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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002
OR
| | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________to________________________
COMMISSION FILE NUMBER 1-10113
HALSEY DRUG CO., INC.
(Exact name of registrant as specified in its charter)
New York 11-0853640
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
695 N. Perryville Rd.
Rockford, IL 61107
(Address of Principal executive offices) (Zip Code)
(815) 399 - 2060
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 50 days.
YES |X| NO | |
As of November 13, 2002 the registrant had 15,065,240 Shares of Common Stock,
$.01 par value, outstanding.
HALSEY DRUG CO., INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page #
Condensed Consolidated Balance Sheets- 3
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of 5
Operations - Three and nine months ended September 30, 2002
and September 30, 2001
Condensed Consolidated Statements of Cash 6
Flows - Nine months ended September 30, 2002
and September 30, 2001
Consolidated Statement of Stockholders' 8
Equity - Nine months ended September 30, 2002
Notes to Condensed Consolidated Financial 9
Statements
Item 2. Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 2. Changes in Securities 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands) SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
CURRENT ASSETS
Cash $ 8 $ 442
Accounts Receivable - trade, net of
allowance for doubtful accounts of $24 and
$347 at September 30, 2002 and
December 31, 2001, respectively 749 367
Inventories 2,425 2,729
Prepaid expenses and other current assets 691 238
------- -------
Total current assets 3,873 3,776
PROPERTY PLANT & EQUIPMENT, NET 5,522 5,998
DEFERRED PRIVATE OFFERING COSTS 214 672
OTHER ASSETS AND DEPOSITS 486 623
------- -------
$10,095 $11,069
======= =======
The accompanying notes are an integral part of these statements.
3
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data) SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable, net $ 27,442 $ 2,568
Convertible subordinated debentures, net 49,247 --
Accounts payable 2,981 2,979
Accrued expenses 7,123 6,205
Department of Justice settlement 300 300
--------- ---------
Total current liabilities 87,093 12,052
CONVERTIBLE SUBORDINATED DEBENTURES, NET -- 46,179
TERM NOTE PAYABLE -- 17,500
DEPARTMENT OF JUSTICE SETTLEMENT 541 774
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized
80,000,000 shares; 15,065,240 shares
issued and outstanding at September 30, 2002
and December 31, 2001 151 151
Additional paid-in capital 44,499 35,914
Accumulated deficit (122,189) (101,501)
--------- ---------
(77,539) (65,436)
--------- ---------
$ 10,095 $ 11,069
========= =========
The accompanying notes are an integral part of these statements.
4
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except, share data)
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30,
-------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Product sales $ 6,152 $ 6,754 $ 2,013 $ 1,826
Product development revenues -- 8,500 -- 3,500
------------ ------------ ------------ ------------
Net product revenues 6,152 15,254 2,013 5,326
Cost of manufacturing 9,372 11,504 3,118 3,657
Research & development 1,161 926 404 306
Selling, general and administrative expenses 5,472 4,672 1,957 1,656
Plant shutdown costs (120) -- -- --
------------ ------------ ------------ ------------
Loss from operations (9,733) (1,848) (3,466) (293)
Other income (expense)
- ----------------------
Interest expense, net (3,398) (2,890) (1,232) (925)
Amortization of deferred debt discount and
private offering costs (7,562) (1,834) (3,187) (673)
Investment in joint venture -- (45) -- (14)
Other 5 11 16 2
------------ ------------ ------------ ------------
NET LOSS $ (20,688) $ (6,606) $ (7,869) $ (1,903)
============ ============ ============ ============
Basic and diluted loss per share $ (1.37) $ (0.44) $ (0.52) $ (0.13)
============ ============ ============ ============
Weighted average number of outstanding shares 15,065,240 14,951,285 15,065,240 15,043,378
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
5
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) NINE MONTHS ENDED
SEPTEMBER 30
----------------------
2002 2001
-------- -------
Cash flows from operating activities
Net loss $(20,688) $(6,606)
-------- -------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities
Depreciation and amortization 641 868
Amortization of deferred debt discount and
private offering costs 7,562 1,834
Amortization of deferred product acquisition costs 27 35
Provision for losses on accounts receivable -- 89
Loss on sale of assets 12 --
Debentures issued for interest 1,633 1,623
Changes in assets and liabilities
Accounts receivable (1,739) 3,160
Inventories 304 344
Prepaid expenses and other current assets (453) 938
Other assets and deposits 140 (245)
Accounts payable 531 (1,225)
Accrued expenses 2,080 (405)
-------- -------
Total adjustments 10,738 7,016
-------- -------
Net cash (used in) provided by operating activities (9,950) 410
-------- -------
Cash flows from investing activities
Capital expenditures (267) (1,034)
Net proceeds from sale of assets 16 --
Investment in joint venture -- (41)
-------- -------
Net cash used in investing activities (251) (1,075)
-------- -------
Cash flows from financing activities
Proceeds from issuance of notes payable 10,000 6,000
Payments on notes payable -- (1,761)
Payments on convertible debentures -- (2,500)
Proceeds from exercise of stock options -- 87
Payments to Department of Justice (233) (225)
-------- -------
Net cash provided by financing activities 9,767 1,601
-------- -------
NET (DECREASE) INCREASE IN CASH (434) 936
Cash at beginning of period 442 697
-------- -------
Cash at end of period $ 8 $ 1,633
======== =======
6
Supplemental disclosure of noncash investing and financing activities
For the nine months ended September 30, 2002
The Company issued approximately $1,633 of debentures as payment for like amount
of accrued debenture interest.
The Company issued approximately 2,120,000 warrants with an estimated relative
fair value of $2,412 in connection with the refinancing of existing bridge loans
in January and May 2002.
The Company issued 600,000 warrants with an estimated relative fair value of
$948 for the lending commitment of a bridge loan.
The Company issued approximately 1,367,000 warrants with an estimated relative
fair value of $1,569 in connection with the issuance of bridge loans.
The Company issued 25,000 warrants with an estimated relative fair value of $30
for acquisition of product ANDAs.
The Company's convertible debt contained beneficial conversion features which
were valued at $3,626.
The accompanying notes are an integral part of these statements.
7
HALSEY DRUG CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
(In thousands, except share data)
Nine months ended September 30, 2002
Common Stock, $.01 par value Additional
---------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
---------- ---------- ---------- ----------- --------
Balance at January 1, 2002 15,065,240 $ 151 $35,914 $(101,501) $(65,436)
Net loss for the nine months
ended September 30, 2002 (20,688) (20,688)
Issuance of warrants and
beneficial conversion features
in connection with convertible
debt 8,555 8,555
Issuance of warrant for the
acquisition of product ANDAs 30 30
---------- ---------- ------- --------- --------
Balance at September 30, 2002 15,065,240 $ 151 $44,499 $(122,189) $(77,539)
========== ========== ======= ========= ========
The accompanying notes are an integral part of this statement.
8
HALSEY DRUG CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Halsey Drug Co., Inc. and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles in the United States for
complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring accrual adjustments, considered necessary to
present fairly the financial position, results of operations and cash flows for
the nine months ended September 30, 2002, assuming that the Company will
continue as a going concern, have been made. The results of operations for the
nine month period ended September 30, 2002 are not necessarily indicative of the
results that may be expected for the full year ended December 31, 2002. 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, 2001 included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission.
At September 30, 2002 the Company had cash of $8,000 as compared to
$442,000 at December 31, 2001. The Company had a working capital deficiency at
September 30, 2002 of $(83,220,000) and an accumulated deficit of approximately
$(122,189,000). The Company incurred a loss of approximately $(20,688,000)
during the nine months ended September 30, 2002. The working capital deficiency
of $(83,220,000) includes the reclassification of $66,747,000 of outstanding
indebtedness to current liabilities comprising a $17,500,000 term loan with
Watson Pharmaceuticals, Inc. (the "Watson Term Loan") and the Company's
$49,247,000 net outstanding 5% net convertible debentures (the "Debentures")
each of which are due in March 2003.
Until such time as the Company successfully develops and commercializes
new finished dosage products and active pharmaceutical ingredients, of which
there can be no assurance, the Company will continue to incur operating losses
and negative cash flow. As of November 13, 2002, cash on hand was $200,000 and
$1,100,000 remained available for advance to the Company under the 2002 Galen
Bridge Loan Commitment. The Company estimates that the balance of the 2002 Galen
Bridge Loan Commitment will fund the Company's working capital requirements only
until mid-December 2002. The Company is in need of immediate additional
financing in order to fund its working capital requirements and to continue to
develop its opiate synthesis technologies. Although the Company is a party to a
non-binding term sheet with Care Capital LLC and Essex Woodlands Health Ventures
providing the terms of a private offering pursuant to which the Company would
receive gross proceeds of $10 million from the issuance of 5% convertible senior
secured debentures (the "2002 Debentures") due March 31, 2006 (the "2002
Debentures Offering"), no assurance can be given that the 2002 Debenture
Offering will be completed or that the amount of such financing, if any, will be
sufficient to meet the Company's working capital requirements and provide
adequate funding to provide for the development of the Company's opiate
synthesis technologies. The failure of the Company to complete the 2002
Debenture Offering by mid-December 2002 will require the Company to
significantly scale back or terminate operations and possibly seek relief under
applicable bankruptcy laws.
The Company has funded operations by securing bridge financing from Galen
Partners III, L.P. ("Galen"), certain of Galen's affiliates and certain
investors in the Company's Debentures (collectively, "Galen Group") in the
aggregate amount of approximately $7,000,000 advanced in five (5) separate
bridge loan transactions during the period from August 15, 2001 through April 5,
2002 (collectively, the "2001/2002 Galen Bridge Loans"). On May 8, 2002, the
Company and the Galen Group completed an amendment to the 2001/2002 Galen Bridge
Loan Agreement to (i) extend the maturity date of the $7,000,000 principal
9
amount of the 2001/2002 Galen Bridge Loans, plus accrued and unpaid interest, to
January 1, 2003, (ii) provide for the commitment of Galen to advance up to
$8,000,000 to the Company in the form of additional bridge loans to fund the
Company's working capital requirements through December 31, 2002, (the "2002
Galen Bridge Loan Commitment"), and (iii) provide for the advance by Galen to
the Company of a bridge loan of $1,000,000 under the 2002 Galen Bridge Loan
Commitment. All advances made by Galen to the Company under the 2002 Galen
Bridge Loan Commitment have a maturity date of January 1, 2003.
The Company's efforts to obtain the approval of the U.S. Drug Enforcement
Administration ("DEA") for a registration to import raw materials for use in
production, including contesting pending third-party opposition proceedings,
and the continuing development of the Company's licensed technologies will
continue through 2004. In order to fund continued operations, satisfy the
Company's obligations under the 2001/2002 Galen Bridge Loans and advances made
to the Company under the 2002 Galen Bridge Loan Commitment, and to fund the
continued development of the Company's licensed technologies during the period
from fiscal 2002 through and including 2004, which includes the completion of
planned capital improvements to the Company's Indiana and New York facilities
and the processing of the registrations and approvals required from the DEA
(including funding the legal fees and related expensycyes in connection with
pending opposition proceedings relating to the Company's request for a raw
material import registration), the Company estimates that it will be required
to obtain additional sources of financing or a third party equity investment of
approximately $10 million. The Company is currently seeking such financing
through transactions related to its business lines as well as private
financings. On November 13, 2002, the Company signed a non-binding term sheet
with Care Capital LLC and Essex Woodlands Health Ventures providing the terms
of a private offering pursuant to which the Company would receive gross
proceeds of $10 million from the issuance of 5% convertible senior secured
debentures (the "2002 Debentures") due March 31, 2006 (the "2002 Debenture
Offering"). The closing of the 2002 Debenture Offering is subject to a number
of conditions, including receipt of the agreement of each of Watson
Pharmaceuticals and the holders of the Company's outstanding debentures to
extend the maturity date of the indebtedness under the Watson Term Loan and the
Company's outstanding debentures to March 31, 2006. In addition, it is a
condition to the completion of the 2002 Debenture Offering that the 2001/2002
Galen Bridge Loans and advances made under the 2002 Galen Bridge Loan
Commitment shall be satisfied by the Company's issuance of 2002 Debentures
under the 2002 Debenture Offering. The Company has been advised by the Galen
Group that it is agreeable to convert the outstanding indebtedness under the
2001/2002 Galen Bridge Loans and advances made under the 2002 Galen Bridge Loan
Commitment to 2002 Debentures. In addition, the Company and Watson have agreed
in principle to (i) transfer to the Watson Term Loan the Company's payment
obligation to Watson of approximately $3.9 million under the Core Products
Supply Agreement between the parties, and (ii) extend the maturity date of the
Watson Term Loan to March 31, 2006. In consideration of the amendments to the
Watson Term Loan Agreement, the Company will issue to Watson common stock
purchase warrants to purchase approximately 10,750,000 shares of the Company's
common stock. The Company expects to negotiate with the holders of the
Company's Debentures to extend the maturity date of the Debentures. No
assurance can be given, however, that the Company will be successful in
converting the Company's outstanding bridge loans to 2002 Debentures, in
finalizing the amendments to the Watson Term Loan, in extending the maturity
dates of the Debentures, or in completing the 2002 Debenture Offering.
The failure to complete the 2002 Debenture Offering and to extend the
maturity dates of each of the Watson Term Loan and the Debentures will require
the Company to (i) significantly curtail product development activities, (ii) if
available, obtain funding through arrangements with collaborative partners or
others on terms that may require the Company to relinquish certain rights to its
products and technologies, which the Company could otherwise pursue on its own,
or that would significantly dilute the Company's stockholders, (iii)
significantly scale back or terminate operations, and/or (iv) seek relief under
applicable bankruptcy laws. Any extended delay in completing the 2002 Debenture
Offering or in obtaining the extension of the maturity dates of the Company's
indebtedness will result in the cessation of the Company's continuing
development efforts relating to its products and technologies and will have a
material adverse effect on the Company's financial condition and results of
operations.
10
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," as
amended.
The Company adopted the provisions of SFAS No. 142 effective January 1,
2002. The adoption of SFAS No. 142 had no effect on the financial position or
results of operations of the Company.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting for the
impairment or disposal of long-lived assets.
The Company adopted the provisions of SFAS No. 144 effective January 1,
2002. The adoption of SFAS No. 144 had no effect on the financial position or
results of operations of the Company.
On April 30, 2002, the FASB issued Statement of Financial Accounting
Standard No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145
rescinds Statement No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net the related income tax effect. Upon adoption of SFAS No.
145, companies will be required to apply the criteria in APB Opinion No. 30,
"Reporting the Results of Operations-reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" in determining the classification of gains and losses
resulting from the extinguishment of debt. SFAS No. 145 is effective for all
financial statements issued on or after May 15, 2002.
The Company adopted the provisions of SFAS No. 145 effective May 15, 2002.
The adoption of SFAS No. 145 had no effect on the financial position or results
of operations of the Company.
On July 30, 2002, the FASB issued Statement of Financial Accounting
Standard No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS No. 146"). The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company is currently evaluating the requirements and impact of
this statement on its consolidated results of operations and financial position.
NOTE 3 - STRATEGIC ALLIANCE WITH WATSON PHARMACEUTICALS
Pursuant to the terms of the Company's Core Products Supply Agreement with
Watson, Watson was required to purchase and pay for on a quarterly basis a
minimum of $3,060,000 for products supplied by the Company under such Agreement.
For the three quarters ended December 31, 2000, Watson had made an advance
payment of approximately $4,402,000 as
11
required under the terms of the Core Products Supply Agreement to be applied
against future product purchases under such Agreement. The advance payments and
any additional advance payments made by Watson under the Core Products Supply
Agreement will require that the Company supply Watson with a like amount of
products without additional payments from Watson at such time. On August 8,
2001, the Company and Watson executed an amendment to the Core Products Supply
Agreement (the "Core Products Amendment") providing (i) for a reduction of
Watson's minimum purchase requirements from $3,060,000 to $1,500,000 per
quarter, (ii) for an extension of Watson's minimum purchase requirements from
the quarter ending September 30, 2001 to quarter ending September 30, 2002,
(iii) for Watson to recover previous advance payments made under the Core
Products Supply Agreement in the form of the Company's provision of products
having a purchase price of up to $750,000 per quarter (such credit amount to be
in excess of Watson's $1,500,000 minimum quarterly purchase obligation), and
(iv) for the Company's repayment to Watson of any remaining advance payments
made by Watson under the Core Products Supply Agreement (and which amount has
not been recovered by product deliveries by the Company to Watson as provided in
Subsection (iii) above) (the "Advance Payment Balance") in two (2) equal monthly
installments on October 1, 2002 and November 1, 2002.
As of November 13, 2002, the Advance Payment Balance was $3,901,000. The
Company is in default of its obligation to satisfy the repayment of the Advance
Payment Balance in equal installments on October 1, 2002 and November 1, 2002.
The Core Products Supply Agreement provides that Watson may transfer the Advance
Payment Balance to the principal amount of the Watson Term Loan. The Core
Products Supply Agreement further provides that Watson may terminate the
Agreement if the Company fails to satisfy its payment obligations within sixty
(60) days of the receipt of written notice of breach from Watson. To date,
Watson has not advised the Company that the Advance Payment Balance will be
transferred to the Watson Term Loan nor has Watson provided to the Company a
written notice of breach of the Company's payment obligations under the Core
Products Supply Agreement. The Company and Watson have agreed in principle to
allow the Company to satisfy the Advance Payment Balance by the transfer of such
amount to the Watson Term Loan. Although the Company expects that it will be
successful in finalizing amendments to the Watson Term Loan Agreement to satisfy
its obligations under the Core Products Supply Agreement, no assurance can be
given that this will be the case. There also can be no assurance that Watson
will not provide to the Company a written notice of breach of the Company's
payment obligations under the Core Products Supply Agreement.
Pending the Company's development and receipt of regulatory approval for
its API's and finished dosage products currently under development, and the
marketing and sale of the same, of which there can be no assurance,
substantially all the Company's revenues are expected to be derived from the
Core Products Supply Agreement with Watson. In the event Watson provides to the
Company a written notice of breach of the Core Products Supply Agreement and the
Company is unable to complete the 2002 Debenture Offering or obtain other
sources of third-party financing to satisfy its payment obligations to Watson,
Watson could elect to terminate the agreement. The Company's failure to satisfy
its payment obligations to Watson within sixty (60) days of Watson's provision
of a written notice of breach under the Core Products Supply Agreement would
also constitute a default under the Watson Term Loan Agreement, permitting
Watson to declare the Watson Term Loan due and payable. The termination of the
Core Products Supply Agreement with Watson or the Company's default under the
Watson Term Loan would have a material adverse effect on the Company's financial
condition and could result in a significant scale back or termination of
operations, or the Company's petition for relief under applicable bankruptcy
laws.
NOTE 4 - EARNINGS (LOSS) PER SHARE
The computation of basic earnings (loss) per share of common stock is
based upon the weighted average number of common shares outstanding during the
period. Diluted earnings per share is based on basic earnings per share adjusted
for the effect of other potentially dilutive securities. Excluded from the 2002
and 2001 nine month ended computation are approximately 63,582,000 and
52,192,000, respectively, of outstanding
12
warrants and options and the effect of convertible debentures and bridge loans
outstanding which would be antidilutive.
NOTE 5 - INVENTORIES
Inventories consist of the following:
(In thousands)
September 30, 2002 December 31, 2001
------------------ -----------------
Finished Goods $ -- $ 38
Work in Process 515 1,076
Raw Materials 1,910 1,615
------ ------
$2,425 $2,729
====== ======
NOTE 6 - CONVERTIBLE SUBORDINATED DEBENTURES
Convertible Subordinated Debentures consist of the following:
(In thousands)
September 30, 2002 December 31, 2001
------------------ -----------------
1998 Debentures $ 29,894 $ 28,954
1999 Debentures 20,273 19,580
-------- --------
50,167 48,534
Less: Debt discount (920) (2,355)
-------- --------
49,247 46,179
Less: Current maturities (49,247) --
-------- --------
$ -- $ 46,179
======== ========
NOTE 7 - NOTES PAYABLE
Notes payable consist of the following:
(In thousands)
September 30, 2002 December 31, 2001
------------------ -----------------
Bridge loans $ 12,778 $ 2,500
Capital lease obligation 50 68
-------- --------
$ 12,828 $ 2,568
Less: Debt discount (2,886) (--)
-------- --------
$ 9,942 $ 2,568
======== ========
Term note payable $ 17,500 $ 17,500
======== ========
13
On August 15, 2001, the Company and Galen Group executed a certain Bridge
Loan Agreement pursuant to which the Galen Group made a bridge loan to the
Company in the principal amount of $2,500,000 (the "2001/2002 Galen Bridge
Loans"). The proceeds of the 2001/2002 Galen Bridge Loans were used by the
Company to satisfy in full the Company's 10% convertible subordinated debentures
in the principal amount of $2,500,000 issued in August 1996 and which matured on
August 6, 2001. The 2001/2002 Galen Bridge Loans bear interest at the rate of
10% per annum and is secured by a lien on all the Company's assets, junior to
the security interest granted to Watson under the Watson Term Loan but senior to
the security interest granted to the holders of the Company's 5% convertible
subordinated debentures issued in March, 1998 and May, 1999. The 2001/2002 Galen
Bridge Loans had an initial maturity date of December 31, 2001.
On January 9, 2002, the Company and Galen agreed to amend the 2001/2002
Galen Bridge Loans to (1) refinance existing Bridge Loans to April 30, 2002, (2)
issue warrants expiring January 9, 2009 to purchase approximately 195,000 shares
of the Company's common stock at an exercise price of $1.837 per share in
exchange for the extension of the maturity date, and (3) provide for $3,000,000
of additional financing. The relative estimated fair value of the warrants of
$267,000 was recorded as additional debt discount and amortized over the life of
the bridge loan.
The Company borrowed $3,000,000 of the additional financing in $1,000,000
installments on January 9, February 1, and March 1, 2002. Common stock purchase
warrants to purchase 75,000 shares of the Company's common stock were issued on
January 9, February 1, and March 1, 2002, at exercise prices of $1.837, $1.87
and $2.087, respectively. The relative estimated fair value of the warrants of
$103,000, $119,000, and $112,000, respectively, was recorded as additional debt
discount and amortized over the remaining life of the bridge loans.
The Galen Bridge Loans are convertible into shares of the Company's common
stock at $1.837 to $2.087 per share. The estimated value of the conversion
feature of $754,000, was recorded as additional debt discount and amortized over
the life of the Galen Bridge Loans.
On April 5, 2002, the Company further amended the 2001/2002 Galen Bridge
Loans to provide $1,500,000 of additional financing with a maturity date of
April 30, 2002. The April 5, 2002 bridge loan is convertible into shares of the
Company's common stock at $2.01 per share. Common stock purchase warrants to
purchase 50,000 shares of the Company's common stock were issued on April 5,
2002, at an exercise price of $2.01. The relative estimated fair value of the
warrants of $98,000 and the estimated value of the conversion feature of
$464,000 was recorded as additional debt discount and amortized over the life of
the Galen Bridge Loans.
On May 8, 2002, the Company and the Galen Group completed an amendment to
the 2001/2002 Galen Bridge Loan Agreement to (i) extend the maturity date of a
$7,000,000 principal amount of the 2001/2002 Galen Bridge Loans, plus accrued
and unpaid interest, to January 1, 2003, (ii) provide for the commitment of
Galen to advance up to $8,000,000 to the Company in the form of additional
bridge loans to fund the Company's working capital requirements through December
31, 2002 (the "2002 Galen Bridge Loan Commitment") and (iii) provide for the
advance by Galen to the Company of a bridge loan of $1,000,000 under the 2002
Galen Bridge Loan Commitment.
In consideration for the extension of the maturity date on the 2001/2002
Galen Bridge Loan to January 1, 2003, the Company issued common stock purchase
warrants to the Galen Group to purchase an aggregate of approximately 1,925,000
shares of the Company's common stock, representing 33,000 shares of the
Company's common stock for each $1,000,000 in bridge financing provided under
the 2001/2002 Galen Bridge Loans having a term of thirty
14
(30) days, subject to anti-dilution protection. In consideration for Galen's
agreement to provide the 2002 Galen Bridge Loan Commitment, the Company issued
to Galen a common stock purchase warrant exercisable for 600,000 shares of the
Company's common stock at an exercise price of $2.16. In addition, the Company
will issue additional common stock purchase warrants to Galen exercisable for up
to 1,200,000 shares of the Company's common stock, issued in installments as
advances are made to the Company under the 2002 Galen Bride Loan Commitment. The
number of warrants issuable by the Company for each advance will equal 33,000
shares of the Company's common stock for each $1,000,000 in additional bridge
financing having a term of thirty (30) days. Such additional warrants will have
an exercise price equal to the average trading price of the Company's common
stock for the twenty (20) trading days preceding the issuance of each such
warrant, subject to anti-dilution protection.
The May 8, 2002 bridge loan is convertible into shares of the Company's
common stock at $2.16 per share. Common stock purchase warrants to purchase
approximately an aggregate of 2,789,000 shares of the Company's common stock
were issued at an exercise price of $2.16. The relative estimated fair value of
the warrants of $3,387,000 and the estimated value of the conversion feature of
$1,635,000 was recorded as additional debt discount and amortized over the life
of the Galen Bridge Loans.
On June 3, 2002, $1.0 million was advanced by Galen to the Company in the
form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The bridge
loan is convertible into shares of the Company's common stock at $1.90 per
share. Common stock purchase warrants to purchase approximately 236,000 shares
of the Company's common stock were issued at an exercise price of $1.90. The
relative estimated fair value of the warrants of $234,000 and the estimated
value of the conversion feature of $87,000 was recorded as additional debt
discount and amortized over the remaining life of the bridge loan.
During the month of July 2002, $1.5 million was advanced by Galen to the
Company in the form of bridge loans under the 2002 Galen Bridge Loan Commitment.
The bridge loans are convertible into shares of the Company's common stock at
$1.72 and $1.45 per share. Common stock purchase warrants to purchase 204,000,
and 90,000 shares of the Company's common stock were issued on July 1, and July
23, at exercise prices of $1.72, and $1.45, respectively. The relative estimated
fair value of the warrants of approximately $206,000, and $81,000, respectively,
and the estimated value of the conversion feature of $136,000 and $46,000,
respectively was recorded as additional debt discount and amortized over the
remaining life of the bridge loans.
On August 5, 2002, $1.0 million was advanced by Galen to the Company in
the form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The
bridge loan is convertible into shares of the Company's common stock at $1.42
per share. Common stock purchase warrants to purchase approximately 166,000
shares of the Company's common stock were issued at an exercise price of $1.42.
The relative estimated fair value of the warrants of $167,000 and the estimated
value of the conversion feature of $223,000 was recorded as additional debt
discount and amortized over the remaining life of the bridge loan.
On September 3, 2002, $1.0 million was advanced by Galen to the Company in
the form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The
bridge loan is convertible into shares of the Company's common stock at $1.51
per share. Common stock purchase warrants to purchase approximately 132,000
shares of the Company's common stock were issued at an exercise price of $1.51.
The relative estimated fair value of the warrants of approximately $154,000 and
the estimated value of the conversion feature of approximately $280,000 was
recorded as additional debt discount and amortized over the remaining life of
the bridge loan.
On October 1, 2002, $1.0 million was advanced by Galen to the Company in
the form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The
bridge loan is convertible into shares of the Company's common stock at $1.75
per share. Common stock purchase warrants to purchase approximately 102,000
shares of the Company's common stock were issued at an exercise price of $1.75.
The relative estimated fair value of the warrants of approximately $121,000 and
the estimated value of the conversion feature of
15
approximately $90,000 will be recorded as additional debt discount in the Fourth
Quarter and amortized over the remaining life of the bridge loan.
On November 4, 2002, $200,000 was advanced by Galen to the Company in the
form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The bridge
loan is convertible into shares of the Company's common stock at $1.76 per
share. Common stock purchase warrants to purchase approximately 13,000 shares of
the Company's common stock was issued at an exercise price of $1.76. The
relative estimated fair value of the warrants of approximately $18,000 and the
estimated value of the conversion feature of approximately $29,000 will be
recorded as additional debt discount in the Fourth Quarter and amortized over
the remaining life of the bridge loan.
On November 12, 2002, $200,000 was advanced by Galen to the Company in the
form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The bridge
loan is convertible into shares of the Company's common stock at $1.77 per
share. Common stock purchase warrants to purchase approximately 11,000 shares of
the Company's common stock was issued at an exercise price of $1.77. The
relative estimated fair value of the warrants and the estimated value of the
conversion feature will be recorded as additional debt discount in the Fourth
Quarter and amortized over the remaining life of the bridge loan.
All advances made by Galen to the Company under the 2002 Galen Bridge Loan
Commitment have a maturity date of January 1, 2003.
As of September 30, 2002 Watson Pharmaceuticals, Inc. had advanced
$17,500,000 to the Company under a term loan. The loan is secured by a first
lien on all of the Company's assets, senior to the lien securing all other
Company indebtedness, carries a floating rate of interest equal to prime plus
two percent and matures in March 2003. (See Note 3)
NOTE 8 - 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 condensed consolidated financial statements.
NOTE 9 - RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to
conform to the current year's presentation. Such reclassifications have had no
effect on reported net loss.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 VS NINE MONTHS ENDED SEPTEMBER 30, 2001
NET PRODUCT REVENUES
The Company's net product revenues for the nine months ended September 30,
2002 of $6,152,000 represents a decrease of $9,102,000 (59.7%) as compared to
net product revenues for the nine months ended September 30, 2001 of
$15,254,000. During the nine month period ended September 30, 2001, the Company
recognized $8,500,000 of product development revenues associated with the sale
of certain product rights to Watson Pharmaceuticals, Inc. The $602,000 or (8.9%)
decrease in product sales was due to the inability of the Company to obtain
certain raw materials during the nine months ended September 30, 2002. The
Company believes that these raw materials may become available in the Fourth
Quarter of 2002. On an ongoing basis, the Company expects to generate revenues
from the development and manufacture of both finished dosage and active
pharmaceutical ingredients ("API's"), and then partner with others for the
marketing and distribution of these products.
COST OF MANUFACTURING
For the nine months ended September 30, 2002, cost of manufacturing
decreased $2,132,000 to $9,372,000 as compared to the nine months ended
September 30, 2001 of $11,504,000. This decrease is primarily attributable to
reduced costs associated with the decreased net product revenues as noted above
as well as the elimination of manufacturing overhead expenses from the closure
of the Company's Brooklyn, New York facility in March 2001. During 2001, the
Company's Congers, New York facility utilized both third party packaging
operations and laboratory services. The decrease also reflects the transitioning
of both outside packaging and laboratory functions to internal departments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of net
product revenues for the nine months ended September 30, 2002 and 2001 were
88.9% and 30.6%, respectively. Overall these expenses in the first nine months
of 2002 increased $800,000 over the same period in 2001. The increase is
primarily attributable to legal expenses incurred for patent research and
regulatory matters associated with the DEA manufacturing and import license
registrations and increases in product marketing expenses and corporate
insurance premiums.
RESEARCH AND DEVELOPMENT EXPENSES
The Company currently conducts research and development activities at each
of its Congers, New York and Culver, Indiana facilities. The Company's research
and development activities consist primarily of the development of the Company's
Opiate Synthesis Technologies, including the development for sale of new
chemical products and the development of APIs, as well as new generic drug
product development efforts and manufacturing process improvements. New drug
product development activities are primarily directed at conducting research
studies to develop generic drug formulations, reviewing and testing such
formulations for therapeutic equivalence to brand name products and additional
testing in areas such as bio-availability, bio-equivalence and shelf-life.
During 2002, the Company's research and development efforts will cover finished
dosage products and APIs in a variety of therapeutic applications, with an
emphasis on pain management products. Research and development expenses
increased $235,000 over the same period in 2001 and as a percentage of net
product revenues for the nine months ended September 30, 2002 and 2001 was 18.9%
and 6.1%, respectively.
The Company is proceeding with the development of products, apart from
those obtained from Barr Laboratories, for submission to the FDA. During fiscal
2002, the Company
17
anticipates the submission of four ANDA supplements or amendments to the FDA.
The supplements and amendments relate to the transfer of existing ANDAs from the
Company's Brooklyn facility to its Congers facility as well as the transfer of
certain ANDAs obtained from Barr Laboratories. Although the Company has been
successful in receiving ANDA approvals since its release from the FDA's
Application Integrity Policy list in December 1996, there can be no assurance
that any newly submitted ANDAs, or supplements or amendments thereto or those
contemplated to be submitted, will be approved by the FDA.
The Company is performing the necessary regulatory steps to effect the
transfer of certain of the products obtained from Barr Laboratories in April
1999 to the Company. The Company initially has identified 8 of the products for
which it will devote substantial effort in seeking approval from the FDA for
manufacture and sale. The Company estimates that certain of these Barr Products
will be available for sale in mid-2003, although no assurance can be given that
any of the Barr Products will receive FDA approval or that if approved, that the
Company will be successful in the manufacture and sale of such products. It is
the Company's intention to continue to evaluate the remaining Barr Products on
an ongoing basis to assess their prospects for commercialization and likelihood
of obtaining regulatory approval.
The Company is continuing development efforts relating to certain API's.
In the last few years, the Company has increased its efforts to develop and
manufacture APIs, also known as bulk chemical products. The development and sale
of APIs generally is not subject to the same level of regulation as is the
development and sale of drug products. Accordingly, APIs may be brought to
market substantially sooner than drug products. Although the Company did not
generate revenues from the sale of API's in fiscal 2001 or in the nine months
ended September 30, 2002, it is the Company's expectation that its strategic
alliance with Watson Pharmaceuticals, Inc. and the continued development of the
Opiate Synthesis Technologies and other API development efforts, in addition to
assisting in the expansion of the Company's line of finished dosage products,
will generate revenues from the sale of products using internally produced APIs
starting in the Fourth Quarter of 2003 and such revenue segment will likely
increase thereafter as a percentage of total revenue. The Company currently
manufactures two API's and has seven others under development.
NET LOSS
For the nine months ended September 30, 2002, the Company had a net loss
of $(20,688,000) as compared to a net loss of $(6,606,000) for the nine months
ended September 30, 2001. Included in the results for the nine months ended
September 30, 2002 was net interest expense of $3,398,000 and amortization of
deferred debt discount and private offering costs of $7,562,000 as compared to
$2,890,000 and $1,834,000, respectively, for the nine months ended September 30,
2001.
THREE MONTHS ENDED SEPTEMBER 30, 2002 VS THREE MONTHS ENDED SEPTEMBER 30, 2001
NET PRODUCT REVENUES
The Company's net product revenues for the three months ended September
30, 2002 of $2,013,000 represents a decrease of $3,313,000 or (62.2%) as
compared to net product revenues for the three months ended September 30, 2001
of $5,326,000. During the three month period ending September 30, 2001, the
Company recognized $3,500,000 of product development revenues associated with
the sale of certain product rights to Watson Pharmaceuticals, Inc. The increase
in product sales of $187,000, or 10.2%, reflects some limited availability of
raw material which had been in short supply throughout 2002. The Company
believes that these raw materials may become available in the Fourth Quarter of
2002.
On an ongoing basis, the Company expects to generate revenues from the
development
18
and manufacture of both finished dosage and API's and then partner with others
for the marketing and distribution of these products.
COST OF MANUFACTURING
For the three months ended September 30, 2002 cost of manufacturing
decreased by $539,000 as compared to the three months ended September 30, 2001.
During this three month period in 2001, the Company's Congers, New York facility
utilized both third party packaging operations and laboratory services. The
decrease reflects the transitioning of both outside packaging and laboratory
functions to internal departments.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of net
product revenues for the three months ended September 30, 2002 and 2001 were
97.2% and 31.1%, respectively. Overall these expenses in the three months ended
September 30, 2002 increased $301,000 over the same period in 2001. The increase
is primarily attributable to legal expense incurred for patent research and
regulatory matters associated with the DEA manufacturing and import license
registrations, and increases in product marketing expenses and corporate
insurance premiums.
RESEARCH AND DEVELOPMENT EXPENSES
The Company currently conducts research and development activities at each
of its Congers, New York and Culver, Indiana facilities. The Company's research
and development activities consist primarily of the development of the Opiate
Synthesis Technologies, including the development for sale of new chemical
products and the development of APIs, as well as new generic drug product
development efforts and manufacturing process improvements. New drug product
development activities are primarily directed at conducting research studies to
develop generic drug formulations, reviewing and testing such formulations for
therapeutic equivalence to brand name products and additional testing in areas
such as bioavailability, bioequivalence and shelf-life. During 2002, the
Company's research and development efforts will cover finished dosage products
and APIs in a variety of therapeutic applications, with an emphasis on pain
management products. Research and development expenses for the three months
ended September 30, 2002 increased $98,000 over the same period in 2001 and as a
percentage of net product revenues for the three months ended September 30, 2002
and 2001 was 20.1% and 5.7%, respectively.
NET LOSS
For the three months ended September 30, 2002, the Company had a net loss
of $7,869,000 as compared to a net loss of $1,903,000 for the three months ended
September 30, 2001. Included in the results for the three months ended September
30, 2002 was interest expense of $1,232,000 and amortization of deferred debt
discount and private offering costs of $3,187,000 as compared to $925,000 and
$673,000 respectively, over the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had cash of $8,000 as compared to
$422,000 at December 31, 2001. The Company had a working capital deficiency at
September 30, 2002 of $(83,220,000) and an accumulated deficit of approximately
$(122,189,000). The Company incurred a loss of approximately $(20,688,000)
during the nine months ended September 30, 2002.
Until such time as the Company successfully develops and commercializes
new finished dosage products and active pharmaceutical ingredients, of which
there can be no assurance, the Company will continue to incur operating losses
and negative cash flow. As of November 13, 2002, cash on hand was $200,000 and
$1,100,000 remained available for advance to the Company under the 2002 Galen
Bridge Loan Commitment. The Company estimates that the balance of the 2002 Galen
Bridge Loan Commitment will fund the
19
Company's working capital requirements only until mid-December 2002. The Company
is in need of immediate additional financing in order to fund its working
capital requirements and to continue to develop its opiate synthesis
technologies. Although the Company is a party to a non-binding term sheet with
Care Capital LLC and Essex Woodlands Health Ventures providing the terms of a
private offering pursuant to which the Company would receive gross proceeds of
$10 million from the issuance of 5% convertible senior secured debentures (the
"2002 Debentures") due March 31, 2006 (the "2002 Debentures Offering"), no
assurance can be given that the 2002 Debenture Offering will be completed or
that the amount of such financing, if any, will be sufficient to meet the
Company's working capital requirements and provide adequate funding to provide
for the development of the Company's opiate synthesis technologies. The failure
of the Company to complete the 2002 Debenture Offering by mid-December 2002 will
require the Company to significantly scale back or terminate operations and
possibly seek relief under applicable bankruptcy laws.
In addition to the other strategic alliance transactions with Watson
Pharmaceuticals, Inc. ("Watson") completed on March 29, 2000, the Company and
Watson executed a Loan Agreement providing for Watson's extension of a
$17,500,000 term loan to the Company (the "Watson Term Loan"). The Watson Term
Loan provides for funding in installments upon the Company's request for
advances and the provision to Watson of a supporting use of proceeds relating to
each such advance. As of September 30, 2002, Watson had advanced the full $17.5
million available to the Company under the Watson Term Loan. The Watson Term
Loan is secured by a first lien on all of the Company's assets, senior to the
liens securing all other Company indebtedness, carries a floating rate of
interest equal to prime plus two percent and matures in March 2003. The net
proceeds of the Watson Term Loan were used in part to satisfy certain bridge
loans made by Galen Partners III, L.P. ("Galen") to the Company during 2000, to
satisfy the Company's payment obligations under the Settlement Agreement with
the landlord of its Brooklyn, New York facility, to fund capital improvements
and to fund the Company's working capital requirements.
Pursuant to the terms of the Core Products Supply Agreement with Watson,
Watson was required to purchase and pay for on a quarterly basis a minimum of
$3,060,000 for products supplied by the Company under such Agreement. For the
three quarters ended December 31, 2000, Watson had made an advance payment of
approximately $4,402,000 as required under the terms of the Core Products Supply
Agreement to be applied against future product purchases under such Agreement.
The advance payments and any additional advance payments made by Watson under
the Core Products Supply Agreement will require that the Company supply Watson
with a like amount of products without additional payments from Watson at such
time. On August 8, 2001, the Company and Watson executed an amendment to the
Core Products Supply Agreement (the "Core Products Amendment") providing (i) for
a reduction of Watson's minimum purchase requirements from $3,060,000 to
$1,500,000 per quarter, (ii) for an extension of Watson's minimum purchase
requirements from the quarter ending September 30, 2001 to quarter ending
September 30, 2002, (iii) for Watson to recover previous advance payments made
under the Core Products Supply Agreement in the form of the Company's provision
of products having a purchase price of up to $750,000 per quarter (such credit
amount to be in excess of Watson's $1,500,000 minimum quarterly purchase
obligation), and (iv) for the Company's repayment to Watson of any remaining
advance payments made by Watson under the Core Products Supply Agreement (and
which amount has not been recovered by product deliveries by the Company to
Watson as provided in Subsection (iii) above) (the "Advance Payment Balance") in
two (2) equal monthly installments on October 1, 2002 and November 1, 2002.
As of November 13, 2002, the Advance Payment Balance was $3,901,000. The
Company is in default of its obligation to satisfy the repayment of the Advance
Payment Balance in equal installments on October 1, 2002 and November 1, 2002.
The Core Products Supply Agreement provides that Watson may transfer the Advance
Payment Balance to the principal amount of the Watson Term Loan. The Core
Products Supply Agreement further provides that Watson may terminate the
Agreement if the Company fails to satisfy its payment obligations within sixty
(60) days of the receipt of written notice of breach from Watson. To date,
Watson has not advised the Company that the Advance Payment Balance will be
transferred to the Watson Term Loan nor has Watson provided to the Company a
20
written notice of breach of the Company's payment obligations under the Core
Products Supply Agreement. The Company and Watson have agreed in principle to
allow the Company to satisfy the Advance Payment Balance by the transfer of such
amount to the Watson Term Loan. Although the Company expects that it will be
successful in finalizing amendments to the Watson Term Loan Agreement to satisfy
its obligations under the Core Products Supply Agreement, no assurance can be
given that this will be the case. There also can be no assurance that Watson
will not provide to the Company a written notice of breach of the Company's
payment obligations under the Core Products Supply Agreement.
Pending the Company's development and receipt of regulatory approval for
its API's and finished dosage products currently under development, and the
marketing and sale of the same, of which there can be no assurance,
substantially all the Company's revenues are expected to be derived from the
Core Products Supply Agreement with Watson. In the event Watson provides to the
Company a written notice of breach of the Core Products Supply Agreement and the
Company is unable to complete the 2002 Debenture Offering or obtain other
sources of third-party financing to satisfy its payment obligations to Watson,
Watson could elect to terminate the agreement. The Company's failure to satisfy
its payment obligations to Watson within sixty (60) days of Watson's provision
of a written notice of breach under the Core Products Supply Agreement would
also constitute a default under the Watson Term Loan Agreement, permitting
Watson to declare the Watson Term Loan due and payable. The termination of the
Core Products Supply Agreement with Watson or the Company's default under the
Watson Term Loan would have a material adverse effect on the Company's financial
condition and could result in a significant scale back or termination of
operations or the Company's petition for relief under applicable bankruptcy
laws.
The Company secured bridge financing from Galen, certain of Galen's
affiliates and certain investors in the Company's 5% convertible subordinated
debentures (collectively, the "Galen Group") in the aggregate amount of
approximately $7,000,000 funded through five (5) separate bridge loan
transactions during the period from August 15, 2001 through April 5, 2002
(collectively, the "2001/2002 Galen Bridge Loans"). $2,500,000 of the 2001/2002
Galen Bridge Loans were used by the Company to satisfy in full the Company's 10%
convertible subordinated debentures in the principal amount of $2,500,000 issued
in August 1996 and which matured on August 6, 2001. The remaining $4,500,000
balance of the 2001/2002 Galen Bridge Loans was used for working capital to fund
continuing operations. The Galen Bridge Loans bear interest at the rate of 10%
per annum and are secured by a lien on all the Company's assets, junior to the
security interest granted to Watson under the Watson Term Loan but senior to the
security interest granted to the holders of the Company's 5% convertible
subordinated debentures issued in March, 1998 and May, 1999. The promissory
notes issued in the 2001/2002 Galen Bridge Loans are convertible into common
stock at an average initial conversion price of $2.33 per share, which
conversion price equals the average trading price of the Company's common stock
for the 20 days preceding the closing date of each bridge loan advance. The
conversion price of the promissory notes is subject to full-ratchet dilution
protection to equal the lower purchase price/conversion price of the Company's
securities issued in a subsequent offering. In consideration for the extension
of the 2001/2002 Galen Bridge Loans, the Company issued to the Galen Group
common stock purchase warrants to purchase an aggregate of 657,461 shares of the
Company's common stock at an average initial exercise price of $2.22 per share.
The exercise price of the Warrants is subject to full-ratchet dilution
protection to equal the lower purchase price/conversion price of the Company's
securities issued in a subsequent offering.
On May 8, 2002, the Company and the Galen Group completed an amendment to
the 2001/2002 Galen Bridge Loan Agreement to (i) extend the maturity date of the
$7,000,000 principal amount of the 2001/2002 Galen Bridge Loans, plus accrued
and unpaid interest, to January 1, 2003, (ii) provide for the commitment of
Galen to advance up to $8,000,000 to the Company in the form of additional
bridge loans to fund the Company's working capital requirements through December
31, 2002 (the "2002 Galen Bridge Loan Commitment") and (iii) provide for the
advance by Galen to the Company of a bridge loan of $1,000,000 under the 2002
Galen Bridge Loan Commitment.
21
In consideration for the 2001/2002 Bridge Loans Maturity Date Extension,
the Company issued common stock purchase warrants to the Galen Group to purchase
an aggregate of approximately 1,925,000 shares of the Company's common stock,
representing 33,000 shares of the Company's common stock for each $1,000,000 in
bridge financing provided under the 2001/2002 Galen Bridge Loans having a term
of thirty (30) days. With respect to the 2002 Galen Bridge Loan Commitment,
advances bear interest at the rate of ten percent (10%) per annum, are secured
by a lien on all the Company's assets and have a maturity date of January 1,
2003. Promissory notes issued under the 2002 Galen Bridge Loan Commitment are
convertible into the Company's common stock at a conversion price equal to the
average of the trading price of the Company's common stock for the twenty (20)
trading days preceding the issuance of each promissory note, subject to
full-ratchet dilution protection to equal the lower purchase price/conversion
price of the Company's securities issued in a subsequent offering. In
consideration for Galen's agreement to provide the 2002 Galen Bridge Loan
Commitment, the Company issued to Galen a common stock purchase warrant
exercisable for 600,000 shares of the Company's common stock at an exercise
price equal to the average trading price for the Company's common stock for the
twenty (20) trading days preceding the issuance of such warrant, subject to the
same full-ratchet dilution protections provided in the bridge loan promissory
notes. In addition, the Company will issue additional common stock purchase
warrants to Galen exercisable for up to 1,200,000 shares of the Company's common
stock, issued in installments as advances are made to the Company under the 2002
Galen Bridge Loan Commitment. The number of warrants issuable by the Company for
each advance will equal 33,000 shares of the Company's common stock for each
$1,000,000 in additional bridge financing having a term of thirty (30) days.
Such additional warrants will have an exercise price equal to the average
trading price of the Company's common stock for the twenty (20) trading days
preceding the issuance of each such warrant, subject to the same full-ratchet
dilution protections provided in the bridge loan promissory notes.
The May 8, 2002 bridge loan is convertible into shares of the Company's
common stock at $2.16 per share. Common stock purchase warrants to purchase
approximately an aggregate of 2,789,000 shares of the Company's common stock
were issued at an exercise price of $2.16. The relative estimated fair value of
the warrants of $3,387,000 and the estimated value of the conversion feature of
$1,635,000 was recorded as additional debt discount and amortized over the life
of the Galen Bridge Loan.
On June 3, 2002, $1.0 million was advanced by Galen to the Company in the
form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The bridge
loan is convertible into shares of the Company's common stock at $1.90 per
share. Common stock purchase warrants to purchase approximately 236,000 shares
of the Company's common stock were issued at an exercise price of $1.90. The
relative estimated fair value of the warrants of $234,000 and the estimated
value of the conversion feature of $87,000 was recorded as additional debt
discount and amortized over the remaining life of the bridge loans.
During the month of July 2002, $1.5 million was advanced by Galen to the
Company in the form of bridge loans under the 2002 Galen Bridge Loan Commitment.
The bridge loans are convertible into shares of the Company's common stock at
$1.72 and $1.45 per share. Common stock purchase warrants to purchase 204,000,
and 90,000 shares of the Company's common stock were issued on July 1, and July
23, at exercise prices of $1.72, and $1.45, respectively. The relative estimated
fair value of the warrants of approximately $206,000, and $81,000, respectively,
and the estimated value of the conversion feature of $136,000 and 46,000,
respectively, was recorded as additional debt discount and amortized over the
remaining life of the bridge loans.
On August 5, 2002, $1.0 million was advanced by Galen to the Company in
the form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The
bridge loan is convertible into shares of the Company's common stock at $1.42
per share. Common stock purchase warrants to purchase approximately 166,000
shares of the Company's common stock were issued at an exercise price of $1.42.
The relative estimated fair value of the warrants of approximately $167,000 and
the estimated value of the conversion feature of $223,000
22
was recorded as additional debt discount and amortized over the remaining life
of the bridge loan.
On September 3, 2002, $1.0 million was advanced by Galen to the Company in
the form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The
bridge loan is convertible into shares of the Company's common stock at $1.51
per share. Common stock purchase warrants to purchase approximately 132,000
shares of the Company's common stock were issued at an exercise price of $1.51.
The relative estimated fair value of the warrants of approximately $154,000 and
the estimated value of the conversion feature of approximately $280,000 was
recorded as additional debt discount and amortized over the remaining life of
the bridge loan.
On October 1, 2002, $1.0 million was advanced by Galen to the Company in
the form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The
bridge loan is convertible into shares of the Company's common stock at $1.75
per share. Common stock purchase warrants to purchase approximately 102,000
shares of the Company's common stock were issued at an exercise price of $1.75.
The relative estimated fair value of the warrants of approximately $121,000 and
the estimated value of the conversion feature of approximately $90,000 will be
recorded as additional debt discount in the Fourth Quarter and amortized over
the remaining life of the bridge loan.
On November 4, 2002, $200,000 was advanced by Galen to the Company in the
form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The bridge
loan is convertible into shares of the Company's common stock at $1.76 per
share. Common stock purchase warrants to purchase approximately 13,000 shares of
the Company's common stock was issued at an exercise price of $1.76. The
relative estimated fair value of the warrants of approximately $18,000 and the
estimated value of the conversion feature of approximately $29,000 will be
recorded as additional debt discount in the Fourth Quarter and amortized over
the remaining life of the bridge loan.
On November 12, 2002, $200,000 was advanced by Galen to the Company in the
form of a bridge loan under the 2002 Galen Bridge Loan Commitment. The bridge
loan is convertible into shares of the Company's common stock at $1.77 per
share. Common stock purchase warrants to purchase approximately 11,000 shares of
the Company's common stock was issued at an exercise price of $1.77. The
relative estimated fair value of the warrants and the estimated value of the
conversion feature will be recorded as additional debt discount in the Fourth
Quarter and amortized over the remaining life of the bridge loan.
All advances made by Galen to the Company under the 2002 Galen Bridge Loan
Commitment have a maturity date of January 1, 2003.
The Company's efforts to obtain the approval of the U.S. Drug Enforcement
Administration ("DEA") for a registration to import raw materials for use in
production, including contesting pending third-party opposition proceedings, and
the continuing development of the Company's opiate synthesis technologies will
continue through 2004. In order to fund continued operations, and to fund the
continued development of the Company's opiate synthesis technologies during the
period from fiscal 2002 through and including 2004, which includes the
completion of planned capital improvements to the Company's Culver, Indiana and
Congers, NY facilities and the processing of the registrations and approvals
required from the DEA (including funding the legal fees and related expenses in
connection with pending opposition proceedings relating to the Company's request
for a raw material import registration), the Company estimates that it will be
required to obtain additional sources of financing or a third party equity
investment of approximately $10 million. The Company is seeking such financing
through transactions related to its business lines as well as private financings
and is currently in active negotiations with certain third parties. Although the
Company is a party to a non-binding term sheet with Care Capital LLC and Essex
Woodlands Health Ventures providing the terms of the 2002 Debenture Offering,
the closing of the 2002 Debenture Offering is subject to a number of conditions,
including receipt of the agreement of each of Watson Pharmaceuticals and the
holders of the Company's outstanding debentures to
23
extend the maturity date of the indebtedness under the Watson Term Loan and the
Company's outstanding debentures to March 31, 2006. In addition, it is a
condition to the completion of the 2002 Debenture Offering that the 2001/2002
Galen Bridge Loans and advances made under the 2002 Galen Bridge Loan Commitment
shall be satisfied by the Company's issuance of 2002 Debentures under the 2002
Debenture Offering. The Company has been advised by the Galen Group that it is
agreeable to convert the outstanding indebtedness under the 2001/2002 Galen
Bridge Loans and advances made under the 2002 Galen Bridge Loan Commitment to
2002 Debentures. In addition, the Company and Watson have agreed in principle to
(i) transfer to the Watson Term Loan the Company's payment obligation to Watson
of approximately $3.9 million under the Core Products Supply Agreement between
the parties, and (ii) extend the maturity date of the Watson Term Loan to March
31, 2006. In consideration the amendments to the Watson Term Loan Agreement, the
Company will issue to Watson common stock purchase warrants to purchase
approximately 10,750,000 shares of the Company's common stock. The Company
expects to negotiate with the holders of the Company's Debentures to extend the
maturity date of the Debentures. The Debentures have a maturity date of March
31, 2003. No assurance can be given, however, that the Company will be
successful in converting the Company's outstanding bridge loans to 2002
Debentures, in finalizing the amendments to the Watson Term Loan Agreement, in
extending the maturity dates for the Debentures, or in completing the 2002
Debenture Offering.
The failure of the Company to complete the 2002 Debenture Offering and to
extend the maturity dates of each of the Watson Term Loan and the Debentures
will require the Company to (i) significantly curtail product commercialization
efforts, including the development and commercialization of the opiate synthesis
technologies, (ii) if available, obtain funding through arrangements with
collaborative partners or others on terms that may require the Company to
relinquish certain rights in its opiate synthesis technologies, which the
Company could otherwise pursue on its own, or that would significantly dilute
the Company's stockholders, (iii) significantly scale back or terminate
operations, and/or (iv) seek relief under applicable bankruptcy laws. Any
extended delay in completing the 2002 Debenture Offering or in obtaining the
extension of the maturity dates of the Company's indebtedness will result in the
cessation of the Company's continuing development efforts relating to its opiate
synthesis technologies and will have a material adverse effect on the Company's
financial condition and results of operations.
The following table presents the Company's expected cash requirements for
contractual obligations outstanding as of September 30, 2002:
Due as of Due as of
Due as of 9/30/04 and 9/30/06 and Due
(in thousands) Total 9/30/03 9/30/05 9/30/07 Thereafter
----- --------- ----------- ----------- ----------
Convertible
subordinated
debentures (1) $50,167 $50,167 -- -- --
Bridge loans payable (1) 12,778 12,778 -- -- --
Term loan payable (1) 17,500 17,500 -- -- --
Department of justice
settlement 841 300 $ 541 -- --
Capital leases 50 26 24 -- --
Operating leases 1,254 725 517 $12 --
Employment agreements 917 355 562 -- --
------- ------- ------ --- ---
Total-Contractual
Cash Obligations $83,507 $81,851 $1,644 $12 $--
======= ======= ====== === ===
24
(1) As discussed in Note 1 - Basis of Presentation, if the Company is
successful in completing the 2002 Debenture Offering, of which there can be no
assurance, Galen has advised the Company that it is agreeable to convert the
outstanding indebtedness under the 2001/2002 Galen Bridge Loans and advances
made under the 2002 Galen Bridge Loan Commitment to 2002 Debentures. In
addition, the Company and Watson have agreed in principle to (i) transfer to
the Watson Term Loan the Company's payment obligations under the Core Products
Supply Agreement between the parties, and (ii) extend the maturity date of
Watson Term Loan to March 31, 2006. The Company expects to negotiate with the
holders of the Company's Debentures to extend the maturity date of the
Debentures. No assurance can be given, however, that the Company will be
successful in converting the Company's outstanding bridge loans to 2002
Debentures, in finalizing the amendments to the Watson Term Loan Agreement, in
extending the maturity dates for the Debentures, or in completing the 2002
Debenture Offering.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the Securities
and Exchange Commission ("SEC") in December 2001, requires all companies to
include a discussion of critical accounting policies or methods used in the
preparation of financial statements. Note A of the Notes to Consolidated
Financial Statements, as contained in the Company's Annual Report on Form 10-K,
includes a summary of the Company's significant accounting policies and methods
used in the preparation of the financial statements. In preparing these
financial statements, the Company has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. The Company does not
believe there is a great likelihood that materially different amounts would be
reported under different conditions or using different assumptions. The
Company's critical accounting policies are as follows:
REVENUE RECOGNITION
The Company recognizes revenue at the time a product is shipped to
customers. The Company established sales provisions for estimated chargebacks,
discounts, rebates, returns, pricing adjustments and other sales allowances
concurrently with the recognition of revenue. The sales provisions are
established based upon consideration of a variety of factors, including but not
limited to, actual return and historical experience by product type, the number
and timing of competitive products approved for sale, the expected market for
the product, estimated customer inventory levels by product, price declines and
current and projected economic conditions and levels of competition. Actual
product return, chargebacks and other sales allowances incurred are, however,
dependent upon future events. Management continually monitors the factors that
influence sales allowance estimates and make adjustments to these provisions
when allowances may differ from established allowances.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Estimates are used in determining the allowance for doubtful accounts
based on the Company's historical collections experience, current trends, credit
policy and a percentage of its accounts receivable by aging category. In
determining these percentages, the Company looks at historical write-offs of its
receivables. The Company also looks at the credit quality of its customer base
as well as changes in its credit policies. The Company continuously monitors
collections and payments from its customers. While credit losses have
historically been within expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same credit
loss rates that it has in the past.
INVENTORIES
The Company's inventories are stated at the lower of cost or market, with
cost determined on the first-in, first-out basis. In evaluating whether
inventory is stated at
25
the lower of cost or market, management considers such factors as the amount of
inventory on hand, remaining shelf life and current and expected market
conditions, including levels of competition. As appropriate, the Company records
provisions to reduce inventories to their net realizable value.
INCOME TAXES
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and loss
carry-forwards for which income tax benefits are expected to be realized in
future years. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. In estimating future
tax consequences, the Company generally considers all expected future events
other than an enactment of changes in the tax laws or rates. The Company has
recorded a full valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While the Company has
considered future taxable income in assessing the need for the valuation
allowance, in the event the Company were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.
STOCK COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") and comply with the disclosure provision of SFAS
No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123"). If the
Company were to include the cost of stock-based employee compensation in the
financial statements, the Company's operating results would decline based on the
fair value of the stock-based employee compensation.
DEFERRED DEBT DISCOUNT
Deferred debt discount results from the issuance of stock warrants in
connection with the issuance of subordinated debt and other notes payable. The
amount of the discount is recorded as a reduction of the related obligation and
is amortized over the remaining life of the related obligations. Management
determines the amount of the discount, based, in part, by the relative fair
values ascribed to the warrants determined by an independent valuation or
through the use of the Black-Scholes valuation model. Inherent in the
Black-Scholes valuation model are assumptions made by management regarding the
estimated life of the warrant, the estimated volatility of the Company's common
stock and the expected dividend yield.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets". SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," as
amended.
The Company adopted the provisions of SFAS No. 142 effective January 1,
2002. The adoption of SFAS No. 142 had no effect on the financial position or
results of operations of the Company.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting for the
impairment or disposal of long-lived
26
assets.
The Company adopted the provisions of SFAS No. 144 effective January 1,
2002. The adoption of SFAS No. 144 had no effect on the financial position or
results of operations of the Company.
On April 30, 2002 the FASB issued Statement of Financial Accounting
Standard No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145
rescinds Statement No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. Upon adoption of SFAS No.
145, companies will be required to apply the criteria in APB Opinion No. 30,
"Reporting the Results of Operations-reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" in determining the classification of gains and losses
resulting from the extinguishment of debt. SFAS No. 145 is effective for all
financial statements issued on or after May 15, 2002.
The Company adopted the provisions of SFAS No. 145 effective May 15, 2002.
The adoption of SFAS No. 145 had no effect on the financial position or results
of operations of the Company.
On July 30, 2002, the FASB issued Statement of Financial Accounting
Standard No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS No. 146"). The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company is currently evaluating the requirements and impact of
this statement on its consolidated results of operations and financial position.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic Securities and Exchange Commission filings.
No significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
Disclosure controls and procedures are those controls and other procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the Company's management, including the Company's principal executive officer
and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
27
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2002, the Company issued (i) 5%
Convertible Debentures in the principal amount of approximately $551,000 in
satisfaction of accrued interest on the Company's outstanding 5% Convertible
Subordinated Debentures issued in March and June 1998, and May and July 1999
(the "Convertible Debentures"), and (ii) convertible promissory notes and
warrants pursuant to outstanding bridge loans (the "Bridge Loan Securities").
Each of the holders of the Convertible Debentures for which interest
payments were made in 5% Convertible Subordinated Debentures, and the bridge
lenders receiving the Bridge Loan Securities are accredited investors as defined
in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as
amended (the "Act"). The 5% Convertible Subordinated Debentures issued in
satisfaction of the interest payments under the Convertible Debentures and the
Bridge Loan Securities 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.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2002 HALSEY DRUG CO., INC.
By: s/s Michael K. Reicher
-------------------------
Michael K. Reicher
Chairman and
Chief Executive Officer
By: s/s Peter A. Clemens
-------------------------
Peter A. Clemens
VP & Chief Financial Officer
29
CERTIFICATION OF PERIODIC REPORT PURSUANT TO RULES 13a-14 AND 15d-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Michael K. Reicher, the Chief Executive Officer of Halsey Drug Co.,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Halsey Drug
Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
30
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
s/s Michael K. Reicher
-----------------------
Michael K. Reicher
Chief Executive Officer
31
CERTIFICATION OF PERIODIC REPORT PURSUANT TO RULES 13a-14 AND 15d-14
OF THE SECURITIES EXCHANGE ACT OF 1934
I, Peter A. Clemens, the Chief Financial Officer of Halsey Drug Co., Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Halsey Drug
Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
c. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
32
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
s/s Peter A. Clemens
-----------------------
Peter A. Clemens
Chief Financial Officer
33