FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1996
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 officer) (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 X NO
----- ------
As of May 9,1996 the registrant had 9,058,858 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
March 31, 1996
Condensed Consolidated Statements of 5
Operations - Three months ended March 31, 1996
and March 31, 1995
Consolidated Statements of Cash 6
Flows - Three months ended March 31, 1996
and March 31, 1995
Consolidated Statements of Stockholders' 7
Equity - Three months ended March 31, 1996
Notes to Condensed Consolidated Financial 8
Statements
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1.Legal Proceedings 13
Item 2.Changes in Securities 13
Item 3.Default upon Senior Securities 13
Item 5.Other Information 13
Item 6.Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
(UNAUDITED)
(Amounts in thousands) 1996 1995
MARCH 31 DECEMBER 31
-------- -----------
CURRENT ASSETS
Cash ................................................. $ 250 $ 353
Accounts Receivable - trade, net of
allowances for doubtful accounts of $221
and $ 280 in 1996 and 1995, respectively .......... 1,531 1,689
Inventories .......................................... 7,907 7,716
Prepaid insurance and other current assets ........... 609 656
------- -------
Total current assets ............................... 10,297 10,414
PROPERTY PLANT & EQUIPMENT, NET .............................. 7,157 7,394
LONG-TERM RECEIVABLE ......................................... 1,900 1,900
OTHER ASSETS ................................................. 959 1,054
------- -------
$20,313 $20,762
======= =======
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) 1996 1995
MARCH 31 DECEMBER 31
-------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft ..................................................... $ 693 $ 213
Due to Banks ....................................................... 3,395 3,395
Current maturities of long-term debt ............................... 200 200
Convertible Subordinated Debentures ................................ 7,367 7,347
Department of Justice settlement ................................... 2,059 2,000
Accounts payable ................................................... 2,960 2,546
Accrued expenses ................................................... 2,034 1,867
Advances from minority stockholders ................................ 206 206
Income taxes payable ............................................... 13 33
- - ----------------------------------------------------------------------------- -------- --------
Total current liabilities ............................... 18,927 17,807
LONG-TERM DEBT .......................................................... 2,621 2,595
CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized 20,000,000, shares; issued
and outstanding 8,540,192 shares at March 31,1996 and 8,973,459
shares at December
31, 1995 ....................................................... 91 90
Additional paid-in capital ......................................... 14,616 14.459
Accumulated deficit ................................................ (14,842) (13,089)
-------- --------
(135) 1,460
Less: Treasury stock - at cost (500,000 shares) .................... 1,100 (1,100)
-------- --------
Total stockholders' equity .............................. (1,335) 360
-------- --------
$ 20,313 $ 20,762
======== ========
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 For the Three months ended
--------------------------
March 31
--------
1996 1995
---- ----
- - ----------------------------------------------------------------------------------------------
Net Sales ..................................................... $ 4,166 $ 6,873
Cost of goods sold ............................................ 3,749 5,114
----------- -----------
Gross profit ............................................... 417 1,759
Research & Development ........................................ 358 156
Selling, general and administrative expenses .................. 1,377 1,538
----------- -----------
(Loss)earnings from operations ............................. (1,318) 1,765
Interest expense .............................................. (435) (226)
Gain on the sale of assets .................................... -- 4,188
----------- -----------
(Loss) earnings before income taxes ........................ (1,753) 4,027
Provision for income taxes .................................... -- 296
----------- -----------
Net (loss) earnings ........................................... $ (1,753) $ 3,731
=========== ===========
Net (loss) earnings per common share .......................... ($ 0.22) $ .48
=========== ===========
Average number of outstanding shares .......................... 7,886,101 7,859,537
=========== ===========
The accompanying notes are an integral part of these statements
5
HALSEY DRUG CO., AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
- - ------------------------------------------------------------------------------------------------
Amounts in thousands THREE MONTHS ENDED
MARCH 31
1996 1995
---- ----
- - ------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net (loss) earnings ........................................... $(1,753) $ 3,731
------- -------
Adjustments to reconcile net (loss) earnings to net cash used in
operating activities
Depreciation and amortization ............................. 533 419
Provision for losses on accounts receivable ............... -- 6
Gain on sale of assets .................................... -- (4,188)
Accrued Department of Justice interest .................... 59 30
Deferred income taxes ..................................... -- 296
Changes in assets and liabilities
Accounts receivable .................................... 158 58
Inventories ............................................ (191) (389)
Prepaid insurance and other current assets ............. 47 213
Accounts payable ....................................... 414 (1,817)
Accrued expenses ....................................... 167 (21)
Income taxes payable ................................... (20) (18)
------- -------
Total adjustments ...................................... 1,167 (5,411)
------- -------
Net cash used in operating activities ............... (586) (1,680)
------- -------
Cash flows from investing activities
Capital expenditures ...................................... (188) (50)
(Decrease)increase in other assets ........................ 33 20
Proceeds from sale of assets .............................. 2,000
------- -------
Net cash provided by investing activities .............. (155) 1,970
------- -------
Cash flows from financing activities
Payment of long term debt ................................. -- (1,064)
Proceeds from issuance of common stock .................... 158 982
Bank overdraft............................................ 480 148
Advances from former minority stockholder ................. -- (212)
------- -------
Net cash (used in) provided by financing activities .... 638 (146)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................. 103 144
Cash and cash equivalents at beginning of period ............... 353 28
------- -------
Cash and cash equivalents at end of period ..................... 250 172
======= =======
The accompanying notes are an integral part of these statements
6
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three months ended March 31. 1996
Amounts in thousands except per share data
(UNAUDITED)
- - ---------------------------------------------------------------------------------------------------------------------------------
Common
Stock
$.01 par Additional Treasury stock,
Value Paid-In Accumulated at cost
Shares Amount Capital Deficit Shares Amount Total
------ ------ ------- ------- ------ ------ ------
Balance at December 31, 1995 ......................... 8,973,459 $ 90 $14,459 ($13,089) 500,000 $1,100 $ 360
Net earnings for the three months
ended March 31, 1996 ............................... (1,753) (1,753)
Exercise of stock options ............................ 13,393 39 39
Exercise of warrants ................................. 53,400 1 118 119
---------- ------- ------- -------- ------- ------ -------
Balance at March 31 , 1996 ........................... 9,040,192 $ 91 $14,616 ($14,842) 500,000 $1,100 ($1,235)
========== ======= ======= ======== ======= ====== =======
============================================================================================================================
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 months ended March 31, 1996 have been made, but the financial
results for the three months period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full year ended December
31, 1996. 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, 1995 included in the Company's Annual
Report on Form 10-K.
Note 2 - Inventories
(Amounts in thousands)
Inventories consists of the following:
March 31, 1996 December 31, 1995
-------------- -------- --- ----
Finished Goods $2,585 $2,491
Work in Process 1,451 1,398
Raw Materials 3,871 3,827
----- -----
$7,907 $7,716
====== ======
NOTE 3 - Debt
The Company's Credit Agreement with its banks expired on March 31, 1996, at
which time the Company was required to repay all outstanding principal plus any
accrued interest, or approximately $ 3,395,000 and $31,000 oof accrued interest.
The Company has not repaid such amount and interest continues to accrue.
Borrowings under long-term debt consist of the following at March 31, 1996 and
December 31, 1995.
(Amounts in thousands)
1996 1995
Convertible subordinated promissory note $1,422 $1,395
Subordinated promissory note 1,400 1,400
----- -----
2,822 2,795
Less current maturities ( 200) (200)
------ ----
$2,621 $2,595
====== ======
8
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 liablility and other actions involving the Company. The
final outcome of these lawsuits cannot be determined at this time, and
accordingly, no adustment has been made to the consoldated financial statements.
A lawsuit has been filed by the minority shareholders of H. R. Cenci
Laboratories, Inc. ("Cenci") and Cenci Powder Products, Inc. ("Cenci Powder")
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. The Company has retained California
counsel to represent its interests. The parties have recently concluded
conducting document and deposition discovery. Counsel for the Company moved for
a summary judgment on April 30, 1996. At this preliminary stage the Company is
unable at this time to predict with reasonable certainty the ultimate outcome of
this matter with reasonable certainty and, accordingly, no provision has been
made for any potential costs relating to this matter.
The Company was named a defendent in a complaint by the Company's labor
union funds which seeks sums, approximately $272,000, allegedly owed to these
funds under the Company's collective bargainging agreement. In April 1996, the
Company and the labor union funds agreed to settle the action which obligates
the Company to remain current on its obligations and to pay portions of the
alleged arreats in installments.
In April 1996, the Company received two complaints, seeking unspecified
damages, captioned Golovatskaya v. Halsey Drug Co., 96 Civ. 0662 and Petrakova
v. Halsey Drug , 96 Civ. 0660, both filed in the United States District Court
for the Eastern District of New York, alleging employment discrimination and
harassment against the Company. The Company has answered each of the complaints
and denied the material allegations asserted against it. No discovery has taken
place and the Company is unable to predict with reasonable certainty the outcome
of these actions.
9
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
Percentage of Net Sales Increase (decrease)
----- ----------
- - -------------------------------------------------------------------------------------
1996 as
compared to
1996 1995 1995
---- ---- ----
% % %
- - -
Net Sales 100.0 100.0 (39.4)
Cost of goods sold 90.0 74.4 (26.7)
---- ----
Gross profit 10.0 25.6 (76.3)
Research & Development 8.6 2.3 129.5
Selling, general and administrative expenses 33.0 22.4 (10.5)
----- ----
(Loss)earnings from operations (31.6) .9 (100.0)
Interest expense 10.4 3.3 (100.00)
Gain on the sale of assets -- 60.9 92.5
----- ----
(Loss) earnings before income taxes (42.1) 58.6 (143.5)
Provision for income taxes -- 4.3 (100.0)
----- -----
Net (loss) earnings (42.1) 54.3 (147.8)
====== ====
10
- - ------------------------------------------------------------------------------
Three months ended March 31, 1996 vs three months ended March 31, 1995
Net Sales
- - ---------
The Company's net sales for the three months ended March 31, 1996 of
$4,166,0000 represents a decrease of $2,707,000 (39.4%) as compared to net sales
for the three months ended March 31, 1995 of $6,873,000. First quarter sales for
1995 included sales of Oxycodone HCL and Acetaminophen Tablets of approximately
$1,100,000 sold prior to the sale of the Abbreviated New Drug application
("ANDA") to Mallinckrodt Chemical, Inc. ("Mallinckrodt"). Also, included in this
first quarter of 1995 are sales of inventory of approximatey $800,000 to
Mallinckrodt. In addition the decrease is attributable to price reductions
effected during the quarter in an effort to meet increased competition.
Cost of Goods Sold
- - ------------------
For the three months ended March 31, 1996, cost of goods sold decreased
by approximately $1,365,000 as compared to the three months ended March 31,
1996. The decrease for 1996 is attributable to the reduction in shipments of
tablet products due to the sale at the end of the first quarter of 1995 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 March 31, 1996 was
10.0% as compared to 25.6% for the three months ended March 31, 1996.
Selling, General and Administrative Expenses
- - --------------------------------------------
Selling, general and administrative expenses as a percentage of sales for
the three months ended March 31, 1996 and 1995 were 33.1% and 22.4%,
respectively. These expenses decreased by $161,000 or 10.5% as compared to the
prior year as a result of the Company's effort to reduce expenses through
implementing cost saving measures combined with a reduction in freight cost
associated with a reduced sales volume at the subsidiary locations.
Research and Development Expenses
- - ---------------------------------
Research and development expenses increased by 129.5% as compared to the
first quarter of 1995. The Company is continuing its effort to obtain FDA
clearance for the Brooklyn facility. At the same time it has engaged in a
research and development program which include submissions to the FDA of
several new products as soon as permitted.
Net Earnings (Loss)
- - -------------------
For the three months ended March 31, 1996, the Company had net loss of
$1,753,000 as compared to net earnings of $3,731,000 for the three months ended
March 31, 1995. 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 of
1995 by the Company of the tablets ANDA combined with price reductions to
compete with increase market competion.
11
Liquidity and Capital Resources
- - -------------------------------
At March 31, 1996, the Company had cash and cash equivalents of $250,000
as compared to $353,000 at December 31, 1995. The Company had a working capital
deficiency at March 31, 1996 of $8,630,000 and $7,393,000 at December 31, 1995.
As a result of the decline in shipments of solid dosage products from
the Company's Brooklyn plant following the entry of a consent decree in the
proceeding between the Company and the U.S. Department of Justice, 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 1995 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.
The Company's Credit Agreement with its banks expired on March 31, 1996,
at which time the Company was required to repay all outstanding principal plus
any accrued interest, or approximately $ 3,395,000 and $31,000 of accrued
interest. The Company has not repaid such amount and interest continues to
accrue.
12
PART II OTHER INFORMATION
- - -------------------------
Item 1. Legal Proceedings.
A lawsuit hs been filed by the minority shareholders of Cenci
and Cenci Powder against the Company and several 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 pruchase of 51% of the stock of Cenci. The Complaint, which
includes several causes of 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. The Company has retained California counsel to represent its
interests. The parties have recently concluded conducting document and
deposition discovery. Counsel for the Company moved for summary judgment
on April 30, 1996. At this stage, the Company is unable to determine the
outcome of this motion or litigation with any reasonable certainty.
In April 1996, the Company received two complaints, seeking
unspecified damages, captioned Golovatskaya v. Halsey Drug Co., 96 Civ.
0662 and Petrakova v. Halsey Drug , 96 Civ. 0660, both filed in the
United States District Court for the Eastern District of New York,
alleging employment discrimination and harassment against the Company.
The Company has answered each of the complaints and denied the material
allegations asserted against it. No discovery has taken place and we are
unable to predict with reasonable certainty the outcome of these
actions.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities
The Company was not in compliance with certain of the provisions
of its Credit Agreement with its banks prior to its expiration,
including but not limited to covenants relating to the maintenance of
certain financial ratios. Such non-compliance constituted a technical
default under each of the Company's other loan instruments. As of the
date of this Report, no creditor of the Company has declared the Company
to be in default under its various debt instruments.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - See Exhibit Index.
(b) Reports on Form 8-K - none.
13
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, 1996 BY:s/s Rosendo Ferran
--- ------- -----
Rosendo Ferran
President and Chief
Executive Officer
Date: May 14, 1996 BY:s/s Robert J. Mellage
--- ------ -- -------
Robert J. Mellage
Corporate Controller
14
EXHIBIT INDEX
Exhibit Description
No.
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission
for informatin only and not filed.
15
5
1,000
3-MOS
DEC-31-1996
MAR-31-1996
250
0
1,752
221
7,907
10,297
18,675
11,518
20,313
18,927
0
0
0
91
14,616
20,313
4,166
0
3,749
0
1,735
0
435
(1,753)
0
0
0
0
0
(1,753)
(0.22)
0
