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 June 30, 1997
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)
1827 Pacific Street
Brooklyn, New York 11233
- --------------------------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(718) 467-7500
- --------------------------------------------------------------------------------
(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 NO X
----- -----
As of August 13, 1997 the registrant had 14,012,410 Shares of Common Stock, $.01
par value, outstanding.
HALSEY DRUG CO., & SUBSIDIARIES
-------------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited) Page #
Condensed Consolidated Balance Sheets- 3
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of 5
Operations - Three and six months ended June 30, 1997
and June 30, 1996
Consolidated Statements of Cash 6
Flows - Six months ended June 30, 1997
and June 30, 1996
Consolidated Statements of Stockholders' 7
Equity - Six months ended June 30, 1997
Notes to Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(UNAUDITED)
(Amounts in thousands) 1997 1996
JUNE 30 DECEMBER 31
------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 202 $ 118
Accounts Receivable - trade, net of
Allowances for doubtful accounts of $502 and
$ 424 at December 31, 1997 and
December 31, 1996, respectively 630 226
Other receivable -- 1,000
Inventories 4,472 3,758
Prepaid insurance and other current assets 405 252
------- -------
Total current assets 5,709 5,354
PROPERTY PLANT & EQUIPMENT, NET 5,404 6,222
OTHER ASSETS 409 406
------- -------
$11,522 $11,982
======= =======
The accompanying notes are an integral part of these statements
3
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(UNAUDITED)
(Amounts in thousands) 1997 1996
JUNE 30 DECEMBER 31
------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES
Bank overdraft $ 296 $ 286
Due to Banks 2,476 3,195
Notes payable 5,525 1,625
Convertible Subordinated Debentures 2,209 2,173
Department of Justice settlement 2,190 2,168
Accounts payable 4,204 4,533
Accrued expenses and other liabilities 5,584 3,575
-------- --------
Total current liabilities 22,484 17,555
LONG-TERM DEBT -- 1,508
CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized 20,000,000, shares; issued 139 131
and outstanding 13,995,102 shares at June 30,1997 and
13,175,708 shares at December 31, 1996
Additional paid-in capital 25,378 23,316
Accumulated deficit (35,490) (29,484)
-------- --------
(9,973) (6,037)
Less: Treasury stock - at cost -(449,603 shares at June 30, (989) (1,044)
-------- --------
1997 and 474,603 shares at December 31, 1996)
Total stockholders' equity(deficit) (10,962) (7,081)
-------- --------
$ 11,522 $ 11,982
======== ========
The accompanying notes are an integral part of these statements
4
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------
Amounts in thousands except per share data
June 30
-------
For the six months ended For the three months ended
------------------------ --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net Sales .............................................. $ 5,052 $ 7,643 $ 2,209 $ 3,477
Cost of goods sold ..................................... 7,355 7,740 3,250 3,991
------------ ------------ ------------ ------------
Gross profit(loss) .................................. (2,303) (97) (1,041) (514)
Research & Development ................................. 483 629 318 271
Selling, general and administrative expenses ........... 2,682 3,144 1,222 1,767
------------ ------------ ------------ ------------
Loss from Operations ................................ (5,468) (3,807) (2,581) (2,552)
Interest expense ....................................... 537 879 277 444
------------ ------------ ------------ ------------
Loss before income taxes ........................... (6,005) (4,749) (2,858) (2,996)
------------ ------------ ------------ ------------
Provision for income taxes ............................. -- -- -- --
------------ ------------ ------------ ------------
Net loss ............................................... ($ 6,005) ($ 4,749) ($ 2,858) ($ 2,996)
============ ============ ============ ============
Net loss per common share .............................. (0.45) ($ 0.47) (0.21) ($ 0.26)
============ ============ ============ ============
Average number of outstanding shares ................... 13,246,077 10,179.172 13,515,063 11,375,177
============ ============ ============ ============
The accompanying notes are an integral part of these statements
5
HALSEY DRUG CO., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
For the six months ended
------------------------
1997 1996
---- ----
Cash flows from operating activities
Net loss ................................................ (6,005) ($4,749)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ....................... 854 1,193
Changes in assets and liabilities
Accounts receivable .............................. (404) 17
Other receivable ................................. 1,000
Inventories ...................................... (714) 602
Prepaid insurance and other current assets ....... (153) 3
Accounts payable ................................. (329) 855
Accrued expenses and other liabilities ........... 2022 871
------- -------
Total adjustments ................................ 2,276 3,541
------- -------
Net cash used in operating activities ......... (3,729) (1,208)
------- -------
Cash flows from investing activities
Capital expenditures ................................ 36 (360)
(Decrease)increase in other assets .................. (3) (574)
------- -------
Net cash used in investing activities ............ 33 (934)
------- -------
Cash flows from financing activities
Increase in notes payable ........................... 3,900
Decrease in due to banks ............................ (719)
Issuance of common stock for payment of interest .... 112 1,556
Exercise of warrants of convertible debentures ...... 72
Exercise of stock options ........................... 305
Payment to Department of Justice .................... (10)
Proceeds from issuance of treasury stock ............ 100
Bank overdraft ...................................... 10 354
------- -------
Net cash provided by financing activities ........ 3,780 1,900
------- -------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS . 84 (242)
Cash and cash equivalents at beginning of period ......... 118 353
------- -------
Cash and cash equivalents at end of period ............... $ 202 $ 111
======= =======
The accompanying notes are an integral part of these statements
6
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
Six months ended June 30, 1997
Amounts in thousands except per share data
(UNAUDITED)
- --------------------------------------------------------------------------------
Common Stock, $.01 par value Treasury stock, at cost
---------------------------- Additional Accumulated -----------------------
paid-in
Shares Amount Capital deficit Shares Amount Total
------ ------ --------- ------- ------ ------ -----
Balance January 1, 1997 13,175,708 $ 131 $ 23,316 ($ 29,484) (474,603) ($ 1,044) ($ 7,081)
Net Loss for the six months ended June (6,006) (6,006)
30, 1997
Conversion of convertible subordinated 642,407 7 1,529 1,536
promissory note
Issuance of shares as payment of 34,754 112 112
interest
Sale of treasury stock 25,000 45 25,000 55 100
Exercise of warrants of convertible 22,267 72 72
debentures
Stock options exercised 94,966 1 304 305
------ ------ --- ----------- ----------- -------- -----------
Balance at June 30, 1997 13,995,102 $ 139 $ 25,378 ($ 35,490) ( 449,603) ($ 989) ($ 10,962)
========== ====== ========= =========== =========== ======== ===========
The accompanying notes are an integral part of this statement
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 six months ended June 30, 1997 have been made, but the financial results
for the six month period ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the full year ended December 31, 1997. 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, 1996 included in the Company's Annual Report on Form
10-K.
As of June 30, 1997, the Company has a working capital deficiency of
approximately $16,775,000 has a stockholders' equity (deficit) of approximately
$10,962,000 and has incurred a loss of approximately $6,005,000 during the six
months ended June 30, 1997, and is not in compliance with its financial
covenants pursuant to its banking agreement and its convertible subordinated
debenture agreement. In addition, the Company is delinquent in the payment of
its payroll taxes and the Company's credit agreement with its banks expired June
30, 1997. These factors and other matters as discussed in Annual Report on Form
10-K at December 31, 1996, raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments relative to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence. Management's plans with
respect to those conditions include seeking alternative sources of financing. In
this regard, the Company (a) is reviewing several unsolicited expressions of
interest from prospective joint venture partners and investors, (b) plans to
refinance or extend the maturity date of the Company's bank debt, (c) has sold
the rights to one of its products to a major vendor and has received a
commitment for future production of such product and submitted Abbreviated New
Drug Applications ("ANDA") for approval by the Food and Drug Administration
("FDA"). There can be no assurance that management can obtain alternative
sources of financing or obtain approvals for the ANDA's.
Note 2 - Inventories
(Amounts in thousands)
Inventories consists of the following:
June 30, 1997 December 31, 1996
------------- -----------------
Finished Goods $ 1,859 $ 2,121
Work In Process 1,124 1,018
Raw Materials 1,489 619
----- ---
$ 4,472 $ 3,758
======= =======
8
NOTE 3 - Debt
As per the agreement with Mallinckrodt Acquisition, Inc.(Mallinckrodt), on
January 9,1997, the Bank Group received payment of $1,000,000, towards principal
reduction, interest payments and legal expenses which reduced the principal
balance outstanding to approximately $2,476,000. During the first quarter of
1997, the Company borrowed from and issued to several debenture holders and
shareholders, unsecured, demand promissory notes in the amount of $900,000,
bearing interest at 12% per annum, with interest payable quarterly. In addition,
during the second quarter of 1997, the Company received funds, in the amount of
$3,000,000, from the proposed purchaser of the Company's Indiana facility. These
funds were tendered during the due diligence period, as an unsecured advance
against anticipated payment, by the proposed purchase, at the consummation of
the transaction. In the event that the transaction is not realized, the funds
convert to a non-collaterized, one year loan to the Company.
During March 1997, pursuant to the agreement with Zatpack, Inc., the convertible
subordinated promissory note in the amount of $ 1,292,000 and accrued interest
of approximately $ 243,000 were converted to common stock.
Borrowings under long-term debt consist of the following at:
(In thousands) June 30, 1997 December 31, 1997
------------- -----------------
Convertible subordinated promissory note $ 1,508
Subordinated promissory notes $ 1,400 1,400
Other 4,125 225
----- ---
5,525 3,133
Less: current maturities of long-term debt (5,525) (1,625)
------- -------
$ -- $ 1,508
======= =======
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.
A lawsuit was filed against the Company seeking payment of $164,000 in past due
invoices. On August 6, 1997, a Stipulation of Settlement was entered into by the
parties, specifying a fifteen month pay-out.
The Company was named as Defendant in a lawsuit filed on June 5, 1997. The
Complaint seeks payment, in the amount of $35,000, for past due invoices. A
Settlement Agreement reached between the parties on June 18, 1997, allows for an
incemental payment schedule of the amounts owed.
On August 5, 1997, a Stipulation of Dismissal was filed by the Plaintiff in the
matter of Lexington Insuance Company vs. Halsey Drug Co., Inc. 95 CIV 3403.
On August 4, 1997, a General Dismissal and Release was filed by the Plaintiff,
in the case involving claims of a former employee of the Company, involving
allegedly owed back pay.
A Landlord-Tenant action was settled between the parties on April 18, 1997,
whereby the Company agreed to pay back rent and penalties owed to the Plaintiff.
To date, the majority of the arrearages have been satisfied.
9
NOTE 5 - New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share, which is
effective for financial statements for both interim and annual periods ending
after December 31, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share together with
disclosure of how the per share amounts were computed. The adoption of this new
standard is not expected to have material impact on the disclosure of earnings
per share in the financial statements.
10
HALSEY DRUG CO.,INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Six months ended June 30 Three months ended June 30
Percentage Percentage
Change Change
Year-to-Year Year-to-Year
Increase Percentage of Net Sales Increase
-------- ----------------------- --------
(decrase) (decrease)
--------- ----------
1997 as 1997 as
------- -------
compared to compared to
----------- -----------
1997 1996 1996 1997 1996 1996
----- ----- ------ ----- ----- -----
Net Sales ............................................ 100.0 100.0 (33.9) 100.0 100.0 (36.5)
Cost of goods sold ................................... 145.6 101.3 (5.0) 147.1 114.8 (18.6)
------ ----- ----- -----
Gross profit(loss) ................................ (45.6) (1.3) (2274.2) (47.1) (14.8) 102.5
Research & Development ............................... 9.6 8.2 (23.2) 14.4 7.8 17.3
Selling, general and administrative expenses ......... 53.0 41.1 (14.7) 55.3 50.9 (30.8)
------ ----- ----- -----
Loss from Operations .............................. (108.2) (50.6) 41.3 (116.8) (73.5) 1.1
Interest expense ..................................... 10.7 11.5 (38.9) 12.6 12.8 (37.4)
------ ----- ----- -----
Loss before income taxes ......................... (118.9) (62.1) 26.4 (129.4) (86.3) (4.6)
------ ----- ----- -----
Provision for income taxes ........................... -- -- -- -- -- --
------ ----- ----- -----
Net loss ............................................. (118.9) (62.1) 26.4 (129.4) (86.3) (4.6)
====== ===== ===== =====
11
- --------------------------------------------------------------------------------
Six months ended June 30, 1997 vs six months ended June 30, 1996
- --------------------------------------------------------------------------------
Net Sales
The Company's net sales for the six months ended June 30, 1997 of $ 5,052,000
represents a decrease of $2,591,000 (33.9%) as compared to net sales for the six
months ended June 30, 1996 of $7,643,000. This decrease is as a result of the
removal from the marketplace of four products and the withdrawal of four ANDA's
by the Company, pursuant to a requirement by the FDA in October 1996.
Cost of Goods Sold
For the six months ended June 30, 1997, cost of goods sold of $ 7,355,000
decreased as compared to the six months ended June 30, 1996 of $7,740,000. This
is attributable a reduction in sales combined with unabsorbed manufacturing
costs which directly impact upon the Company's cost of sales and gross margin.
Gross margin as a percentage of sales for the six months ended June 30, 1997 was
(45.6%) as compared to 1.3% for the six months ended June 30, 1996. This is
attributable to a reduction in sales combined with the unabsorbed manufacturing
costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the six months ended June 30, 1997 and 1996 were 53.0% and 41.1%, respectively.
Research and Development Expenses
Research and development expenses as a percentage of sales for the six
months ended June 30, 1997 and 1996 were 9.6% and 8.2%, respectively. The
Company's research and development program continues to concentrate its efforts
toward the submission of new products to the FDA. The Company has submitted four
Abreviated New Drug Applications(ANDA's) for six new products as of this date.
Currently, we are working on twenty-five additional products which include seven
submissions scheduled for this year.
Net Earnings (Loss)
For the six months ended June 30, 1997, the Company had net loss of
$6,005,000 as compared to a net loss of $4,749,000 for the six months ended June
30, 1996. This decrease is as a result of unabsorbed manufacturing costs and the
removal from the marketplace of four products and the withdrawal of four ANDA's
by the Company, pursuant to a requirement by the FDA.
12
- --------------------------------------------------------------------------------
Three months ended June 30, 1997 vs Three months ended June 30, 1996
- --------------------------------------------------------------------------------
Net Sales
The Company's net sales for the three months ended June 30, 1997 of
$2,209,000 represents a decrease of $1,268,000 (36.5%) as compared to net sales
for the three months ended June 30, 1996 of $3,477,000. This decrease is as a
result of the removal from the marketplace of four products and the withdrawal
of four ANDA's by the Company, pursuant to a requirement by the FDA in October
1996.
Cost of Goods Sold
For the three months ended June 30, 1997, cost of goods sold decreased by
approximately $741,000 as compared to the three months ended June 30, 1996. The
decrease for 1997 is attributable to the reduction in shipments which directly
impact upon the Company's cost of sales and gross margin. Gross margin as a
percentage of sales for the three months ended June 30, 1997 was (47.1%) as
compared to (14.8%) for the three months ended June 30, 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses as a percentage of sales for
the three months ended June 30, 1997 and 1996 were 55.3% and 50.9%,
respectively.
Research and Development Expenses
Research and development expenses as a percentage of sales for the three
months ended June 30, 1997 and 1996 was 14.4% and 7.8%, respectively. The
Company's research and development program continues to concentrate its efforts
toward the submission of new products to the FDA. The Company has submitted four
Abbreviated New Drug Applications (ANDA's) for six new products as of this date.
Currently, we are working on twenty-five additional products which include seven
submissions scheduled for this year.
Net Earnings (Loss)
For the three months ended June 30, 1997, the Company had net loss of
$2,858,000 as compared to a net loss of $2,996,000 for the three months ended
June 30, 1996. This decrease is as a result of unabsorbed manufacturing costs
and the removal from the marketplace of four products and the withdrawal of four
ANDA's by the Company, pursuant to a requirement by the FDA.
13
Liquidity and Capital Resources
At June 30, 1997, the Company had cash and cash equivalents of $202,000 as
compared to $118,000 at December 31, 1996. The Company had a working capital
deficiency at June 30, 1997 of $16,775,000 and $12,201,000 at December 31, 1996.
The removal from the marketplace of four products and the withdrawal of our
ANDA's pursuant to a requirement by the FDA, as a pre-condition to the release
of the Company from the AIP on December 19, 1996 combined with the lack of
available borrowing under the Company's credit agreement, materially, and
adversely affected the Company cash position and has severely limited the
Company's capital resources. The Company has a working capital deficiency of
approximately $16,775,000, has a stockholders' equity (deficit) of approximately
$10,962,000, has incurred a loss of approximately $6,005,000 during the six
months ended June 30, 1997 and $14,495,000 during the year ended December 31,
1996 and is not in compliance with its financial covenants pursuant to its
banking agreement and its convertible subordinated debenture agreement. In
addition, the Company is delinquent in the payment of its payroll taxes and the
Company's credit agreement with its banks expired June 30, 1997. The Company has
insufficient resources to meet both its current and long-term obligations. These
factors and other matters as discussed in Annual Report on Form 10-K at December
31, 1996, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to those conditions include
seeking alternative sources of financing. In this regard, the Company (a) is
reviewing several unsolicited expressions of interest from prospective joint
venture partners and investors, (b) plans to refinance or extend the maturity
date of the Company's bank debt, (c) has sold the rights to one of its products
to a major vendor and has received a commitment for future production of such
product and submitted Abbreviated New Drug Applications ("ANDA") for approval by
the Food and Drug Administration ("FDA"). There can be no assurance that
management can obtain alternative sources of financing or obtain approvals for
the ANDA's. Failure to obtain alternative sources of financing or infusion of
capital in the near term will have a material adverse effect on the Company's
operations and financial condition.
The Company's Credit Agreement with its banks which expired on December 31,
1996, was extended to June 30, 1997. As per the agreement with Mallinckrodt, on
January 9, 1997, the Bank Group received payment of $1,000,000, towards
principal reduction, interest payments and legal expenses which reduced the
principal balance outstanding to approximately $2,476,000.
During the second quarter of 1997, the Company received funds, in the
amount of $3,000,000, from the proposed purchaser of the Company's Indiana
facility. These funds were tendered during the due diligence period, as an
unsecured advance against anticipated payment, by the proposed purchase, at the
consummation of the transaction. In the event that the transaction is not
realized, the funds convert to a non-collaterized, one year loan to the Company.
Receipt of these funds has permitted the Company to purchase raw materials
and absorb the operational costs necessary to build its finished product
inventory. Increasing inventory serves the two-fold purpose of allowing the
Company to provide optimum level of service to its customers, as well as
facilitating the growth of near-future receivables, which will partially offset
operating costs. These proceeds have further been used to strengthen the
Company's research and development program.
14
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: August 14, 1997 BY: /s/ Rosendo Ferran
----------------------
Rosendo Ferran
President and Chief
Executive Officer
Date: August 14, 1997 BY: /s/ Robert J. Mellage
----------------------
Robert J. Mellage
Corporate Controller
15
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.
16
5
6-MOS
DEC-31-1997
JUN-30-1997
202
0
1132
502
4472
5709
18754
13350
11522
22484
0
0
0
139
25378
11522
5052
0
7355
0
3165
0
537
(6005)
0
0
0
0
0
(6005)
(0.45)
0
