and Forms 10-Q for quarters ended September 30, 1994 and March 31, 1995
were filed late).
YES__________ NO____X_____
As of November 10,1995, the registrant had 8,470,459 of Common Stock, $.01 par
value, outstanding.
HALSEY DRUG CO., & SUBSIDIARIES
-------------------------------
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page #
Condensed Consolidated Balance Sheets- 3
September 30, 1995 and December 31, 1994
Condensed Consolidated Statements of 5
Operations - Three and nine months ended September 30, 1995
and September 30, 1994
Consolidated Statements of Cash 6
Flows - Nine months ended September 30, 1995
and September 30, 1994
Consolidated Statements of Stockholders' 7
Equity - Nine months ended September 30, 1995
Notes to Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands) SEPTEMBER 30, DECEMBER 31
1995 1994
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash $ 69 $ 28
Accounts Receivable - trade, net
of allowances for doubtful
accounts of $193 and $755
1995 and 1994, respectively 1,763 2,326
Inventories 8,391 6,835
Prepaid insurance and other current assets 441 496
Deferred income tax 296
-------- --------
Total current assets 10,664 9,981
PROPERTY PLANT & EQUIPMENT, NET 7,678 8,561
OTHER ASSETS 716 734
------- -------
$19,058 $19,276
======= =======
The accompanying notes are an integral part of these statements
3
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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(UNAUDITED)
(Amounts in thousands) September 30, December 31,
1995 1994
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft $ 307 $ 218
Current maturities of long-term debt 3,382 4,850
Department of Justice settlement 1,969 2,013
Accounts payable 3,309 4,414
Accrued expenses and other liabilities 2,132 1,823
Advances from minority stockholders 206 418
Income taxes payable 13 196
Deferred income 500
-------- --------
Total current liabilities 11,318 14,432
LONG-TERM DEBT 6,277 2,492
LITIGATION SETTLEMENT 3,000
CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.0l par value; authorized
20,000,000, shares; issued and outstanding 89 76
8,434,279 shares at September 30, 1995 and
7,609,537 shares at December 31, 1994
Additional paid-in capital 13,963 10,162
Accumulated deficit (11,489) (10,886)
-------- --------
2,563 (648)
Less: Treasury stock (1,100) 0
------- -
Total Stockholders' equity(deficit) 1,463 (648)
----- -----
$19,058 $19,276
======= =======
The accompanying notes are an integral part of these statements
4
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Amounts in thousands except per share data For the nine months ended For the three months ended
------------------------- ----------------------------
September 30 September 30
------------ ------------
1995 1994 1995 1994
---- ---- ---- ----
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Net Sales $16,104 $18,617 $4,347 $5,579
Cost of goods sold 12,868 15,301 4,049 4.578
------ ------ ----- -- -----
Gross profit 3,236 3,316 298 1,001
Research & Development 489 339 182 181
Selling, general and administrative expenses 4,487 5,290 1,506 1,603
----- ----- ----- -----
Loss from operations (1,740) (2,313) (1,390) (783)
Gain on the sale of assets 2,288
Other income 7 150 1 38
Interest expense 862 617 422 226
--- --- --- ---
Loss before income taxes (307) (2,780) (1,811) (971)
Provision for income taxes 296 0 0 0
--- - - -
Net loss ($603) ($2,780) ($1,811) ($971)
====== ======== ======== ======
Net loss per common share ($0.08) ($0.39) ($0.23) ($0.14)
======= ======= ======= =======
Weighted average number of outstanding shares 7,819,214 7,109,537 7,717,882 7,109,537
========= ========= ========= =========
The accompanying notes are an integral part of these statements
5
HALSEY DRUG CO., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Amounts in thousands NINE MONTHS ENDED
SEPTEMBER 30
1995 1994
---- ----
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($603) ($2,780)
------ --------
Adjustments to reconcile net (loss) to net cash used in operating
activities
Depreciation and amortization 1,547 1,504
Gain on sale of assets (2,288) -------
Accrued Department of Justice interest 56 -------
Deferred income taxes 296 -------
Changes in assets and liabilities
Accounts receivable 563 (196)
Inventories (909) 1,672
Prepaid insurance and other current assets 55 59
Income tax receivable ------- 660
Accounts payable (919) (1,222)
Accrued expenses 328 254
Income taxes payable (183) (39)
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Total adjustments (1,454) 2,692
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Net cash used in operating activities (2,057) (88)
------- ----
Cash flows from investing activities
Capital expenditures (403) (37)
(Decrease)increase in other assets (320) 123
Proceeds from sale of assets 2,000 -------
----- -------
Net cash provided by investing activities 1,277 86
----- --
Cash flows from financing activities
Note payable -------- 500
Payment of long term debt (1,563) (489)
Proceeds from issuance of convertible debentures 3,707 -------
Acquisition of treasury stock (1100) -------
Payment to Department of Justice (100) (18)
` Bank overdraft 89 (322)
Advances from former minority stockholder (212) 324
----- ---
Net cash (used in) provided by financing activities 821 (5)
--- ---
NET INCREASE IN CASH AND CASH EQUIVALENTS 41 (7)
Cash and cash equivalents at beginning of period 28 32
-- --
Cash and cash equivalents at end of period $ 69 $ 25
==== ====
The accompanying notes are an integral part of these statements.
6
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30,1995
Amounts in thousands except per share data
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock $.01 par value Additional Accumulated Treasury
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Shares Amount Paid-In Capital Deficit Stock Total
------ ------ --------------- ------- ----- -----
Balance at December 31, 1994 7,609,537 $76 $10,162 ($10,886) ($648)
Net loss for the nine months (603) 603
ended September 30, 1995
Issuance of common stock 500,000 5 828 0 833
Issuance of shares as 824,742 8 2,973 0 2,981
settlement of shareholder
litigation
Acquisition of treasury stock (500,000) 0 0 0 (1,100) (1,100)
--------- - - - ------- -------
Balance at September 30 , 1995 8,434,279 $89 $13,963 ($11,489) $(1,100) $1,463
========= === ======= ========= ======== ======
The accompanying notes are an integral part of these statements.
7
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
for the three month and nine month periods ended September 30, 1995 have been
made, but the financial results for the three month and nine month periods ended
September 30, 1995 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1995. 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, 1994 included in the Company's Annual Report on Form 10-K.
Note 2 - Inventories
-----------
(Amounts in thousands)
Inventories consists of the following:
September 30,1995 December 31, 1994
Finished Goods $2,764 $1,990
Work in Process 1,072 1,301
Raw Materials 4,555 3,544
------ ------
$8,391 $6,835
====== ======
NOTE 3 - Lines of Credit and Long-Term Debt
Lines of Credit
In December 1992, the Company entered into a new credit agreement
providing for borrowings of up to $7,000,000 at the prime rate plus an initial
margin of 1/2%, originally maturing in December 1994. Upon certain conditions,
as defined in the agreement, the margin rate increases by 2%. Borrowings under
the line were available for working capital purposes based upon a percentage of
the parent company's eligible accounts receivable and are collateralized by such
accounts receivable. The agreement contains certain financial covenants,
including minimum interest coverage and working capital ratios, tangible net
worth, limitations on capital expenditures, and maximum debt-to-equity ratios.
The Company and its banks amended the credit agreement to include the
stock of certain subsidiaries, the accounts receivable of the Company's Houba,
Inc. subsidiary, and the parent company's inventory and equipment as additional
collateral, to increase the initial margin rate to 2% (10.75% at September 30,
1995), to restrict certain payments made by the Company, to require payment to
be made by the Company to the banks of any income tax refunds received by the
Company, to extend the maturity date to August 31, 1995, and to agree in
principal to modify the financial covenants at a later date. In addition, if the
outstanding borrowings were not repaid by August 31, 1995, the Company has been
required to pay an additional 3%($ 102,000) of the then outstanding principal
due to the banks. Such amount has been accrued.
8
As consideration for the above amendments and the Company's continued
borrowings in excess of the borrowing formula, the Company has issued to the
banks stock warrants, expiring December 31, 1999, to purchase up to 635,653
shares of the Company's common stock at exercise prices ranging from $2.13 to
$2.275 per share (subject to the anti-dilution provisions of the credit
agreement, as amended). The fair value of the warrants, $200,000, as determined
by the Company's Board of Directors, has been recorded by the Company as
additional paid-in capital and a discount to bank debt which has been amortized
through the maturity date, August 31, 1995.
In July 1995, the Company and its banks amended the credit agreement as
a result of the Company having consummated a private offering on July 18, 1995.
As consideration for waiving any breach or default under the Credit Agreement as
a result of the private offering, the Bank group received $500,000 of the
proceeds as payment for interest, fees and principal and an extension of the
warrant exercise period to July 17, 2000. In addition, the exercise prices of
all warrants for 635,653 shares of the Company's common stock have been adjusted
for any anti-dilution to prices ranging from $2.13 to $ 2.275.
Although the credit agreement with the Bank Group has expired, the
Company and the Bank Group are currently negotiating on an extension of the
agreement.
Convertible Subordinated Promissory Note
Pursuant to the Zatpack, Inc. ("Zatpack") agreement , the Company issued
a convertible subordinated promissory note dated December 31, 1994, to Zatpack,
for the cancellation of trade payables and advances by Zuellig Group N.A. Inc.
("Zuellig") to the Company's subsidiaries, in the amount of $1,292,000, bearing
interest at 8% per annum, compounded annually, due December 1, 1997. The
outstanding principal, plus all accrued and unpaid interest, can be converted,
at the option of Zatpack, into the Company's common stock at the rate of one
share of common stock for every $2.41 of principal and interest being converted
( the $2.41 is subject to the anti-dilution provisions of the promissory note).
The note is subordinated to bank debt.
Subordinated Promissory Note
On March 21, 1995, the Company satisfied certain accounts payable by
issuing a subordinated promissory note to Mallinckrodt Chemical Acquisition,
Inc. ("Mallinckrodt") for $1,200,000, bearing interest at 8% per annum, with
interest and principal payable at the earlier of: (i) receipt by Mallinckrodt of
all necessary authorization from the U. S. Food and Drug Administration (the
"FDA") or (ii) September 21,1997. The note is collateralized by substantially
all of the assets of the Company and is subordinated to future bank indebtedness
of up to $8,000,000. The $1,200,000 note represents the deferral of payment by
the Company of a portion of its December 31, 1994 accounts payable due to an
affiliate of Mallinckrodt.
9
10 % Convertible Subordinated Debentures
The Company consummated a private offering (the "Offering") of 408 units (
"Units" ) of securities on July 18, 1995 for an aggregate purchase price of
$4,080,000. Each Unit consisted of (i) a 10% convertible subordinated debenture
in the principal amount of $ 10,000 (the "Debentures") issued at par and (ii)
750 redeemable common stock purchase warrants( "Warrants" ).
The Debentures will become due and payable as to principal five years
from the date of issuance. Interest, at the rate of 10% per annum, is payable on
a quarterly basis. The Debentures are convertible at any time after issuance
into shares ( the "Conversion Shares" ) of common stock, $ .01 par value per
share (the "Common Stock"), of the Company at a conversion price (the "
Conversion Price" ) of $ 2.00 per share, subject to adjustment.
Each Warrant entitles the holder to purchase one share of Common Stock (
the "Warrant Shares" and collectively with the conversion shares, the underlying
shares ) for $ 2.00 subject to adjustment, during the five year period
commencing on the date of issuance. The Warrants are redeemable by the Company
at a price of $.01 per Warrant at any time commencing one year after issuance,
upon not less than 30 days prior written notice, if the last sale price of the
Common Stock on the American Stock Exchange, Inc. ( the "Exchange" ) following
such one year anniversary equals or exceeds $ 2.00 per share ( the " Threshold"
) for the 20 consecutive trading days ending on the third day prior to the
notice of redemption to holders.
The Company will register the Underlying Shares under the Securities Act
of 1933, as amended (the "Securities Act" ). The Underlying Shares have been
approved for listing on the Exchange.
The Units are convertible (in the case of the Debentures) and/or
exercisable (in the case of the Warrants), as the case may be, into 2,346,000
Underlying Shares, or approximately 24% of the issued and outstanding Common
Stock of the Company immediately after the Offering. The Company reserved
1,846,000 shares of authorized but unissued shares of Common Stock for issuance
upon conversion of the Debentures and exercise of the Warrants; the 500,000
remaining Underlying Shares (the "RPI Shares" ) are represented by treasury
shares which the Company has repurchased from Ranbaxy Pharmaceuticals, Inc.
("RPI") with $1,100,000 of the net proceeds of the offering.
The net proceeds of the Offering ( after giving effect to the repurchase
of the RPI Shares) was approximately $ 2,628,175. The Company was required to
use $500,000 of such net proceeds to repay a portion of its bank debt. The
Company has utilized the balance of the net proceeds of the Offering for the
following purposes: for registration of the Underlying Shares under the
Securities Act; for the purchase of equipment; for research and development
expenses; and for working capital.
10
Borrowings under lines of credit and long-term debt consist of the following at
September 30, 1995 and December 31, 1994.
(Amounts in thousands)
1995 1994
---- ----
Borrowing under lines of credit $3,432 $4,850
Convertible subordinated promissory note 1,370 1,292
Subordinated promissory note 1,200 1,200
10% Convertible Subordinated Debentures 3,707
----- ---------
9,709 7,342
Less current maturities 3,432 4,850
----- -----
$6,277 $2,492
====== ======
NOTE 4 - Gain on Sale of Assets
On March 21, 1995, the Company sold its abbreviated new drug application
("ANDA") for 5mg Oxycodone HCl/325mg and Acetaminophen Tablets ("Tablets") and
certain equipment used in the production of the Tablets for up to $5,400,000 to
Mallinckrodt. The Company received $500,000 of the proceeds in July 1994, which
was recorded as deferred income on the Company's December 31, 1994 consolidated
balance sheet. Mallinckrodt also paid the Company $2,000,000 on March 21,1995
and the remainder will 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 decree 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 ("Deferred Payments"). Mallinckrodt also agreed to
defer $1,200,000 of the Company's trade debt due to an affiliate of
Mallinckrodt.
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 non competition agreement
pursuant to which the Company agreed not to compete with Mallinckrodt and its
affiliates with respect to the Tablets ANDA until March 21, 2000. If, prior to
the time it is possible for Mallinckrodt to commence production under the
Tablets ANDA or any new Tablets ANDA at its own facility, and the Company ceases
or is forced to cease or substantially curtail production under the Tablets
ANDA, as a consequence of (i) any action or communication by the FDA or any
other regulatory or governmental authority or (ii) any financial or other
business difficulty, then Mallinckrodt has the right to cancel payment of any
yet unpaid portion of the Deferred Payment ($1.9 million) and shall further have
the right to a full refund of any portion of the Deferred Payment already made
to the Company. For the nine months ended September 30, 1995, the Company has
recorded a gain of $2,288,000 for the sale of the ANDA and related equipment
net of expenses related to the sale.
In addition, the Company issued to Mallinckrodt an option to purchase the ANDA
for oxycodone/acetaminophen capsules at an exercise price equal to 3/4 of annual
net capsule revenue, as defined. Upon exercise of the option, the Company and
Mallinckrodt would enter into agreements pursuant to which the Company would (i)
manufacture oxycodone and acetaminophen capsules for Mallinckrodt for a period
of time and (ii) be prohibited from competing with Mallinckrodt and its
affiliates with respect to the production of capsules.
11
The Company has revised the gain recorded on the sale of assets to
Mallinckrodt and will not recognize the Deferred Payment until the earlier of
(i) Mallinckrodt receiving certain authorizations from the FDA or (ii) March 31,
1998. The effect of the adjustments on the accompanying financial statements is
as follows (in thousands, except for per share amounts):
As of June 30, 1995:
As Previously Reported As Restated
-----------
Net Earnings(loss) $1,297,000 ($603,000)
Net earnings(loss) per common stock $.16 ($.08)
Long Term Receivable 1,900,000 0
Accumulated Deficit (9,589,000) (11,489,000)
NOTE 5 - Sale of Common Stock
--------------------
On March 30, 1995, the Company entered into an Agreement with Zatpack
for the purchase of 500,000 shares of common stock of the Company by Zatpack,
with registration rights, in consideration of $1,000,000 ($983,000 net of
expenses). The $1,000,000 consideration consists of the cancellation of
indebtedness (incurred by the Company's subsidiaries for the purchase of raw
materials delivered or being delivered from affiliates of Zuellig) and shares of
the Company's Indiana Fine Chemicals Corporation subsidiary valued at $150,000.
As a result of the above transaction, the Company owns 100% of Indiana Fine
Chemical Corporation. In addition, as described in Note 3 previously, the
Company issued a convertible promissory note to Zatpack, dated December 1, 1994.
Zatpack has acquired the above assets from Zuellig and its subsidiaries.
NOTE 6 - 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 of these actions. Management is of the opinion that final
disposition of these lawsuits will not result in a material adverse impact on
the financial condition of the Company.
On June 29, 1993, the Company entered into a consent decree with the U.
S. Attorney for the Eastern District of New York on behalf of the FDA that
resulted from the FDA's investigation of the Company. Under the terms of the
consent decree, the Company was enjoined from shipping any solid dosage drug
products, (i.e., excluding liquid drug formulations) manufactured at the
Company's facilities until the Company established, to the satisfaction of the
FDA, that the methods used in, and the facilities and controls to be used for,
manufacturing, processing, packing, labeling and holding any drug are
established, operated and administered in conformity with the Federal Food, Drug
and Cosmetic Act and the FDA's Current Good Manufacturing Practice regulations.
As part of satisfying the foregoing requirements, the Company is required to
validate the manufacturing process for each solid dosage drug product prior to
manufacturing and shipping the drug product, except that the Company is
permitted under the terms of the consent decree to manufacture and ship from its
facilities six identified drug products at its own risk provided that (i) at
least twice per month, the Company's independent expert certifies that each
batch of drug product upon validation will have been manufactured in accordance
with the FDA Regulations and the formulation described in the drug products
approved NDA ("New Drug Application") or ANDA, until such time as validation is
completed for these products; and (ii) for any batches of these products that
have already been manufactured, such certification will include certification by
a Company representative with personal knowledge of the records relating to such
drug that they are accurate and
12
complete and a certification signed by an independent expert that he has
personally reviewed the records provided and that in his professional opinion,
the foregoing requirement concerning validation has been met. The Company
commenced shipments of five of the six solid dosage products under the foregoing
certification process. After review by the Company and its consultants of one of
the Company's six core products, hydrocodone bitartrate 5mg and acetaminophen
500mg tablet, discrepancies were discovered with some of the data in the
Company's ANDA. This resulted in a voluntary recall of this product and the
withdrawal of the ANDA.
On June 21, 1993, the Company entered into a plea agreement with the
Department of Justice to resolve the government's investigation. Under the terms
of the plea agreement, the Company agreed to plead guilty to five counts of
adulteration of a single drug product shipped in interstate commerce and related
recordkeeping violations. The plea agreement also requires the Company to pay a
fine of $2,500,000 over five years in quarterly installments of $125,000
beginning September 15, 1993. As of September 30, 1995, the Company has paid two
quarterly installments and several partial payments. The plea agreement
stipulated that if the Company does not make timely payments, the entire fine
becomes due and payable. As a result, the entire Department of Justice
settlement has been reclassified as a current liability in the December 31,1994
consolidated balance sheets. At the present time, no action has been initiated
by the Department of Justice to require payment of the entire amount.
On March 31, 1993 and April 1, 1993, five lawsuits were filed by
shareholders against the Company and three or more of the Company's directors.
In June 1994, the plaintiffs of the five lawsuits and the two
shareholder-derivative lawsuits and the Company agreed to a settlement of these
lawsuits. The Company agreed to pay to the plaintiffs $1,000,000 in cash, which
has been paid by the Company's insurance carrier and, at the Company's option,
either (i) the issuance of shares of the Company's common stock having a value,
as of the date of distribution of $3,000,000 or (ii) the payment by the Company
of $3,000,000 in cash or (iii) any combination of issuance of shares or payment
of cash by the Company having a combined value as of the date of distribution of
$3,000,000. The suit has been settled and payment has been made by the insurance
carrier for the agreed amount of $1,000,000 , and the Company has issued 824,742
shares of stock at the per share price of $ 3.6375 amounting to a value of $
3,000,000.
On November 12, 1993, the Securities and Exchange Commission ("SEC")
requested that the Company provide to the SEC, on a voluntary basis, information
and documents regarding the ingredients and fillings relating to the following
drugs; quinidine gluconate, propylthiourical, acetaminophen and codeine
phosphate, metronidazole, quinidine sulfate, and hydralazine hydrochloride. The
SEC advised the Company that the inquiry relates to public information
disseminated by the Company and trading in the Company's securities during the
period August 1987 through July 1993. The Company is cooperating with the SEC
and has made available various documents. These documents relate to the testing,
formulations and sale of these drugs which were maintained by the Company at the
offices of its counsel in Maryland. In April 1994, the SEC requested additional
documentation regarding these matters. The Company has complied with the
additional request. On July 5,1994, the Company made a formal submission to the
SEC and outlined the parameters of a proposed settlement. An additional
submission was made on January 31, 1995 to bring additional information to the
SEC. In May 1995, a formal Order of Investigation was issued by the SEC covering
the foregoing matters. In June 1995, additional documents were submitted.
Officers and directors of the Company have also testified before the SEC. On
October 24, 1995, the SEC staff informed the Company that it would recommend
that the Commission authorize the institution of an administrative proceeding
pursuant to Section 21C of the Securities and Exchange Act of 1934 (the
"Exchange Act") against the Company. Specifically, the staff indicated it would
seek an order requiring the Company to cease and desist from violating Section
17 (a) of the Securities act and Sections 10 (b) and 13 (a) of the Exchange Act
and Rules 10b-5, 12B-20, 13a-1 and 13a-13 thereunder. The proposed action
13
would allege that the Company's December 31, 1991 Annual Reports on Form 10-k
and March 31, 1991, June 30, 1991, September 30, 1992 quarterly reports on Form
10-Q were materially false and misleading. The SEC staff proposal conforms in
large part to the settlement proposal submitted by the Company. The Company is
unable to predict the likelihood of the SEC adoption the staff proposal. An
adverse determination in this regard could have material adverse effect on the
Company's financial condition.
By letter dated October 23, 1995, the Company was notified by the New
York State Education Department, that the Professional Conduct Officer of the
office of Professional Discipline has determined that there is sufficient
evidence of professional misconduct on Halsey'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
Department of Justice investigation, indictment and plea. The Company is
preparing a written response.
On November 9, 1995, the Company received two Notices of Charge of
Discrimination from the United States Equal Employment Opportunity Commission
relating to two claimed violations of Title VII of the Civil Rights Act of 1964.
The first charge of employment discrimination was filed on October 31, 1995 by a
female employee of the Company and alleges sexual discrimination and harassment.
A second separate charge of discrimination was also filed on October 31, 1995,
by another female employee alleging sexual harassment against the same
individual.
The Company has investigated these charges and undertaken to remedy the
situation. The Company is unable to predict with reasonable certainty the
outcome of these claims and, accordingly, no provision has been made for any
potential costs.
The Company has been named as a defendant in an action commenced on
August 19, 1995 by the Company's former product liability insurer ( "Lexington")
captioned Lexington Insurance Company v. Halsey Drug Co., Inc., 95 Civ. 3403,
pending in the United States District Court for the Eastern District of New
York. The Complaint seeks the recovery of sums paid by Lexington to settle a
lawsuit brought by Linda K. Walton relating to the ingestion of quinidine
gluconate allegedly manufactured by the Company. The Complaint requests not less
than $75,000 in damages, plus a declaration that the Walton claim, and other
similar claims are not covered under their policy. The Company has served its
Answer which denies that the exclusion relied on by the Lexington applies to the
Walton claim. No discovery has been exchanged.
A lawsuit has been filed by the minority shareholders of H. R. Cenci
Laboratories, Inc. ("Cenci") and Cenci Powder Products, Inc. against the Company
and several of the officers of the Company. The lawsuit alleges that the Company
has breached several representations made during the course of negotiations
leading to the Company's purchase of 51% of the stock of Cenci. This action
seeks unspecified compensatory damages, as well as punitive damages, rescission,
specific performance, reformation and a declaration as to what amount, if any,
is owed to plaintiff. Because of the early stage of this action, it is not
possible at this time to predict with reasonable certainty the ultimate outcome
of this matter and, accordingly, no provision has been made for any potential
costs relating to this matter. A counter claim has been filed by the Company.
14
HALSEY DRUG CO.,INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------
Nine months ended Three months ended
September 30 September 30
-------------------------------------- -------------------------------------
Percentage Percentage
Change Change
Year-to-Year Year-to-Year
Percentage of Net Sales Increase Percentage of Net Increase
(decrease) Sales (decrease)
---------- ----- ----------
- -------------------------------------------------------------------------------------------------------------
1995 as 1995 as
compared to compared to
1995 1994 1994 1995 1994 1994
% % % % % %
Net Sales 100.0 100.0 (13.5) 100.0 100.0 (22.1)
Cost of Goods 79.9 82.2 (15.9) 93.1 82.1 (11.6)
---- ---- ---- ----
Gross Profit 20.1 17.8 (2.4) 6.9 17.9 (70.2)
Research & Development 3.0 1.8 44.2 4.2 3.2 .7
Selling, General and 27.9 28.4 (15.2) 34.7 28.7 (6.1)
administrative expenses
----- ----- ----- -----
Loss from operations (10.8) (12.4) 24.8 (32.0) (14.0) (77.5)
Gain on the sale of assets 14.2 ----- 100.0 ----- ----- 100.0
----- ----- -----
Other income .------ 0.8 (95.3) ------ 0.7 (96.5)
Interest expense (5.3) (3.3) 39.7 (9.7) (4.1) 86.7
----- ----- ----- ----- ----
Loss before income taxes (1.9) (14.9) 88.9 (41.7) (17.4) (86.5)
Provision for income taxes 1.8 ----- 100.0 ------- ----- 100.0
--- ----- ------- ----- -----
Net Loss (3.7) (14.9) 78.3 (41.7) (17.4) (86.5)
===== ====== ====== ======
15
Nine months ended September 30, 1995 vs. Nine months ended September 30, 1994
- -----------------------------------------------------------------------------
Net Sales
- ---------
The Company's net sales for the nine months ended September 30, 1995 of
$16,104,000 represents a decrease of $(2,513,000) or (13.5%) as compared to net
sales for the nine months ended September 30, 1994 of $18,617,000. The decrease
in 1995 is attributable to the reduction in shipments of tablet products due to
the sale at the end of the first quarter by the Company of the tablets ANDA to
Mallinckrodt which is partially offset by manufacturing revenue that the Company
is receiving as part of its agreement with Mallinckrodt. In addition, the
decrease is attributable to price reductions effected during the third quarter
in order to meet increased competition in the market.
Cost of Goods Sold
- ------------------
For the nine months ended September 30, 1995, cost of goods sold of
$12,868,000 represents a decrease of approximately $2,433,000 as compared to
$15,301,000 for the nine months ended September 30, 1994. The decrease for 1995
is attributable to the reduction in shipments of tablet products due to the sale
at the end of the first quarter by the Company of the tablets ANDA combined with
significant reductions in manufacturing costs of personnel and other expenses.
The Company's gross margin as a percentage of sales for the nine months ended
September 30, 1995 was 20.1% as compared to 17.8% for the nine months ended
September 30, 1994.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses as a percentage of sales
for the nine months ended September 30, 1995 and 1994 were 27.9% and 28.4%,
respectively. These expenses decreased by approximately $803,000 or 15.2% as
compared to 1994. The decrease was attributable to cost saving measures effected
by management during the year, a reduction in personnel and related costs
combined with reductions in legal and consulting expenses.
Gain on Sale of Assets
- ----------------------
On March 21, 1995, the Company sold its abbreviated new drug application
("ANDA") for 5mg Oxycodone HCl/325mg and Acetaminophen Tablets ("Tablets") and
certain equipment used in the production of the Tablets for up to $5,400,000 to
Mallinckrodt. The Company received $500,000 of the proceeds in July 1994, which
was recorded as deferred income on the Company's December 31, 1994 consolidated
balance sheet. Mallinckrodt also paid the Company $2,000,000 on March 21,1995
and the remainder will 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 decree 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 ("Deferred Payments"). Mallinckrodt also agreed to
defer $1,200,000 of the Company's trade debt due to an affiliate of
Mallinckrodt. For the nine months ended Spetember 30, 1995, the Company has
recorded a gain of $2,288,000 for the sale of the ANDA and related equipment
net of expenses related to the sale.
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 non competition agreement
pursuant to which the Company agreed not to compete with Mallinckrodt and its
affiliates with respect to the Tablets ANDA until March 21, 2000. If, prior to
the time it is possible for Mallinckrodt to commence production under the
Tablets ANDA or any new Tablets ANDA
16
at its own facility, and the Company ceases or is forced to cease or
substantially curtail production under the Tablets ANDA, as a consequence of (i)
any action or communication by the FDA or any other regulatory or governmental
authority or (ii) any financial or other business difficulty, then Mallinckrodt
has the right to cancel payment of any yet unpaid portion of the Deferred
Payment ($1.9 million) and shall further have the right to a full refund of any
portion of the Deferred Payment already made to the Company.
Other Income
- ------------
Other income decreased by $143,000 as compared to 1994. This decrease in
other income is attributable to the sale by the Company of certain equipment
which resulted in a gain during the second quarter of 1994.
Interest Expense
- ----------------
Interest expense for 1995 increased by $245,000 as compared to 1994 as a
result of the fee($102,000) payable to the Bank Group at the end of August, an
increase in the level of borrowings and an increase in the interest rate after
the second quarter of 1994.
Provision for Income Taxes
- --------------------------
The Company had a tax provision of $296,000 as a result of available net
operating loss carryforward. In 1994, the Company had no tax benefit since the
available loss carryback to prior years was utilized by the net operating loss
for 1993 carryback to the prior three years.
Net (Loss)
- ----------
For the nine months ended September 30, 1995, the Company had a net loss
of $603,000 as compared to $2,780,000 for the nine months ended September 30,
1994. The increase is attributable to the gain on the sale of assets of $
2,288,000 net of the tax provision of $296,000, or $ 1,992,000.
17
Three months ended September 30, 1995 Vs three months ended September 30, 1994
- ------------------------------------------------------------------------------
Net Sales
- ---------
The Company's net sales for the three months ended September 30, 1995 of
$4,347,000 represents a decrease of $1,232,000 (22.1%) as compared to net sales
for the three months ended September 30 , 1994 of $5,579,000. The decrease in
1995 is attributable to the reduction in shipments of tablet products due to the
sale at the end of the first quarter by the Company of the tablets ANDA to
Mallinckrodt. This decrease is partially offset by the manufacturing revenue
that the Company is receiving as part of its agreement with Mallinckrodt. In
addition, the decrease is attributable to price reductions effected during the
third quarter in an effort to meet increased competition.
Cost of Goods Sold
- ------------------
For the three months ended September 30, 1995, cost of goods sold
decreased by approximately $529,000 as compared to the three months ended
September 30, 1994. The decrease for 1995 is attributable to the reduction in
shipments of tablet products due to the sale at the end of the first quarter by
the Company of the tablets ANDA. In addition price reductions were effected
during the quarter as a result of increased market competition. In an effort to
reduce manufacturing costs , the Company has decreased operating costs through
significant reductions in personnel and other expenses. The Company's gross
margin as a percentage of sales for the three months ended September 30, 1995
was 6.9% as compared to 17.9% for the three months ended September 30, 1994.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses as a percentage of sales
for the three months ended September 30, 1995 and 1994 were 34.7% and 28.7%,
respectively.
Interest Expense
- ----------------
Interest expense for the three months ended September 30, 1995 increased
by $196,000 as compared to 1994 as a result of the fee($102,000) payable to the
Bank Group at the end of August combined with an increase in the level of
borrowings.
Net Loss
- --------
For the three months ended September 30, 1995, the Company had net loss
of $1,811,000 as compared to a net loss of $971,000 for the three months ended
September 30, 1994. This increase in loss is attributable to the reduction in
shipments of tablet products due to the sale at the end of the first quarter by
the Company of the tablets ANDA combined with price reductions to compete with
increase market competition.
18
Liquidity and Capital Resources
- -------------------------------
At September 30, 1995, the Company had cash and cash equivalents of
$69,000 as compared to $28,000 at December 31, 1994. The Company had a working
capital deficiency at September 30, 1995 of $654,000 and $4,451,000 at December
31, 1994.
As a result of the decline in shipments of solid dosage products from
the Company's Brooklyn plant following the entry of the consent decree, and as a
result of the lack of available borrowing under the Company's credit agreement,
the Company's liquidity position has been materially adversely affected since
June 30, 1993 and the Company's capital resources have been severely limited.
The Company has actively sought to reduce its operating costs at the Brooklyn
plant, where it has made significant reductions in personnel. In addition, the
Company's liquidity position has been affected during the second half of 1994 by
the discontinuance of shipments of liquid products from its Cenci subsidiary as
a result of review completed by the Company of this liquid operation. In an
effort to reduce the loss from lower revenues at this subsidiary, the Company
has reduced its operating costs at Cenci through significant reductions of
personnel and other expenses.
Under the terms of the plea agreement with the DOJ, the Company has
agreed to pay a $2,500,000 fine, payable in quarterly installments of $125,000
over five years. Two installments plus additional partial payments have been
paid to date. The agreement with the DOJ stipulates if any payments are not made
in a timely fashion, the entire amount of the fine shall become due and payable
immediately. As a result, the entire amount of the settlement has been
classified as current as of December 31, 1994. As of the current date, no action
has been initiated to require immediate payment of the entire amount.
In May 1994, the Company and its banks amended the credit agreement to
(i) modify the terms of the warrants by adjusting the initial exercise price per
share of the warrants to $2.875; (ii) require the payment of any income tax
refunds of the Company and its subsidiaries to an escrow account maintained by a
designated agent; (iii) require the maintenance of a consultant for designated
duties specified in the agreement; (iv) restrict certain payments made by the
Company or its subsidiaries; and (v) require the reimbursement of certain fees
incurred by the banks in connection with the credit agreement.
In July 1994, the Company and its banks further amended the credit
agreement to extend the due date to December 31, 1994, to modify certain
financial covenants, to restrict the use of proceeds of loans and advances
received by the Company including the receipts from the agreement with
Mallinckrodt and to require the reimbursement of certain fees to the bank in
connection with this agreement. As consideration, the Company issued 77,988 new
warrants, at an exercise price of $3.4375 per share, and agreed to issue
additional warrants, for each month the loan remains outstanding through the due
date of December 31, 1994. The Company has issued warrants for the purchase of
an aggregate of 203,939 shares at exercise prices varying from $2.875 to $2.25
per share. Such warrants were valued at $100,000 in 1993 and $100,000 in 1994.
The fair value of the warrants, $200,000, as determined by the Company's Board
of Directors, has been recorded by the Company as additional paid-in-capital and
a discount to bank debt which is being amortized through the extended maturity
date of the credit agreement, which is August 31, 1995.
In July 1994, the Company received an income tax refund of $470,000, net
of penalties and interest, which the Company used to reduce the outstanding debt
and to pay interest and fees outstanding to the banks.
19
In March 1995, the Company and its banks restructured the credit
agreement to include an extension of the due date to August 31, 1995,
modification of the financial covenants, reduction of the exercise prices of all
warrants in excess of $2.375 per share to $2.375 per share and extension of the
expiration date of the warrants to December 1999. As consideration for these
modifications, the banks received $1,500,000 of the proceeds received from the
transaction with Mallinckrodt. Funds have been applied to reduce outstanding
principal by approximately $1,113,000 to approximately $3,777,000, to pay
accrued interest (approximately $154,000) and fees (approximately $233,000). In
addition, if the outstanding borrowings were not repaid by August 31, 1995, the
Company has been required to pay an additional 3%($ 102,000) of the then
outstanding principal due to the banks. Such amount has been accrued.
In July 1995, The Company and its banks amended the credit agreement as
a result of the Company having consummated a private offering on July 18, 1995
as discussed previously in Note 6 to the financial statements. As consideration
for waiving any breach or default under the Credit Agreement as a result of the
private offering, the Bank group received $500,000 of the proceeds as payment
for interest, fees and principal and an extension of the warrant exercise period
to July 17, 2000. In addition, the exercise prices of all warrants for 635,653
shares of the Company's common stock have been adjusted for any anti-dilution to
prices ranging from $2.13 to $ 2.275.
Although the credit agreement with the Bank Group has expired, the
Company and the Bank Group are currently negotiating on an extension of the
agreement.
See "Gain on Sale of Assets" for a description of the transaction with
Mallinckrodt..
On March 30, 1995, the Company signed the Zatpack Agreement with Zatpack
which provides for the purchase of 500,000 shares of common stock of the Company
by Zatpack in consideration of $1,000,000 ($982,000 net of expenses).
As described in Note 3 to the financial statements, the Company
consummated a private offering of 408 Units of securities on July 18, 1995 for
an aggregate purchase price of $4,080,000(less related expenses of $343,000).
Each Unit consisted of a 10% Debenture in the principal amount of $ 10,000
issued at par with 750 Redeemable Warrants.
The Company will register the Underlying Shares under the Securities
Act. The Underlying Shares have been approved for listing on the Exchange.
The net proceeds of the Offering ( after giving effect to the repurchase
of the RPI Shares) was approximately $ 2,628,175. The Company was required to
use $500,000 of such net proceeds to repay a portion of its bank debt. The
Company intends to utilize the balance of the net proceeds of the Offering for
the following purposes: for registration of the Underlying Shares under the
Securities Act; for the purchase of equipment; for research and development
expenses; and for working capital.
As previously indicated, the Company continues to actively pursue
additional financing. At the current time, the Company is discussing with
several parties to obtain such financing which will provide additional working
capital. There can be no assurance that the Company will be able to obtain any
such financing on commercially acceptable terms.
20
PART II OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Financial Data Schedule
(b)Reports on Form 8-K
None
21
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALSEY DRUG CO., INC.
Date: October 3 , 1995 BY: /s/ Rosendo Ferran
--------------------
Rosendo Ferran
President and Chief
Executive Officer
Date: October 3 , 1996 BY: /s/ Robert J. Mellage
----------------------
Robert J. Mellage
Corporate Controller
5
1,000
6-MOS
DEC-31-1995
SEP-30-1995
69
0
1,956
193
8,391
10,664
18,348
10,670
19,058
11,318
0
0
0
89
12,863
19,058
16,104
0
12,868
0
4,976
0
855
(307)
296
0
0
0
0
(603)
(.08)
0
