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 March 31, 1999
OR
|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to_______________________
COMMISSION FILE NUMBER 1-10113
HALSEY DRUG CO., INC.
---------------------
(Exact name of registrant as specified in its charter)
New York 11-0853640
- -------------------------------------------------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
695 N. Perryville Road
Rockford, Illinois 61107
- -------------------------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
(815) 399-2060
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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 90 days.
YES |X| NO |_|
As of May 13,1999 the registrant had 14,286,444 shares of Common Stock, $.01 par
value, outstanding.
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HALSEY DRUG CO., Inc. & SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page#
Condensed Consolidated Balance Sheets- 3
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of 5
Operations - Three months ended March 31, 1999
and March 31, 1998
Consolidated Statements of Cash 6
Flows - Three months ended March 31, 1999
and March 31, 1998
Consolidated Statements of Stockholders' 8
Equity - Three months ended March 31, 1999
Notes to Condensed Consolidated Financial 9
Statements
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(UNAUDITED)
(Amounts in thousands) 1999 1998
MARCH 31 DECEMBER 31
-------- ----------
CURRENT ASSETS
Cash and cash equivalents $ 888 $ 1,850
Accounts Receivable - trade, net of
allowances for doubtful accounts of $101
at March 31, 1999 and $280 at
December 31, 1998, respectively 1,971 1,439
Other receivable 34
Inventories 4,657 6,354
Prepaid insurance and other current assets 84 148
------- -------
Total current assets 7,634 9,791
PROPERTY PLANT & EQUIPMENT, NET 4,516 4,787
OTHER ASSETS 1,375 1,335
------- -------
TOTAL ASSETS $13,525 $15,913
======= =======
The accompanying notes are an integral part of these statements
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HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(UNAUDITED)
(Amounts in thousands) 1999 1998
MARCH 31 DECEMBER 31
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable 11,696 10,350
Department of Justice settlement 300 300
Accounts payable 1,215 1,834
Accrued expenses 3,879 3,972
-------- --------
Total current liabilities 17,090 16,456
CONVERTIBLE DEBENTURES 26,187 26,187
OTHER LONG-TERM DEBT 2,148 2,223
CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized
40,000,000, shares; issued and outstanding
14,260,715 shares at March 31,1999 and
14,003,609 shares at December 31, 1998 147 144
Additional paid-in capital 29,445 29,113
Accumulated deficit (60,503) (57,221)
-------- --------
(30,911) (27,964)
Less: Treasury stock - at cost - (439,603
shares at March 31, 1999 and December 31,
1998) (989) (989)
-------- --------
Total stockholders' equity (deficit) (31,900) (28,953)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,525 $ 15,913
======== ========
The accompanying notes are an integral part of these statements
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HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -------------------------------------------------------------------------------
Amounts in thousands except per share data For the Three months
ended
--------------------------
March 31
--------
1999 1998
------ ------
Net Sales ...................................... $ 3,224 $ 1,895
Cost of goods sold ............................. 3,648 3,332
------------ ------------
Gross profit (loss) ......................... (424) (1,437)
Research & Development ......................... 176 221
Selling, general and administrative expenses ... 1,821 1,587
------------ ------------
Loss from Operations ........................ (2,421) (3,245)
Other (Income) ................................. 3 (1,902)
Interest expense, net .......................... 858 438
------------ ------------
Loss before income taxes ................... (3,282) (1,781)
Provision for income taxes ..................... -- --
Net loss ....................................... $ (3,282) $ (1,781)
============ ============
Net loss per common share, basic and diluted ... $ (0.23) $ (0. 13)
============ ============
Average number of outstanding shares ........... 14,257,159 13,686,379
============ ============
The accompanying notes are an integral part of these statements
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HALSEY DRUG CO., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -------------------------------------------------------------------------------
Amounts in thousands THREE MONTHS ENDED
MARCH 31
--------
1999 1998
---- ----
Cash flows from operating activities
Net loss .............................................. $ (3,282) $ (1,781)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization ..................... 329 290
Provision for loss on accounts receivable -- (64)
Changes in assets and liabilities
Accounts receivable ............................ (530) 31
Other receivable ............................... (28) (150)
Inventories .................................... 1,698 (70)
Prepaid insurance and other current assets ..... 57 87
Accounts payable ............................... (619) (3,004)
Deferred gain .................................. -- (1,900)
Accrued expenses ............................... 242 (854)
-------- --------
Total adjustments .............................. 1,147 (5,634)
-------- --------
Net cash used in operating activities ....... (2,135) (7,415)
-------- --------
Cash flows from investing activities
Capital expenditures .............................. (57) (254)
(Decrease) increase in other assets ............... (40) (1,443)
-------- --------
Net cash used in investing activities .......... (97) (1,697)
-------- --------
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7
Cash flows from financing activities
Increase in notes payable (decrease) .............. 1,271 (1,025)
Decrease in amount due to banks ................... -- (2,476)
Issuance of common stock for payment of interest .. -- --
Exercise of warrants of convertible debentures .... -- --
Exercise of stock options ......................... -- --
Issuance of convertible subordinated debentures ... -- 20,800
Proceeds from issuance of treasury stock .......... -- --
Bank overdraft .................................... -- (159)
-------- --------
Net cash provided by financing activities ...... 1,271 17,140
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (962) 8,028
Cash and cash equivalents at beginning of period ....... 1,850 26
-------- --------
Cash and cash equivalents at end of period ............. $ 888 $ 8,054
======== ========
Supplemental disclosure of noncash activities:
Quarter ended March 31, 1999
The Company issued 257,106 shares of common stock as payment for $335,022 of
accrued interest.
The accompanying notes are an integral part of these statements
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HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Three months ended March 31, 1999
Amounts in thousands except per share data
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------
Common Stock Treasury Stock,
$.01 par value Additional at cost
----------------- Paid-in Accumulated -----------------
Shares Amount Capital Deficit Shares Amount Total
------ ------ --------- -------- ------- ------- ------
Balance January 1, 1999 14,443,208 $144 $29,113 $(57,221) 439,603 $(989) $(28,953)
Net Loss for the three
months ended March 31, 1999 (3,282) (3,282)
Issuance of shares as
payment of interest 257,106 3 332 335
---------- ----- --------- ---------- -------- ------ ---------
Balance at March 31, 1999 14,700,314 $147 $29,445 $(60,503) 439,603 $(989) $(31,900)
========== ===== ========== ========== ======== ====== =========
The accompanying notes are an integral part of this statement
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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 three months ended March 31, 1999 have been made. The results
of operations for the three months period ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the full year
ended December 31, 1999. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto for the year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
As of March 31, 1999, the Company had a working capital deficiency of
approximately $9,456,000 and an accumulated deficit of approximately
$60,503,000. The Company has incurred a loss of approximately $3,282,000 during
the three months ended March 31, 1999.
Note 2 - Inventories
(Amounts in thousands)
Inventories consists of the following:
March 31, 1999 December 31, 1998
-------------- -----------------
Finished Goods $ 1,263 $ 2,675
Work in Process 960 1,166
Raw Materials 2,434 2,513
------- -------
$ 4,657 $ 6,354
======= =======
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NOTE 3 - Debt
Borrowings under long-term debt consist of the following at March 31, 1999 and
December 31, 1998.
(Amounts in thousands)
1999 1998
------- ------
Department of Justice Settlement $1,900 $1,975
Other 548 548
------- ------
2,448 2,523
Less current maturities (300) (300)
------- ------
$2,148 $2,223
======= ======
NOTE 4 - Contingencies
The Company currently is a defendant in several lawsuits involving product
liability claims. The Company's insurance carriers have assumed the defense for
all product liability and other actions involving the Company. The final outcome
of these lawsuits cannot be determined at this time, and accordingly, no
adjustment has been made to the consolidated financial statements.
Note 5 - Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income, in the first
quarter of 1998, which requires companies to disclose comprehensive income
separately of net income from operations. Comprehensive income is defined as the
change in equity during the period from transactions and other events and
circumstances from non-ownership sources. It includes all changes in equity
during a period, except those resulting from investments by owners and
distributions to owners. The adoption of this statement had no effect on the
Company for the quarters ended March 31, 1999 or 1998.
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HALSEY DRUG CO.,INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------
Three months ended
March 31
-----------------------------------------------------
Percentage Change
Year-to-Year
Increase (decrease)
------------------
Percentage of Net Sales 1999 as
----------------------- Compared to
1999 1998 1998
----- ----- ----
% % %
- - -
Net Sales 100.0 100.0 70.1
Cost of goods sold 113.2 175.8 9.5
----- ----- ----
Gross profit(loss) (13.2) (75.8) (70.5)
Research & Development 5.5 11.7 (20.4)
Selling, general and administrative expenses 56.5 83.7 14.7
----- ----- ----
Loss from operations (75.2) (171.2) (25.4)
Other (income) .1 (100.4) --
Interest expense 26.6 23.1 95.9
----- ----- ----
Loss before income taxes (101.7) (93.9) 84.3
Provision for income taxes -- -- --
----- ----- ----
Net loss (101.7) (93.9) 84.3
===== ===== ====
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Three months ended March 31, 1999 vs three months ended March 31, 1998
Net Sales
- ---------
The Company's net sales for the three months ended March 31, 1999 of
$3,224,000 represents an increase of $1,329,000 (70.1%) as compared to net sales
for the three months ended March 31, 1998 of $1,895,000. This increase is a
result of recapturing market share that had been lost in the prior year because
the Company lacked working capital in the first quarter of 1998 to maintain
sufficient inventories for sale. Further, the sales increase reflects aggressive
selling efforts by the Company's sales force.
Cost of Goods Sold
- ------------------
For the three months ended March 31, 1999, cost of goods sold increased
by approximately $316,000 as compared to the three months ended March 31, 1998.
The increase for 1999 is attributable to greater manufacturing activity
associated with the sales increase. Gross margin as a percentage of sales for
the three months ended March 31, 1999 was (13.2%) as compared to (75.8%) for the
three months ended March 31, 1998. The improvement in gross margin is mainly
attributable to improvements in manufacturing efficiencies and the elimination
of certain non core manufacturing activities in California.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses as a percentage of sales for
the three months ended March 31, 1999 and 1998 were 56.5% and 83.7%,
respectively. Overall these expenses in the first three months of 1999 increased
$234,000 over the same period in 1998. The increase is primarily attributable to
the cost of additional personnel, increased costs of litigation and professional
services.
Research and Development Expenses
- ---------------------------------
Research and development expenses as a percentage of sales for the three
months ended March 31, 1999 and 1998 was 5.5% and 11.7%, respectively. The
Company's research and development program continues to concentrate its efforts
toward the submission of new products to the FDA.
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Net Earnings (Loss)
- -------------------
For the three months ended March 31, 1999, the Company had net loss of
$3,282,000 as compared to a net loss of $1,781,000 for the three months ended
March 31, 1998. Included in results for the three months ended March 31, 1998 is
other income of $1,900,000 that had been recorded in September, 1997 as a
deferred gain on the sale of certain assets to Mallinckrodt. This transaction
contained certain future requirements that were met in the first quarter of
1998.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1999, the Company had cash and cash equivalents of $888,000
as compared to $1,850,000 at December 31, 1998. The Company had a working
capital deficiency at March 31, 1999 of $9,456,000 and $6,665,000 at December
31, 1998.
The Company secured bridge financing from Galen Partners III, L.P.,
Galen Partners International III, L.P., Galen Employee Fund III, L.P.
(collectively, "Galen") and certain other investors in the aggregate amount of
$9,504,111, funded through eight separate bridge loan transactions between the
period from August through and including March, 1999 (collectively, the "Bridge
Loans"). These bridge loans bear interest at 10% per annum, are secured by a
first lien on all of the Company's assets and have a maturity date of May 30,
1999. Approximately $9,120,000 in the principal amount of the bridge loans were
advanced by Galen. These bridge loans are evidence by 10% convertible senior
secured promissory notes which are convertible at any time prior to maturity
into shares of the Company's Common Stock at a conversion price of approximately
$1.368 per share with respect to approximately $7,820,000 of such indebtedness,
$1,331 per share with respect to approximately $284,000 of such indebtedness,
and $1.197 per share with respect to approximately $1,400,000 of such
indebtedness, for an aggregate of 7,099,338 shares of common stock (such
conversion prices equal the fair market value of the Common Stock at the date of
issuance of the convertible promissory notes). In addition, in consideration for
the extension of the Bridge Loans, the Company issued common stock purchase
warrants to Galen and the other investors in the Bridge Loans, to purchase an
aggregate of approximately 1,009,909 shares of the Company's common stock
(representing warrants to purchase 50,000 shares of Common Stock for each
$1,000,000 in principal amount of the Bridge Loans). The Bridge Loan warrants
are substantially identical to those issued by the Company in its Debenture and
Warrant Offering completed on March 10, 1998.
The Bridge Loans were obtained by the Company in order to provide
necessary working capital. In view of the Company's current cash reserves and
projections for revenues through May 30, 1999, the Company will be unable to
satisfy the Bridge Loans in full at the stated maturity date of May 30, 1999.
Galen, the holder of approximately 96% of such indebtedness, has indicated to
the Company a willingness to cooperate in the restructuring of the indebtedness
evidenced by the Bridge Loans to extend the maturity date of such debt and/or
convert the debt into common stock or longer-term convertible indebtedness. The
terms of such restructuring will depend, to a large extent, on the terms and
timing of any third-party investment, as described below. Accordingly, the terms
of any such restructuring have yet to be agreed to by the parties and will be
subject to the negotiation and reparation of definitive agreements.
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The Company is in negotiations with an unaffiliated third party
concerning the terms of a proposed investment on the Company in an amount of up
to $15 million, to be funded in three equal increments based on the achievement
of certain milestones. The structure of the investment will likely take the form
of convertible debentures and common stock warrants, similar in many respects to
the debentures and warrants issued by the Company in its March 10, 1998
offering. There can be no assurance given that these negotiations will result in
terms acceptable to the Company and/or that if consummated, that the Company
will be successful in achieving the milestones necessary to fund all or any
portion of the proposed investment.
In the event the Company is successful in restructuring the Bridge
Loans and completing a third party investment of the type and size described
above, the Company will have sufficient cash reserves to satisfy its working
capital requirements for at least the next 12 months. The Company is also
seeking to secure a senior revolving line of credit from a banking institution.
There can be no assurance, however, that the Company will be able to obtain such
third party investment or a bank facility. If the Company is unable to complete
the third party investment described above or obtain other sources of working
capital, including a bank line of credit or proceeds from the issuance of debt
and/or equity securities, the Company's cash reserves will be sufficient to
satisfy the Company's working capital requirements for approximately two to
three months. Failure to obtain a third party investment of the described above,
a bank line of credit or alternative sources of financing of a comparable amount
in the near term will materially adversely affect the Company's working capital
position and financial condition and results of operations.
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PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 8, 1999, the Company secured a bridge loan from Galen
Partners III,L.P., Galen Partners International III,L.P. and Galen Employee Fund
III, L.P. (collectively, the "Galen Group")in the principal amount of $1,400,000
(the "Bridge Loan"). The Bridge Loan bears interest at 10% per annum, is secured
by a first lien on all the Company's assets and has a maturity date of May 30,
1999. The Bridge Loan is evidenced by 10% convertible senior secured promissory
notes which are convertible at any time prior to maturity into shares of the
Company's common stock at a conversion price of approximately $1.197 per share
(such conversion price equal to the fair market value of the Company's common
stock at the date of issuance of the convertible promissory notes). In addition,
in consideration for the extension of the Bridge Loan, the Company issued common
stock purchase warrants to the Galen Group to purchase an aggregate of
approximately 66,887 shares of the Company's common stock having an exercise
price of approximately $1.197 per share. The warrants issued in connection with
the Bridge Loan are substantially identical to those issued in the Company's
March 1998 Debenture and Warrant Offering.
During the quarter ended March 31, 1999, the Company issued an
aggregate of 257,106 shares of the Company's common stock in satisfaction of
$355,022 of accrued interest on the Company's outstanding 5% convertible senior
secured debentures due March 15, 2003 (the "Convertible Debentures").
Each of the persons comprising the Galen Group and the holders of the
Convertible Debentures for which interest payments were made in Common Stock are
accredited investors as defined in Rule 501(a) of Regulation D promulgated under
the Securities Act of 1933, as amended (the "Act"). The convertible notes and
warrants issued in connection with the Bridge Loan and the Common Stock issued
in satisfaction of 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.
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 Exhibit Index.
(b) Reports on Form 8-K. None.
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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: May 14, 1999 BY:s/s Michael K. Reicher
---------------------
Michael K. Reicher
President and Chief
Executive Officer
Date: May 14, 1999 BY:s/s Peter A. Clemens
---------------------
Peter A. Clemens
VP & Chief Financial
Officer
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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.
17
5
1,000
3-MOS
DEC-31-1999
MAR-31-1999
888
0
2,072
101
4,657
7,634
19,230
14,714
13,525
17,090
0
0
0
147
29,445
13,525
3,224
3,224
3,648
3,648
1,997
2,421
858
(3,282)
0
(3,282)
0
0
0
(3,282)
(0.23)
(0.23)
