Filed On 4/14/00 ˇ SEC File 1-10113 ˇ Accession Number 950123-0-3670
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
4/14/00 Acura Pharmaceuticals/Inc 10-K405 12/31/99 8:162 Bowne of NY City...01/FA
Annual Report -- [X] Reg. S-K Item 405 ˇ Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Halsey Drug Co., Inc. 67 226K
2: EX-3.1 Certificate of Incorporation and Amendments 3 11K
3: EX-10.72 Debenture and Warrant Purchase Agreement 50 187K
4: EX-10.73 Form of 5% Convertible Senior Secured Debenture 15 59K
5: EX-10.74 Form of Common Stock Purchase Warrant 13 46K
6: EX-10.75 Lease Termination and Settlement Agreement 12 50K
7: EX-23.1 Consent of Grant Thornton Llp 1 6K
8: EX-27 Financial Data Schedule 1 7K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
|_| TRANSITION 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 NORTH PERRYVILLE ROAD, CRIMSON BUILDING NO. 2, ROCKFORD, ILLINOIS 61107
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (815) 399-2060
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $0.01 THE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS)
NONE
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
As of March 31, 2000, the registrant had 14,427,619 shares of Common
Stock, par value $0.01, outstanding. Based on the closing price of the Common
Stock on March 31, 2000 ($1.875), the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $26,781,000.
DOCUMENTS INCORPORATED BY REFERENCE
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Document Where Incorporated
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Proxy Statement for the 2000 Annual Meeting Part III
of Shareholders
CONTENTS
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PAGE
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PART I
Item 1. Business.............................................................................. 4
Item 2. Properties............................................................................ 14
Item 3. Legal Proceedings..................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................................. 16
Item 6. Selected Financial Data............................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................... 18
Item 8. Financial Statements and Supplementary Data........................................... 23
Item 9. Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure................................................................ 23
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 23
Item 11. Executive Compensation................................................................ 23
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 23
Item 13. Certain Relationships and Related Transactions........................................ 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K Signatures................................................................. 25
Index to Consolidated Financial Statements............................................ F-1
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report under the captions Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Item 1, "Business", Item 3, "Legal Proceedings" and elsewhere in
this Report constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Halsey Drug Co., Inc. ("Halsey" or the "Company"), or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: changes in general economic and business
conditions; loss of market share through competition; introduction of competing
products by other companies; the timing of regulatory approval and the
introduction of new products by the Company; changes in industry capacity;
pressure on prices from competition or from purchasers of the Company's
products; regulatory changes in the generic pharmaceutical manufacturing
industry; regulatory obstacles to the introduction of new products that are
important to the Company's growth; availability of qualified personnel; the loss
of any significant customers; and other factors both referenced and not
referenced in this Report. When used in this Report, the words "estimate,"
"project," "anticipate," "expect," "intend," "believe," and similar expressions
are intended to identify forward-looking statements.
3
PART I
ITEM 1. BUSINESS.
GENERAL
The Company, a New York corporation established in 1935, and its
subsidiaries, are engaged in the manufacture, sale and distribution of generic
drugs. A generic drug is the chemical and therapeutic equivalent of a brand-name
drug for which patent protection has expired. A generic drug may only be
manufactured and sold if patents (and any additional government-granted
exclusivity periods) relating to the brand-name equivalent of the generic drug
have expired. A generic drug is usually marketed under its generic chemical name
or under a brand name developed by the generic manufacturer. The Company sells
its generic drug products under its Halsey label and under private-label
arrangements with drugstore chains and drug wholesalers. While subject to the
same governmental standards for safety and efficacy as its brand-name
equivalent, a generic drug is usually sold at a price substantially below that
of its brand-name equivalent.
The Company manufactures its products at facilities in New York and
Indiana. During the last several years, the Company has sought to diversify its
businesses through strategic acquisitions and alliances and through the
development, manufacture and sale of bulk chemical products used by others as
raw materials in the manufacture of finished drug forms.
RECENT EVENTS
Regulatory Compliance
During the past several years, the Company's business has been
adversely affected by the discovery of various manufacturing and record keeping
problems identified with certain products manufactured at its Brooklyn, New York
plant. In October 1991, the U.S. Food and Drug Administration (the "FDA") placed
the Company on the FDA's Application Integrity Policy list and its restrictions
(collectively, the "AIP"). Under the AIP, the FDA suspended all of the parent
company's applications for new drug approvals, including Abbreviate New Drug
Applications ("ANDAs") and Supplements to ANDAs. During the period that
followed, the U.S. Department of Justice ("DOJ") conducted an investigation into
the manufacturing and record keeping practices at the Company's Brooklyn plant.
As a consequence, on June 21, 1993, the Company entered into a plea agreement
(the "Plea Agreement") with the DOJ to resolve the DOJ's investigation. Under
the terms of the Plea Agreement, the Company agreed to plead guilty to five
counts of adulteration of a single drug product shipped in interstate commerce
and related record keeping violations. The Plea Agreement also required the
Company to pay a fine of $2,500,000 over five years in quarterly installments of
$125,000 commencing in September 1993. As of February 28, 1998, the Company was
in default of the payment terms of the Plea Agreement and had made payments
aggregating $350,000. On March 27, 1998, the Company and the DOJ signed a Letter
Agreement serving to amend the Plea Agreement relating to the terms of the
Company's satisfaction of the fine assessed under the Plea Agreement. The Letter
Agreement provides, among other things, that the Company will satisfy the
remaining $2,150,000 of the fine through the payment of $25,000 on a monthly
basis commencing June 1, 1998, plus interest on the outstanding balance. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" for a more detailed description
of the Letter Amendment to the Plea Agreement between the DOJ and the Company.
On June 29, 1993, the Company entered into a consent decree (the
"Consent Decree") with the U.S. Attorney for the Eastern District of New York on
behalf of the FDA that resulted from the FDA's investigation into the Brooklyn
plant's compliance with the FDA's Current Good Manufacturing Practices ("CGMP")
regulations. Under the terms of the Consent Decree, the Company was enjoined
from shipping any solid dosage drug products (i.e., excluding liquid drug
formulations) manufactured at the Brooklyn plant until the Company established,
to the satisfaction of the FDA, that the methods used in, and the facilities and
controls used for, manufacturing, processing, packing, labeling and holding any
drug, were established, operated, and administered in conformity with the
Federal Food, Drug, and Cosmetic Act and all CGMP Regulations. As part of
satisfying these requirements, the Company was required to validate the
manufacturing processes for each solid dosage drug product prior to
manufacturing and shipping the drug product.
On October 23, 1996, the Company withdrew four of its ANDAs, including
its ANDA (the "Capsules ANDA") for
4
acetaminophen/oxycodone capsules (the "Capsules"), and halted sales of the
affected products. Net sales derived from the withdrawn Capsule ANDA were
approximately $3 million and $8 million for the years ended December 31, 1996
and December 31, 1995, respectively, and accounted for approximately 24% and 40%
of the Company's total net sales during such twelve month periods. The Company
instituted the withdrawal of the Capsule ANDA at the suggestion of the FDA and
in anticipation of its release from the AIP. At the FDA's suggestion, the
Company retained outside consultants to perform validity assessments of its drug
applications. Thereafter, in October 1996, the FDA recommended that several
applications, including the Capsule ANDA, be withdrawn. As a basis for its
decision, the FDA cited questionable and incomplete data submitted in connection
with the applications. The FDA indicated that the withdrawal of the four ANDAs
was necessary for the release of the Company from the AIP. The FDA further
required submission by the Company of a Corrective Action Plan, which was
prepared and submitted by the Company and accepted by the FDA.
On December 19, 1996, the FDA released the Company from the AIP. As a
consequence, for the first time since October 1991, the Company was permitted to
submit ANDAs to the FDA for review. Since its release from the AIP in December
1996, through the fiscal year ended December 31, 1999, the Company submitted 9
ANDAs for review by the FDA, including a new ANDA with respect to the Capsules.
During the period from the Company's release from the AIP to March 31, 2000, the
Company received the following ANDA approvals, all of which relate to ANDA
filings made with the FDA subsequent to the Company's release from the AIP:
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PRODUCT NAME
(DRUG CLASS) STRENGTH TRADE NAME STATUS
------------ -------- ---------- ------
Hydrocodone Bitartate and.............. 5mg/500mg Vicodin(R)(1) FDA approval of ANDA received
Acetaminophen Tablets September 26, 1997.
(narcotic analgesic)
Hydrocodone Bitartate and.............. 7.5mg/750mg VicodinES(R)(1) FDA approval of ANDA received
Acetaminophen Tablets September 26, 1997
(narcotic analgesic)
Hydrocodone Bitartate and.............. 7.5mg/650mg Lorcet FDA approval of ANDA received
Acetaminophen Tablets, CIII Plus(R)(2) November 26, 1997.
(narcotic analgesic)
Hydrocodone Bitartrate and............. 10mg/650mg Lorcet(R)(2) FDA approval of ANDA received
Acetaminophen Tablets, CIII November 26, 1997.
(narcotic analgesic)
Oxycodone HCI and...................... 5mg/50mg Tylox(R)(3) FDA approval of ANDA received
Acetaminophen Capsules, CII January 22, 1998.
(narcotic analgesic)
Oxycodone HCI/Oxycodone................ 4.5mg/325mm Percodan(R)(4) FDA approval of ANDA received
Terephthalate Tablets, CII July 24, 1998
(narcotic analgesic)
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Prednisolone Syrup, USP................ 15mg/15ml Prelone(R)(5) FDA approval of ANDA
(systemic costicosteroid) received May 28, 1999
Hydrocodone Bitartrate and............. 5 mg/1.5mg/5ml Hydocan(R)(6) FDA approval of ANDA
Homatropine Methylbromide Syrup received July 21, 1999
(antitussive)
----------------------------
(1) Registered trademark of Knoll Pharmaceutical Co.
(2) Registered trademark of Forest Laboratories, Inc.
(3) Registered trademark of McNeil Consumer Products Company
(4) Registered Trademark of DuPont Merck
(5) Registered Trademark of Muro Pharmaceuticals, Inc.
(6) Registered Trademark of Endo Pharmaceuticals, Inc.
During the fiscal year ended December 31, 1999, the Company submitted 1
ANDA for review by the FDA. The Company anticipates the submission during fiscal
2000 of 9 ANDA supplements or amendments. These 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 the ANDA
approvals described above since its release from the AIP in December 1996, there
can be no assurance that any of its newly submitted ANDAs, or supplements or
amendments thereto or those contemplated to be submitted, will be approved by
the FDA. The Company will not be permitted to market any new product unless and
until the FDA approves the ANDA relating to such product. Failure to obtain FDA
approval for the Company's pending ANDAs, or a significant delay in obtaining
such approval, would adversely affect the Company's business operations and
financial condition.
Strategic Alliance with Watson Pharmaceuticals
On March 29, 2000, the Company completed various strategic alliance
transactions with Watson Pharmaceuticals, Inc. ("Watson"). The transactions with
Watson provided for Watson's purchase of a certain pending ANDA from the
Company, for Watson's rights to negotiate for Halsey to manufacture and supply
certain identified future products to be developed by Halsey, for Watson's
marketing and sale of the Company's core products and for Watson's extension of
a $17,500,000 term loan to the Company.
The product acquisition portion of the transactions with Watson
provided for Halsey's sale of a pending ANDA and related rights (the "Product")
to Watson for aggregate consideration of $13,500,000 (the "Product Acquisition
Agreement"). As part of the execution of the Product Acquisition Agreement, the
Company and Watson executed ten year supply agreements covering the active
pharmaceutical ingredient ("API") and finished dosage form of the Product
pursuant to which Halsey, at Watson's discretion, will manufacture and supply
Watson's requirements for the Product API and, where the Product API is sourced
from the Company, finish dosage forms of the Product. The purchase price for the
Product is payable in three approximately equal installments as certain
milestones are achieved.
The Company and Watson also executed a right of first negotiation
agreement providing Watson with a first right to negotiate the terms under which
the Company would manufacture and supply certain specified APIs and finished
dosage products to be developed by the Company. The right of first negotiation
agreement provides that upon Watson's exercise of
6
its right to negotiate for the supply of a particular product, the parties will
negotiate the specific terms of the manufacturing and supply arrangement,
including price, minimum purchase requirements, if any, territory and term. In
the event Watson does not exercise its right of first negotiation upon receipt
of written notice from the Company as to its receipt of applicable governmental
approval relating to a covered product, or in the event the parties are unable
to reach agreement on the material terms of a supply arrangement relating to
such product within sixty (60) days of Watson's exercise of its right to
negotiate for such product, the Company may negotiate with third parties for the
supply, marketing and sale of the applicable product. The right of first
negotiation agreement has a term of ten years, subject to extension in the
absence of written notice from either party for two additional periods of five
years each. The right of first negotiation agreement applies only to API and
finished dosage products identified in the agreement and does not otherwise
prohibit the Company from developing APIs or finished dosage products for itself
or third parties.
The Company and Watson also completed a manufacturing and supply
agreement providing for Watson's marketing and sale of the Company's existing
core products portfolio (the "Core Products Supply Agreement"). The Core
Products Supply Agreement obligates Watson to purchase a minimum amount of
approximately $18,363,000 (the "Minimum Purchase Agreement") in core products
from the Company, in equal quarterly installments over a period of 18 months
(the "Minimum Purchase Period"). At the expiration of the Minimum Purchase
Period if Watson does not continue to satisfy the Minimum Purchase Amount, the
Company may market and sell the core products on its own or through a third
party. Pending the Company's development and receipt of regulatory approval for
its APIs and finished dosage products currently under development, including,
without limitation, the Product sold to Watson, and the marketing and sale of
same, of which there can be no assurance, substantially all the Company's
revenues will be derived from the Core Products Supply Agreement with Watson.
The final component of the Company's strategic alliance with Watson
provided for Watson's extension of a $17,500,000 term loan to the Company. The
loan will be funded 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. 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 on March 31, 2003.
The net proceeds from the term loan will, in large part, be used to upgrade and
equip the API manufacturing facility of Houba, Inc., the Company's wholly-owned
subsidiary, to upgrade and equip the Company's Congers, New York leased
facility, to satisfy approximately $3,300,000 in bridge financing provided by
Galen Partners and for working capital to fund continued operations. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a more detailed discussion of the $17,500,000 term loan from
Watson.
Private Offering
On May 26, 1999, the Company consummated a private offering of
securities for an aggregate purchase price of up to $22.8 million (the "Oracle
offering"). The securities issued in the Oracle Offering consisted of five
percent convertible senior secured debentures (the "1999 Debentures") and common
stock purchase warrants (the "1999 Warrants"). The 1999 Debentures and 1999
Warrants were issued by the Company pursuant to a certain Debenture and Warrant
Purchase Agreement dated May 26, 1999 (the "Oracle Purchase Agreement") by and
among the Company, Oracle Strategic Partners, L.P. ("Oracle") and such other
investors in the Company's March 10, 1998 offering electing to participate in
the Oracle Offering (inclusive of Oracle, collectively, the "Oracle Investor
Group").
The 1999 Debentures were issued at par and will become due and payable
as to principle on March 15, 2003. Approximately $12.8 million in principle
amount of the 1999 Debentures were issued on May 26, 1999. Interest on the
principle amount of the 1999 Debentures, at the rate of 5% per annum, is payable
on a quarterly basis.
The maximum principal amount of the 1999 Debentures are convertible
into shares of the Company's common stock at a conversion price of $1.404 per
share, for an aggregate of up to approximately 16,283,694 shares of the
Company's common stock. The 1999 Warrants are exercisable for an aggregate of
approximately 4,618,702 shares of the Company's common stock. Of such warrants,
2,309,351 warrants are exercisable at $1.404 per share and the remaining
2,309,351 warrants are exercisable at $2.279 per share. The 1999 Debentures and
1999 Warrants are convertible and exercisable, respectively, for an aggregate of
approximately 20,902,396 shares of the Company's common stock.
7
Of the $22.8 million to be invested pursuant to the Oracle Purchase
Agreement, $5,000,000 was funded by Oracle on May 26, 1999, the closing date of
the Oracle Purchase Agreement, and an additional $5,000,000 was funded on July
27, 1999. On March 20, 2000, the Company and Oracle executed a Release Agreement
releasing Oracle from its obligation to make the remaining investment of
$5,000,000 pursuant to the Oracle Purchase Agreement. After giving effect to the
Release Agreement with Oracle, the 1999 Debentures and 1999 Warrants are
convertible and exercisable, respectively, for an aggregate of approximately
16,331,043 shares of the Company's common stock.
In addition to the $10,000,000 investment made by Oracle pursuant to
the Oracle Purchase Agreement, approximately $7,037,000 of the 1999 Debentures
issues pursuant to the Oracle Purchase Agreement were issued in exchange for the
surrender of a like amount of principle and accrued interest outstanding under
the Company's convertible promissory notes issued pursuant to various bridge
loan transactions with Galen Partners, III, L.P., Galen Partners International,
III, L.P., Galen Employee Fund, L.P. (collectively, "Galen Partners") and
certain other investors, in the aggregate amount of $10,104,110 during the
period from August, 1998 through and including May, 1999 (the "Galen Bridge
Loans"). The remaining balance of the Galen Bridge Loans in the principal amount
of $3,495,001 plus accrued and unpaid interest were satisfied with a portion of
the proceeds of Oracle's second $5,000,000 installment on made July 27, 1999
pursuant to the Oracle Purchase Agreement.
Acquisition of Product ANDAs
On April 16, 1999, the Company completed an acquisition agreement with
Barr Laboratories, Inc. ("Barr") providing for the Company's purchase of the
rights to 50 pharmaceutical products (the "Barr Products"). Under the terms of
the acquisition agreement with Barr, the Company acquired all of Barr's rights
in the Barr Products, including all related governmental approvals (including
ANDAs) and related technical data and information. In consideration for the
acquisition of the Barr Products, the Company issued to Barr a common stock
purchase warrant exercisable for 500,000 shares of the Company's common stock
having an exercise price of $1.0625 per share (the fair market value of the
Common Stock on the date of issuance) and having a term of five years. The
acquisition agreement with Barr also allows Barr to purchase any of the Barr
Products manufactured by the Company for a period of five years.
The Barr Products acquired by the Company were previously marketed by
Barr, prior to its decision to strategically refocus its generic product
portfolio several years ago. While the Barr Products cover a broad range of
therapeutic applications and are the subject of approved ANDAs, the Company will
be required to obtain approval from the U.S. Food and Drug Administration
("FDA") to permit manufacture and sale of any of the Barr Products, including
site specific approval. 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 Product
will be available for sale in the fourth quarter of 2000, 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 the
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.
Cessation and Relocation of Brooklyn, New York Operations
On March 22, 2000 the Company executed a Lease Termination and
Settlement Agreement with the landlord of the Company's Brooklyn, New York
manufacturing facility (the "Settlement Agreement"). The Settlement Agreement
provides for the early termination of the lease covering the Brooklyn facility
and provides the Company with the time necessary to transfer operations to the
Company's Congers, New York facility and cease all manufacturing, research and
development and warehouse operations currently conducted in Brooklyn. The
Settlement Agreement provides for the termination of the Brooklyn facility lease
on August 31, 2000, subject to the Company's right to extend the term to March
31, 2001. The original lease provided for a term expiring December 31, 2005 with
a rental payment obligation of $6,715,000 during the period from September 1,
2000 through December 31, 2005.
The Settlement Agreement provided for the Company's payment of a
termination fee of $1,150,000, the advance payment of rent through August 31,
2000 and the deposit of a restoration escrow of $200,000 to be used for facility
repairs. The Company also deposited $390,600 in escrow with its counsel. This
escrow amount represents the rental payments for the period September 1, 2000
through March 31, 2001 and will be returned to the Company in the event it
vacates the
8
Brooklyn facility on or prior to August 31, 2000. The Company recorded a total
charge against earnings of approximately $3,220,000 resulting from the
elimination of its Brooklyn, New York operations. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
more detailed discussion of this charge against earnings.
Lease of Congers, New York Facility
Effective March 22, 1999, the Company leased, as sole tenant, a
pharmaceutical manufacturing facility located in Congers, New York (the "Congers
Facility") from Par Pharmaceuticals, Inc. ("Par") pursuant to an Agreement to
Lease (the "Lease"). The Congers Facility contains office, warehouse and
manufacturing space and is approximately 35,000 square feet. The Lease provides
for a term of three years, with a two year renewal option and provides for
annual fixed rent of $500,000 per year during the primary term of the Lease and
$600,000 per year during the option period. The Lease also covers certain
manufacturing and related equipment previously used by Par in its operations at
the Congers Facility (the "Leased Equipment"). In connection with the execution
of the Lease, the Company and Par entered into a certain Option Agreement
pursuant to which the Company may purchase the Congers Facility and the Lease
Equipment at any time during the lease term for $5 million.
As part of the execution of the Lease, the Company and Par entered into
a certain Manufacturing and Supply Agreement (the "M&S Agreement") having a
minimum term of twenty seven months. The M&S Agreement provides for the
Company's contract manufacture of certain designated products manufactured by
Par at the Congers Facility prior to the effective date of the Lease. The M&S
Agreement also provides that Par will purchase a minimum of $1,150,000 in
product during the initial 18 months of the Agreement. The M&S Agreement further
provides that the Company will not manufacture, supply, develop or distribute
the designated products to be supplied by the Company to Par under the M&S
Agreement to or for any other person for a period of three years.
PRODUCTS AND PRODUCT DEVELOPMENT
Generic Drug Products
The Company historically has manufactured and sold a broad range of
prescription and over-the-counter drug products. The Company's pharmaceutical
product list currently includes a total of approximately 31 products, consisting
of 21 dosage forms and strengths of prescription drugs and 10 dosage forms and
strengths of over-the-counter drugs. Each dosage form and strength of a
particular drug is considered in the industry to be a separate drug product. The
Company's drug products are sold in various forms, including liquid and powder
preparations, compressed tablets and two-piece, hard-shelled capsules.
Most of the generic drug products manufactured by the Company can be
classified within one of the following categories:
1. Antibiotics,
2. Narcotic analgesics,
3. Anti-infective and anti-tubercular drugs,
4. Antihistamines and antihistaminic decongestants,
5. Antitussives, or
6. Steroids
During fiscal 1999, sales of antibiotics and narcotic analgesics
accounted for approximately 67% of total net sales during such year. The Company
anticipates that sales of antibiotics and narcotic analgesics will continue to
represent a significant portion of the Company's revenue.
9
The Company's development strategy for new drug products has been to
focus on the development of a broad-range of generic form drugs, each of which
(i) has developed a solid market acceptance with a wide base of customers, (ii)
can be sold on a profitable basis notwithstanding intense competition from other
drug manufacturers, and (iii) is no longer under patent protection. The Company
has also diversified its current product line to include some less widely
prescribed drugs as to which limited competition might be expected. While the
Company will continue the development of its finished goods pharmaceutical
business, including the rehabilitation of the product ANDAs acquired from Barr,
the Company's will dedicate increasing resources to the expansion and
enhancement of its operations devoted to the development and manufacture of APIs
for use in the Company's finished dosage products as well as for sale to third
party pharmaceutical companies, including Watson, in the form and API and
finished dosage products.
Development activities for each new generic drug product begin several
years in advance of the patent expiration date of the brand-name drug
equivalent. This is because the profitability of a new generic drug usually
depends on the ability of the Company to obtain FDA approval to market that drug
product upon or immediately after the patent expiration date of the equivalent
brand-name drug. Being among the first to market a new generic drug product is
vital to the profitability of the product. As other off-patent drug
manufacturers receive FDA approvals on competing generic products, prices and
revenues typically decline. Accordingly, the Company's ability to attain
profitable operations will, in large part, depend on its ability to develop and
introduce new products, the timing of receipt of FDA approval of such products
and the number and timing of FDA approvals for competing products.
Active Pharmaceutical Ingredients
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. As described under the caption
"Recent Events - Strategic Alliance with Watson Pharmaceuticals" above, the
Company is a party to agreements with Watson Pharmaceuticals providing for
Watson's right to negotiate for a supply of select APIs currently in development
and to be developed by the Company. In addition to its alliance with Watson, it
is the Company's intention to develop APIs for its own manufacture and sale
(both in API and finished dosage form) and in partnership with other
pharmaceutical manufacturers. A significant portion of the net proceeds from the
Watson loan transaction described above will be devoted to the upgrade of its
Culver, Indiana manufacturing facility operated by its Houba subsidiary,
including HVAC, equipment and operational upgrades. During fiscal 1999, all of
the Company's revenues were delivered from the sale of finished dosage products.
It is the Company's expectation that in connection with a strategic alliance
with Watson and other API development efforts, in addition to assisting in the
expansion of the Company's line of finished products, the Company will generate
revenues from the sale of APIs starting in the latter part of 2000 and such
revenue segment will likely increase thereafter as a percentage of total
revenue.
RESEARCH AND DEVELOPMENT
The Company currently conducts research and development activities at
each of its Brooklyn and Indiana facilities. Once the cessation and relocation
of the Company's Brooklyn, New York operations are completed, the Company's
research and development activities previously conducted in Brooklyn will be
transferred to its Congers, New York facility. The Company's research and
development activities consist primarily of new generic drug product development
efforts and manufacturing process improvements, the development for sale of new
chemical products and the development of APIs. 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. For fiscal years 1999,
1998 and 1997, total research and development expenditures were $1,075,000,
$651,000 and $979,000, respectively. During 2000, the Company's research and
development efforts will cover finished dosage products and APIs in a variety of
therapeutic applications.
As of March 31, 2000, the Company maintained a full-time staff of 11 in
its Research and Development Departments.
10
MARKETING AND CUSTOMERS
The application of the AIP to the Company's operations until December
1996, combined with the Company's continuing operating losses and lack of
adequate working capital during fiscal 1997 and the first quarter of 1998
resulted in the Company's inability to maintain sufficient raw materials and
finish goods inventories to permit the Company to actively solicit customer
orders, and when orders were received, to fill such orders promptly. Following
the completion in March 1998 of the offering with Galen Partners (the "Galen
Offering"), new Management adopted a marketing strategy focused on developing
and maintaining sufficient raw materials and finish goods inventories so as to
permit a targeted sales effort by the Company to a core customer group, with an
emphasis on quality, prompt product delivery and excellent customer service.
The strategic alliance with Watson entered into on March 29, 2000
provides for the Company's core products portfolio to be sold by Watson's sales
force under Watson's label. Accordingly, the Company intends to discontinue
sales efforts of these products. The two companies are working together during
the second quarter of 2000 to effect an orderly transition of existing sales
agreements and orders from Halsey to Watson. The Company continues to perform
limited contract manufacturing of certain non-core products for other
pharmaceutical companies.
During 1999, the Company had net sales to two customers aggregating
approximately 25.3% of total sales. The Company believes that the loss of these
customers would have a material adverse effect on the Company. During 1998 the
Company had net sales to two customers, aggregating 19.1% of total sales. During
1997, the Company had net sales to one customer in excess of 10% of total sales,
aggregating 22.3% of total sales.
The estimated dollar amount of the backlog of orders for future
delivery as of March 31, 2000 was approximately $800,000 as compared with
approximately $500,000 as of March 15, 1999. Although these orders are subject
to cancellation, management expects to fill substantially all orders by the
second quarter of 2000. The increase in the Company's backlog as of March 31,
2000 compared to that in 1999 is largely a function of an increase in market
penetration.
GOVERNMENT REGULATION
General
All pharmaceutical manufacturers, including the Company, are subject to
extensive regulation by the Federal government, principally by the FDA, and, to
a lesser extent, by state and local governments. Additionally, the Company is
subject to extensive regulation by the U.S. Drug Enforcement Agency ("DEA") as a
manufacturer of controlled substances. The Company cannot predict the extent to
which it may be affected by legislative and other regulatory developments
concerning its products and the healthcare industry generally. The Federal Food,
Drug, and Cosmetic Act, the Generic Drug Enforcement Act of 1992, the Controlled
Substance Act and other Federal statutes and regulations govern or influence the
testing, manufacture, safe labeling, storage, record keeping, approval, pricing,
advertising, promotion, sale and distribution of pharmaceutical products.
Noncompliance with applicable requirements can result in fines, recall or
seizure of products, criminal proceedings, total or partial suspension of
production, and refusal of the government to enter into supply contracts or to
approve new drug applications. The FDA also has the authority to revoke
approvals of new drug applications. The ANDA drug development and approval
process now averages approximately eight months to two years. The approval
procedures are generally costly and time consuming.
FDA approval is required before any "new drug," whether prescription or
over-the-counter, can be marketed. A "new drug" is one not generally recognized
by qualified experts as safe and effective for its intended use. Such general
recognition must be based on published adequate and well controlled clinical
investigations. No "new drug" may be introduced into commerce without FDA
approval. A drug which is the "generic" equivalent of a previously approved
prescription drug also will require FDA approval. Furthermore, each dosage form
of a specific generic drug product requires separate approval by the FDA. In
general, as discussed below, less costly and time consuming approval procedures
may be used for generic equivalents as compared to the innovative products.
Among the requirements for drug approval is that the prospective manufacturer's
methods must conform to the CGMPs. CGMPs apply to the manufacture, receiving,
holding and shipping of all drugs, whether or not approved by the FDA. CGMPs
must be followed at all times during which the drug is manufactured. To ensure
full compliance with standards, some of which are set forth in regulations, the
Company must continue to expend time, money and effort in the areas of
production and quality control. Failure to so comply risks delays in approval of
drugs, disqualification from eligibility to sell to the government, and possible
FDA enforcement actions, such as an injunction against shipment of the Company's
products, the seizure of noncomplying drug products, and/or, in serious
11
cases, criminal prosecution. The Company's manufacturing facilities are subject
to periodic inspection by the FDA.
In addition to the regulatory approval process, the Company is subject
to regulation under Federal, state and local laws, including requirements
regarding occupational safety, laboratory practices, environmental protection
and hazardous substance control, and may be subject to other present and future
local, state, Federal and foreign regulations, including possible future
regulations of the pharmaceutical industry.
Drug Approvals
There are currently three ways to obtain FDA approval of a new drug.
1. New Drug Applications ("NDA"). Unless one of the procedures
discussed in paragraph 2 or 3 below is available, a prospective manufacturer
must conduct and submit to the FDA complete clinical studies to prove a drug's
safety and efficacy, in addition to the bioavailability and/or bioequivalence
studies discussed below, and must also submit to the FDA information about
manufacturing practices, the chemical make-up of the drug and labeling.
2. Abbreviated New Drug Applications ("ANDA"). The Drug Price
Competition and Patent Term Restoration Act of 1984 (the "1984 Act") established
the ANDA procedure for obtaining FDA approval for those drugs that are
off-patent or whose exclusivity has expired and that are bioequivalent to
brand-name drugs. An ANDA is similar to an NDA, except that the FDA waives the
requirement of conducting complete clinical studies of safety and efficacy,
although it may require expanded clinical bioavailability and/or bioequivalence
studies. "Bioavailability" means the rate of absorption and levels of
concentration of a drug in the blood stream needed to produce a therapeutic
effect. "Bioequivalence" means equivalence in bioavailability between two drug
products. In general, an ANDA will be approved only upon a showing that the
generic drug covered by the ANDA is bioequivalent to the previously approved
version of the drug, i.e., that the rate of absorption and the levels of
concentration of a generic drug in the body are substantially equivalent to
those of a previously approved equivalent drug. The principle advantage of this
approval mechanism is that an ANDA applicant is not required to conduct the same
preclinical and clinical studies to demonstrate that the product is safe and
effective for its intended use.
The 1984 Act, in addition to establishing the ANDA procedure, created
new statutory protections for approved brand-name drugs. In general, under the
1984 Act, approval of an ANDA for a generic drug may not be made effective until
all product and use patents listed with the FDA for the equivalent brand name
drug have expired or have been determined to be invalid or unenforceable. The
only exceptions are situations in which the ANDA applicant successfully
challenges the validity or absence of infringement of the patent and either the
patent holder does not file suit or litigation extends more than 30 months after
notice of the challenge was received by the patent holder. Prior to enactment of
the 1984 Act, the FDA gave no consideration to the patent status of a previously
approved drug. Additionally, under the 1984 Act, if specific criteria are met,
the term of a product or use patent covering a drug may be extended up to five
years to compensate the patent holder for the reduction of the effective market
life of that patent due to federal regulatory review. With respect to certain
drugs not covered by patents, the 1984 Act sets specified time periods of two to
ten years during which approvals of ANDAs for generic drugs cannot become
effective or, under certain circumstances, ANDAs cannot be filed if the
equivalent brand-name drug was approved after December 31, 1981.
3. "Paper" NDA. An alternative NDA procedure is provided by the 1984
Act whereby the applicant may rely on published literature and more limited
testing requirements. While that alternative sometimes provides advantages over
the ANDA procedure, it is not frequently used.
Generic Drug Enforcement Act
As a result of hearings and investigations concerning the activities of
the generic drug industry and the FDA's generic drug approval process, Congress
enacted the Generic Drug Enforcement Act of 1992 (the "Generic Drug Act"). The
Generic Drug Act confers significant new authority upon the FDA to impose
debarment and civil penalties for individuals and companies who commit certain
illegal acts relating to the generic drug approval process.
The Generic Drug Act requires the mandatory debarment of companies or
individuals convicted of a federal felony for conduct relating to the
development or approval of any ANDA, and gives the FDA discretion to debar
corporations or
12
individuals for similar conduct resulting in a federal misdemeanor or state
felony conviction. The FDA may not accept or review during the period of
debarment (one to ten years in the case of mandatory, or up to five years in the
case of permissive, debarment of a corporation) any ANDA submitted by or with
the assistance of the debarred corporation or individual. The Generic Drug Act
also provides for temporary denial of approval of generic drug applications
during the investigation of crimes that could lead to debarment. In addition, in
more limited circumstances, the Generic Drug Act provides for suspension of the
marketing of drugs under approved generic drug applications sponsored by
affected companies. The Generic Drug Act also provides for fines and confers
authority on the FDA to withdraw, under certain circumstances, approval of a
previously granted ANDA if the FDA finds that the ANDA was obtained through
false or misleading statements. The Company was not debarred as a result of the
FDA investigation and settlement and the Consent Decree with the FDA makes no
provision therefor.
Healthcare Reform
Several legislative proposals to address the rising costs of healthcare
have been introduced in Congress and several state legislatures. Many of such
proposals include various insurance market reforms, the requirement that
businesses provide health insurance coverage for all their employees,
significant reductions in the growth of future Medicare and Medicaid
expenditures, and stringent government cost controls that would directly control
insurance premiums and indirectly affect the fees of hospitals, physicians and
other healthcare providers. Such proposals could adversely affect the Company's
business by, among other things, reducing the demand, and the prices paid, for
pharmaceutical products such as those produced and marketed by the Company.
Additionally, other developments, such as (i) the adoption of a nationalized
health insurance system or a single payor system, (ii) changes in needs-based
medical assistance programs, or (iii) greater prevalence of capitated
reimbursement of healthcare providers, could adversely affect the demand for the
Company's products.
COMPETITION
The Company competes in varying degrees with numerous companies in the
health care industry, including other manufacturers of generic drugs (among
which are divisions of several major pharmaceutical companies) and manufacturers
of brand-name drugs. Many of the Company's competitors have substantially
greater financial and other resources and are able to expend more money and
effort than the Company in areas such as marketing and product development.
Although a company with greater resources will not necessarily receive FDA
approval for a particular generic drug before its smaller competitors,
relatively large research and development expenditures enable a company to
support many FDA applications simultaneously, thereby improving the likelihood
of being among the first to obtain approval of at least some generic drugs.
One of the principal competitive factors in the generic pharmaceutical
market is the ability to introduce generic versions of brand-name drugs promptly
after a patent expires. The Company believes that it was at a competitive
disadvantage until its release from the AIP program and the FDA's resumption of
review of ANDAs submitted by the Company's Brooklyn plant. See "Government
Regulation--Generic Drug Enforcement Act" above. Other competitive factors in
the generic pharmaceutical market are price, quality and customer service
(including maintenance of sufficient inventories for timely deliveries).
RAW MATERIALS
The raw materials essential to the Company's business are bulk
pharmaceutical chemicals purchased from numerous sources. Raw materials are
generally available from several sources. The Federal drug application process
requires specification of raw material suppliers. If raw materials from a
supplier specified in a drug application were to become unavailable on
commercially acceptable terms, FDA supplemental approval of a new supplier would
be required. During 1999 and 1998, the Company purchased approximately
$1,107,000 and $2,583,000, respectively, of its raw materials (constituting 15%
and 29%, respectively, of its aggregate purchases of raw materials) from
Mallinckrodt. Although the Company is now able to submit supplements to the FDA
in order to allow the Company to purchase raw materials from alternate sources,
there can be no assurance that if the Company were unable to continue to
purchase raw materials from this supplier, that the Company would be successful
in receiving FDA approval to such supplement or that it would not face
difficulties in obtaining raw materials on commercially acceptable terms.
Failure to receive FDA approval for, and to locate, an acceptable alternative
source of raw materials would have a material adverse effect on the Company.
13
The DEA limits the quantity of the Company's inventories of certain raw
materials used in the production of controlled substances based on historical
sales data. In view of the Company's recently depressed sales volume, these DEA
limitations could increase the likelihood of raw material shortages and of
manufacturing delays in the event the Company experiences increased sales volume
or is required to find new suppliers of these raw materials.
SUBSIDIARIES
The Company's Indiana manufacturing operations are conducted by Houba,
Inc., an Indiana corporation and wholly-owned subsidiary of the Company. Halsey
Pharmaceuticals, Inc., a Delaware corporation, is a wholly-owned subsidiary
which is currently inactive. The Company also has the following additional
subsidiaries, each of which is currently inactive and anticipated to be
dissolved during the remainder of the 2000 fiscal year: Indiana Fine Chemicals
Corporation, a Delaware corporation, H.R. Cenci Laboratories, Inc., a California
corporation, Cenci Powder Products, Inc., a Delaware corporation, Blue Cross
Products, Inc., a New York corporation, and The Medi-Gum Corporation, a Delaware
corporation.
EMPLOYEES
As of March 31, 2000, the Company had approximately 179 full-time
employees. Approximately 39 employees are administrative and professional
personnel and the balance are in production and shipping. Among the professional
personnel, 11 are engaged in research and product development. Approximately 46
employees at the Company's Brooklyn facility are represented by a local
collective bargaining unit. The collective bargaining agreement between the
Company and the union was extended on March 5, 1998 (retroactive to July 2,
1997) and expires June 30, 2000. As discussed above under the caption "Recent
Events - Cessation and Relocation of Brooklyn, New York Operations", the Company
is in the process of ceasing operations at its leased facility in Brooklyn, New
York. The Company estimates that it will complete its relocation of the
operations conducted in Brooklyn to its Congers, New York facility by August 31,
2000. After giving effect to the cessation of operations in Brooklyn, New York,
the Company estimates that it will have approximately 107 employees. Management
believes that its relations with its employees are satisfactory.
ITEM 2. PROPERTIES.
Halsey leases, as sole tenant, a pharmaceutical manufacturing facility
of approximately 35,000 square feet located at 77 Brenner Drive, Congers, New
York. The Agreement of Lease, with an unaffiliated third party, contains a three
year term with a two year renewal option and provides for annual fixed rent of
$500,000 per year during the primary term of the Lease and $600,000 per year
during the renewal period. The primary term of the Lease expires on March 21,
2002. The Leased facility houses a portion of the Company's manufacturing
operations and includes office and warehouse space. The Lease also contains an
option pursuant to which the Company may purchase the leased premises and
improvements (including certain production and related equipment) for a purchase
price of $5 million, exercisable at any time during the Lease term.
Halsey leases, as sole tenant, a total of approximately 147,000 square
feet in three buildings on Pacific Street and Dean Street in Brooklyn, New York.
Each of these leases is between Halsey and unaffiliated lessors. The approximate
aggregate minimum rental commitments under these operating leases are as
follows: $1,023,000 for the year 1999 and $781,000 for the year 2000. The leases
of the Brooklyn, New York facility expire on August 31, 2000, subject to the
Company's right to extend the lease term to March 31, 2001. The Company is in
the process of ceasing and relocating its Brooklyn operations to its Congers,
New York facility. See "Item 1. Business - Recent Events - Cessation and
Relocation of Brooklyn, New York Operations."
Halsey leases approximately 4,700 square feet of office space located
at 695 North Perryville Road, Building No. 2, Rockford, Illinois. The lease is
between the Company and an unaffiliated lessor. The lease has a term of two
years expiring August 31, 2000 and calls for annual rental, including
maintenance and common area expense, of approximately $50,000 per year. The
Company is currently in discussion with the landlord to extend the term of the
lease of this facility. This leased facility houses the Company's principal
executive offices, including its sales, administration and finance operations.
The Company's Houba, Inc. subsidiary owns approximately 45,000 square
feet of building space on approximately 30 acres of land in Culver, Indiana,
which includes a 15,000 square foot manufacturing facility. This manufacturing
facility
14
houses separate plants for the production of certain raw materials, capsules and
tablets. In 1996, in conjunction with a settlement with two former employees,
the Company acquired real property, improved by a residential property, in
Culver, Indiana adjacent to the manufacturing facility.
ITEM 3. LEGAL PROCEEDINGS.
GOVERNMENTAL PROCEEDINGS
Reference is also made to the discussion of the Company's Plea
Agreement and Letter Agreement with the DOJ contained in "Item 1.
Business--Recent Events" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OTHER LEGAL PROCEEDINGS
Beginning in 1992, actions were commenced against the Company and
numerous other pharmaceutical manufacturers in the Pennsylvania Court of Common
Pleas, Philadelphia Division, in connection with the alleged exposure to
diethylstilbestrol ("DES"). The defense of all of such matters was assumed by
the Company's insurance carrier, and a substantial number have been settled by
the carrier. Currently, several actions remain pending with the Company as a
defendant, and the insurance carrier is defending each action. Similar actions
were brought in Ohio, and have been dismissed based on Ohio law. The Company
does not believe any of such actions will have a material impact on the
Company's financial condition.
The Company has been named as a defendant in one additional action
which has been referred to the Company's insurance carrier and has been accepted
for defense. The action, Alonzo v. Halsey Drug Co., Inc. and K-Mart Corp., No.
64DOT-95111-CT-2736 (Indiana Superior Court, Porter County), was commenced on
November 7, 1995 and involves a claim for unspecified damages relating to the
alleged ingestion of "Doxycycline 100." The Company does not believe this action
will have a material impact on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
15
PART II
ITEM 5. MARKET PRICE FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS.
MARKET AND MARKET PRICES OF COMMON STOCK
The Company's Common Stock is listed on the American Stock Exchange
(the "Exchange") under the symbol "HDG." Set forth below for the periods
indicated are the high and low sales prices for the Common Stock as reported on
the Exchange.
[Download Table]
PERIOD HIGH LOW
------ ---- ---
2000 Fiscal Year
First Quarter (through March 31, 2000) 2 3/8 1
1999 Fiscal Year
First Quarter 1 9/16 1
Second Quarter 3 3/16 1
Third Quarter 3 1/8 2
Fourth Quarter 2 3/4 3/4
1998 Fiscal Year
First Quarter 3 5/8 1 1/4
Second Quarter 3 1/8 2 3/8
Third Quarter 2 3/4 1 1/2
Fourth Quarter 1 7/8 1
The Company does not meet certain of the Exchange's criteria for
continued listing. The Company was informed by the Exchange that it has
determined to delist the Company's Common Stock as it does not meet the
Exchange's criteria for continued listing. Such criteria include minimum levels
of shareholders equity and the absence of years of net losses from continuing
operations. The Company has exercised its right to appeal the Exchange's
decision. There can be no assurance that the Company's common stock will remain
listed on the Exchange. If the Common Stock should become delisted from the
Exchange, trading, if any, in the Common Stock would continue on the OTC
Bulletin Board, an NASD-sponsored inter-dealer quotation system, or in what is
commonly referred to as the "Pink Sheets". In such event, a shareholder may find
it more difficult to dispose of, or to obtain accurate quotations as to the
market value of the Common Stock.
HOLDERS
There were 788 holders of record of the Company's common stock on March
31, 2000. This number, however, does not reflect the ultimate number of
beneficial holders of the Company's common stock.
DIVIDEND POLICY
The payment of cash dividends from current earnings is subject to the
discretion of the Board of Directors and is dependent upon many factors,
including the Company's earnings, its capital needs and its general financial
condition. The terms of the Company's 5% convertible senior secured debentures
and the Term Loan Agreement with Watson Pharmaceuticals prohibit the Company
from paying cash dividends. The Company does not intend to pay any cash
dividends in the foreseeable future.
PRIVATE OFFERINGS
The Company secured bridge financing from Galen in the aggregate amount
of approximately $1,500,000, funded through two separate bridge loan
transactions in December, 1999 (collectively, the "Bridge Loans"). In
consideration for the extension for the Bridge Loans, the Company issued common
stock purchase warrants to purchase an aggregate of 75,000
16
shares of the Company's Common Stock having an exercise price equal to the fair
market value of the Common Stock at the date of issuance.
Each of the lenders in the Bridge Loans are accredited investors as
defined in Rule 501(a) of Regulation D promulgated under the Securities Act of
1933, as amended (the "Act"). The warrants issued in connection with the Bridge
Loans were issued without registration under the Act in reliance upon Section
4(2) of the Act and Regulation D promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented on the following
pages for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 are
derived from the Company's audited Consolidated Financial Statements. The
Consolidated Financial Statements as of December 31, 1999 and December 31, 1998,
and for each of the years in the three year period ended December 31, 1999, and
the report thereon, are included elsewhere herein. The selected financial
information as of and for the years ended December 31, 1997, 1996 and 1995 are
derived from the audited Consolidated Financial Statements of the Company not
presented herein.
The information set forth below is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements and
related notes thereto included elsewhere in this Report and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Net sales $ 11,420 $ 8,841 $ 9,088 $ 12,379 $ 20,225
Costs and expenses
Cost of sales 15,316 12,712 15,407 16,826 18,097
Research and development 1,075 651 979 1,854 818
Selling, general and
administrative 7,383 8,078 6,308 7,486 6,098
Plant shutdown costs 3,220 -- -- -- --
Interest expense 2,851 1,285 1,144 1,708 1,307
Amortization of deferred debt
discount and private offering
cost 1,825 661
Other (income) expense (187) (1,822) 264 (1,000) (2,288)
Income (loss) before provision
for income taxes (20,063) (12,724) (15,014) (14,495) (3,807)
Provision (benefit) for
income taxes -- -- -- -- 296
Net income (loss) $ (20,063) $ (12,724) $ (15,014) $ (14,495) $ (4,103)
============ ============ ============ ============ ============
Net income (loss)
per share $ (1.40) $ (.92) $ (1.12) $ (1.49) $ (.52)
============ ============ ============ ============ ============
Weighted average
common shares
outstanding 14,325,551 13,812,529 13,434,215 9,724,106 7,886,101
============ ============ ============ ============ ============
17
[Enlarge/Download Table]
DECEMBER 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Working capital
(deficiency) $ (5,181) $ (6,665) $(22,304) $(12,201) $ (7,393)
Total assets 12,495 16,413 7,667 11,982 18,862
Total liabilities 54,869 45,366 27,524 19,063 20,402
Retained earnings
(accumulated
deficit) (77,284) (57,221) (44,497) (29,484) (14,989)
Stockholders' equity
(deficit) (42,374) (28,953) (19,857) (7,081) (1,540)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Certain statements set forth under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements " on page 1 of this Report for
additional factors relating to such Statements.
OVERVIEW
The Company reported a net loss of $20,063,000 or $1.40 per share for
the year ended December 31, 1999 as compared with the net loss of $12,724,000 or
$ .92 per share for 1998. Included in the loss for 1999 is a one-time charge of
$3,220,000 resulting from the Company's decision to shutdown its Brooklyn
operation. Net Sales for the year ended December 31, 1999 were approximately
$11,420,000 as compared to net sales of approximately $8,841,000 for 1998.
Notwithstanding these results, the Company had the following achievements in
1999:
- Obtained a state-of-the-art pharmaceutical facility by leasing a 35,000
square foot facility in Congers, NY.
- Acquired rights to over 50 products from Barr Laboratories. Certain of
these products will be systematically updated and introduced to the
market over the next three years.
- Received approval from the FDA of two ANDA's and submitted one other
for approval.
- Subsequent to year end, the Company completed various strategic
alliance transactions with Watson Pharmaceuticals, Inc.
RESULTS OF OPERATIONS
18
The following chart reflects expenses, earnings, income, losses and
profits expressed as a percentage of net sales for the years 1999, 1998 and
1997.
[Enlarge/Download Table]
PERCENTAGE CHANGE
YEAR-TO-YEAR
INCREASE (DECREASE)
PERCENTAGE OF NET SALES YEARS ENDED
YEAR ENDED DECEMBER DECEMBER 31,
------------------- ------------
1999 1998 1997 1998 TO 1999 1997 TO 1998
---- ---- ---- ------------ ------------
Net sales 100% 100% 100% 29.2 (2.7)
Cost of Goods 134.1 143.8 169.5 20.5
(17.5)
Gross Profit (34.1) (43.8) (69.5) .6 (38.7)
Research & Development 9.4 7.4 10.8 65.1 (33.5)
Selling, general and
administrative expense 64.6 91.4 69.4 (8.6) 29.5
Plant shutdown costs 28.2 -- -- -- --
(Loss) from operations (136.4) (142.5) (149.7) 23.6 (6.7)
Interest expense 25.0 14.5 12.6 121.9 70.1
Amortization of deferred debt
discount and private offering cost 16.0 7.5 -- 176.1 --
Other (income) expenses (1.6) (20.6) 2.9 (89.7) --
(Loss) before income taxes (175.7) (143.9) (165.2) 57.7 (14.6)
Net (loss) (175.7)% (143.9)% (165.2)% 57.7% (14.6)%
NET SALES
Net sales for 1999 of $11,420,000 represents an increase of $2,579,000 as
compared to net sales for 1998. The increase is attributable to greater market
penetration as well as the introduction of additional products, primarily
prednisolone, which accounted for approximately $815,000 of new sales.
Net sales for 1998 of $8,841,000 represents a decrease of $247,000 as compared
to net sales for 1997. The decrease is attributable in part to a reduction in
toll manufacturing revenue from Mallinckrodt of approximately $878,000 from the
prior year. Additionally, the Company was unable to market successfully to the
retail pharmacy marketplace until the third quarter of 1998 because during
fiscal 1996 and 1997, the Company had failed to pay required rebates to state
Medicaid agencies. This caused those states to deny medicaid reimbursement to
the retail pharmacies on their sales of the Company's products. Commensurate
with the infusion of new capital and management in March, 1998, the Company
began reestablishing itself in good standing with all states. In April 1998, the
Company entered into a new contract with the Health Care Finance Authority
("HCFA") and paid outstanding rebates due to various states. The states
completed the reinstatement of the Company on their medicaid reimbursement by
July, 1998. The Company has been in good standing with HCFA and the individual
states since July 1998 and expects this past non-compliance will have no impact
on future results of operations or liquidity. Also during much of 1998, the
Company experienced difficulty in obtaining certain raw materials which reduced
sales. These shortages were remedied by December 31, 1998.
GROSS MARGINS
The Company's gross margin for 1999 improved to (34.1)% versus (43.8)% for 1998.
The improvement in 1999 is due primarily to the leveraging effect of greater
sales over certain fixed manufacturing expenses.
The Company's gross margin for 1998 of (43.8)% is a 38.7% improvement
over gross margin for 1997. This improvement is due, in part, to the elimination
of non-core manufacturing operations in California, tighter inventory controls
and a general reduction in manufacturing labor. Additionally, the Company's
revenues in 1998 from sales to Mallinckrodt under a toll manufacturing agreement
decreased by approximately $878,000. The gross margins on these products were
substantially less than on the Company's other products.
19
RESEARCH & DEVELOPMENT EXPENSES
For 1999, research and development expenses amounted to $1,075,000 as
compared to $651,000 for 1998. The increase primarily reflects the costs of
additional regulatory personnel hired during 1999 to perform work in conjunction
with new product development and the transfer of certain Barr ANDAs acquired
during 1999.
For 1998, research and development expenses amounted to $651,000 as
compared to $979,000 for 1997. The decrease primarily reflects the costs of
biostudies performed in 1997 that were not duplicated in 1998.
The Company expects research and development expenses to increase
significantly in 2000 consistent with its plans to increase the number of Barr
ANDA's transferred as compared to 1999 and to develop additional active
pharmaceutical ingredients at its Culver, Indiana facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative costs were $7,383,000 (64.6% of net
sales) for 1999 compared to $8,078,000 (91.4% of net sales) for 1998. This
decrease is primarily due to the reduced legal expenses in 1999 as compared to
1998.
Selling, general and administrative costs were $8,078,000 (91.4% of net
sales) for 1998 compared to $6,308,000 (69.4% of net sales) for 1997. This
increase is primarily due to costs associated with legal expenses and settlement
costs of certain litigation ($550,000), severance costs associated with
personnel reductions ($250,000), installation of a new information system
($100,000) and costs associated with expanded regulatory and compliance
departments ($300,000).
PLANT SHUTDOWN COSTS
In the fourth quarter of 1999, the Company decided to discontinue its
Brooklyn operations. The total charge against earnings of approximately
$3,220,000 resulting from eliminating the Brooklyn operation includes the lease
termination payment of $1,150,000, a provision of $200,000 for plant repairs,
the write-off of leasehold improvements of $1,778,000, severance and other costs
for terminated employees of $730,000, less deferred rent previously expensed of
$638,000.
INTEREST EXPENSE
Interest expense for 1999 increased by 121.9% over that of 1998
reflecting the issuance of an additional $17,800,000 of convertible debentures
in 1999.
Interest expense for 1998 increased by 13% over that of 1997 reflecting
the substantial new debt in the form of $25,800,000 of convertible debentures
that was added in 1998.
AMORTIZATION OF DEFERRED DEBT DISCOUNT AND DEBT ISSUANCE COSTS
In 1999 and 1998 the Company issued warrants and incurred costs
associated with private placements and bridge financings. The value of warrants
issued in 1999 and 1998, as determined by use of the Black-Scholes valuation
model, was $5,234,000 and $2,618,000, respectively. Additionally, the Company
incurred approximately $907,000 and $1,516,000 of debt issuance costs in 1999
and 1998, respectively. These amounts are being amortized over the life of the
underlying debentures which expire in March, 2003. Accordingly, the Company
amortized $1,825,000 and $661,000 in 1999 and 1998, respectively.
OTHER INCOME
20
Included in other income for 1998 is $1,900,000 realized from the sale
of certain assets to Mallinckrodt. This transaction was entered into in 1997 but
the conditions for realization of the gain from the sale were not met until
1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of
$786,000 as compared to $1,850,000 at December 31, 1998. The Company had a
working capital deficit at December 31, 1999 of $(5,181,000).
On May 26, 1999, the Company consummated a private offering of
securities for an aggregate purchase price of up to $22.8 million (the "Oracle
Offering"). The securities issued in the Oracle Offering consisted of 5%
convertible senior secured debentures (the "1999 Debentures") and common stock
purchase warrants (the "1999 Warrants"), each of which are substantially similar
to the debentures and warrants issued by the Company in the Galen Offering
completed in March, 1998. Of the $22.8 million to be invested pursuant to the
Oracle Offering, $5 million was funded by Oracle Strategic Partners, L.P.
("Oracle") on May 26, 1999, the closing date of the Oracle Offering, with an
additional $10 million to be funded by Oracle in two (2) installments of $5
million each. The first installment of the additional $10 million Oracle
investment was funded on July 27, 1999. Pursuant to an agreement reached between
the Company and Oracle on March 20, 2000, the final $5 million investment to be
made by Oracle has been waived.
In addition to the $10 million investment made by Oracle, approximately
$7,037,000 of the 1999 Debentures issued pursuant to the Oracle Offering were
issued in exchange for the surrender of a like amount of principal and accrued
interest outstanding under the Company's convertible promissory notes issues
pursuant to various bridge loan transactions with Galen Partners III, L.P.,
Galen Partners International III, L.P., Galen Employee Fund III, L.P.
(collectively, "Galen") and certain other investors in the aggregate amount of
$10,104,110 during the period from August 1998 through and including May, 1999
(the "1999 Galen Bridge Loans"). The remaining balance of the 1999 Galen Bridge
Loans in the principal amount of $3,495,000 plus accrued and unpaid interest was
satisfied with a portion of the proceeds of the second $5 million installment of
Oracle's investment funded on July 27, 1999. After giving effect to the
satisfaction of approximately $7 million of indebtedness under the 1999 Galen
Bridge Loans through the issuance of a like principal amount of 1999 Debentures,
the repayment of the balance of the 1999 Galen Bridge Loans in the principal
amount of approximately $3.5 million plus accrued and unpaid interest, and the
waiver by the Company of the final $5 million installment to be made by Oracle
pursuant to the Oracle Offering, the Company received net cash proceeds from the
Oracle Offering of approximately $7.3 million.
The net proceeds from the issuance of the 1999 Debentures and 1999
Warrants pursuant to the Oracle Offering, in addition to satisfying the
principal and accrued interest under the 1999 Galen Bridge Loans, were used to
fund working capital, including the purchase of raw materials, payroll expenses
and other Company operating expenses.
During the period from May 1997 through July 1997, the Company borrowed
approximately $3 million from Mylan Laboratories, Inc. pursuant to five
unsecured, demand promissory notes. The advances made by Mylan Laboratories,
Inc. were part of a proposed investment by Mylan Laboratories, Inc. in the
Company, including the proposed purchase of the Company's Houba Indiana facility
as well as a partial tender offer for the Company's common stock. The Company
used the proceeds of these borrowings for working capital. To date, $621,000 has
been paid by the Company to Mylan against such indebtedness in the form of
product deliveries to Mylan. Pursuant to an agreement reached between the
parties, the Company is required to satisfy interest on the outstanding
indebtedness on an annual basis while the indebtedness remains outstanding and
to satisfy the principal amount of such indebtedness in the form of product
deliveries to Mylan until such time as the indebtedness is satisfied in full.
In addition to the 1999 Galen Bridge Loans, the Company secured bridge
financing from Galen in the aggregate amount of approximately $3,300,000, funded
through six separate bridge loan transactions during the period from December 8,
1999 through March 29, 2000 (collectively, the "2000 Galen Bridge Loans"). The
principal amount of the 2000 Galen Bridge Loans and accrued and unpaid interest
were satisfied in full with a portion of the proceeds of the Watson Term Loan
(as described below). Prior to repayment, the 2000 Galen Bridge Loans accrued
interest at the rate of 18% per annum and were secured by a first lien on all of
the Company's assets. In consideration for the extension of the 2000 Galen
Bridge Loans, the Company issued common stock purchase warrants to Galen to
purchase an aggregate of 150,000 shares of the Company's common stock
(representing warrants to purchase 50,000 shares of common stock for each
$1,000,000 in
21
principal amount of the 2000 Galen Bridge Loans). The warrants issued pursuant
to the 2000 Galen Bridge Loans have an exercise price equal to the fair market
value of the Company's common stock on the date of issuance and are
substantially identical to those issued by the Company in the Oracle Offering.
The 2000 Galen Bridge Loans were obtained by the Company in order to provide
necessary working capital prior to the completion of the Watson Term Loan as
described below.
On March 22, 2000, the Company executed a Lease Termination and
Settlement Agreement with the landlord of the Company's Brooklyn, New York
manufacturing facility (the "Settlement Agreement"). The Settlement Agreement
accelerates the termination of the lease covering the Company's Brooklyn
facility and provides the Company with the time necessary to transfer operations
to the Company's Congers, New York facility and cease all manufacturing,
research and development and warehouse operations currently conducted in
Brooklyn. The Settlement Agreement provided for the termination of the Brooklyn
lease on August 31, 2000, subject to the Company's right to extend the lease
term to March 31, 2001. The original lease provided for a term expiring December
31, 2005 with a rental payment obligation of $6,715,000 during the period from
September 1, 2000 through December 31, 2005. The Settlement Agreement provided
for the Company's payment of a lease termination fee of $1,150,000, the advance
payment of rent through August 31, 2000 and a restoration escrow deposit of
$200,000 for plant repairs. The Company also deposited in escrow with its
counsel $390,600 which represents rental payments for the period September 1,
2000 through March 31, 2001. Such escrow amount will be returned to the Company
in the event it vacates the Brooklyn facility on or prior to August 31, 2000.
The Company funded the termination fee payment, the advance rental payment
obligations and restoration amount required pursuant to the Settlement Agreement
with the proceeds received from the Watson Term Loan described below.
In addition to the lease termination and escrow payments described
above, the Company estimates that it will incur severance and other costs for
terminated employees of approximately $730,000 which are expected to be paid in
the third quarter of 2000. Also, the Company expects to incur capital costs of
approximately $500,000 associated with the transfer of certain operations from
Brooklyn to the Congers facility.
In addition to the other strategic alliance transactions with Watson
Pharmaceuticals, Inc. ("Watson") completed on March 29, 2000 (see "Item 1.
Business - Recent Events - Strategic Alliance with Watson Pharmaceuticals"), 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 will be funded 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 March 31, 2000, $9 million had been advanced by Watson 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 on March 31, 2003. At March 31, 2000, a portion of the
net proceeds of the Watson Term Loan were used to satisfy in full the 2000 Galen
Bridge Loans, to satisfy the Company's payment obligations under the Settlement
Agreement with the landlord of its Brooklyn, New York facility and for working
capital. The remaining net proceeds of the Watson Term Loan will, in large part,
be used to upgrade and equip the API manufacturing facility of Houba, Inc., the
Company's wholly-owned subsidiary, to upgrade and equip the Company's Congers,
New York leased facility, to fund the relocation of the Company's research and
development and manufacturing operations from its Brooklyn, New York facility to
its Congers, New York facility and for working capital to fund continued
operations.
The net proceeds from the Watson Term Loan has permitted the Company to
satisfy its current liabilities and accounts payable. In addition, the net
proceeds from the Watson Term Loan combined with the payments to be received by
the Company from Watson under each of the Product Acquisition Agreement and the
Core Products Supply Agreement will provide the Company with sufficient working
capital to fund operations for at least the next twelve months.
22
CAPITAL EXPENDITURES
The Company's capital expenditures during 1999, 1998 and 1997 were
$849,000 $1,545,000, and $85,000, respectively. The decrease in capital
expenditures in 1999 as compared to prior years is attributable to the
completion of certain equipment and facility upgrades that had been delayed in
prior years due to the Company's cash conservation measures in those years. The
Company has budgeted for capital expenditures approximately $2,500,000 in fiscal
2000. Such amounts will be funded from the net proceeds of the Watson Term Loan
and the payments to be received by the Company pursuant to each of the Product
Acquisition Agreement and Core Products Supply Agreement with Watson.
YEAR 2000 COMPLIANCE
In anticipation of the Year 2000, the Company installed a new
information system, including hardware and software. To date, neither the
Company nor any of its customers or suppliers has experienced any material Year
2000 failures relating to their computer systems.
IMPACT OF INFLATION
The Company believes that inflation did not have a material impact on
its operations for the periods reported. Significant increases in labor,
employee benefits and other expenses could have a material adverse effect on the
Company's performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted as a separate section of this
Report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders, which will be filed
within 120 days after the close of the Company's fiscal year ended December 31,
1999, and is hereby incorporated herein by reference to such Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders, which will be filed
within 120 days after the close of the Company's fiscal year ended December 31,
1999, and is hereby incorporated herein by reference to such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders, which will be filed
within 120 days after the close of the Company's fiscal year ended December 31,
1999, and is hereby incorporated herein by reference to such Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders, which will be filed
within 120 days after the close of the Company's fiscal year ended December
23
31, 1999, and is hereby incorporated herein by reference to such Proxy
Statement.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements--See Index to Financial Statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K.
(c) Exhibits
The following exhibits are included as a part of this Annual Report on
Form 10-K or incorporated herein by reference.
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*3.1 Certificate of Incorporation and amendments.
3.2 Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993).
3.3 Restated By-Laws (incorporated by reference to Exhibit 3.3 to the Registrant's Annual Report Form 10-K
for the year ended December 31, 1998 (the "1998 Form 10-K")).
10.1 Credit Agreement, dated as of December 22, 1992, among the Registrant and The Chase Manhattan Bank, N.A.
(incorporated by reference to Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992 (the "1992 Form 10-K")).
10.2 Amendment Two, dated as of January 12, 1994, to Credit Agreement among the Registrant and The Chase
Manhattan Bank, N.A., together with forms of Stock Warrant and Registration Rights Agreement
(incorporated by reference to Exhibit 10.1. to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 Form 10-K")).
10.3 Amendment Three, dated as of May 31, 1994, to Credit Agreement among the Registrant and The Chase
Manhattan Bank, N.A. (incorporated by reference to Exhibit 6(a) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994).
10.4 Amendment Four, dated as of July 1994, to Credit Agreement among the Registrant and The Chase Manhattan
Bank, N.A. (incorporated by reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994).
10.5 Amendment Five, dated as of March 21, 1995, to Credit Agreement among the Registrant and The Chase
Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.7 to the Registrant's Current Report on
Form 8-K dated March 21, 1995 (the "March 8-K")).
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10.5(l) Form of Warrants issued to The Bank of New York, The Chase Manhattan Bank, N.A. and the Israel Discount
Bank (incorporated by reference to Exhibit 10.5(i) to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 (the "1995 Form 10-K")).
10.5(2) Letter Agreement, dated July 10, 1995, among Halsey Drug Co., Inc., The Chase Manhattan Bank, N.A., The
Bank of New York and Israel Discount Bank of New York (incorporated by reference to Exhibit 6(a) to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (the "June 10-Q")).
10.5(3) Letter Agreement, dated November 16, 1995, among Halsey Drug Co., Inc., The Chase Manhattan Bank, N.A.,
The Bank of New York and Israel Discount Bank of New York (incorporated by reference to Exhibit 10.25(iv)
to the 1995 10-K).
10.5(4) Amendment 6, dated as of August 6, 1996, to Credit Agreement among Halsey Drug Co., Inc., The Chase Manhattan
Bank, N.A., The Bank of New York and Israel Discount Bank of New York (incorporated by reference to Exhibit 10.1
to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the
"June 1996 10-Q").
10.5(5) Letter Agreement, dated March 25, 1997 among Halsey Drug Co., Inc., The Chase Manhattan Bank, as
successor in interest to The Chase Manhattan Bank (National Association), The Bank of New York and Israel
Discount Bank.
10.6 Agreement Regarding Release of Security Interests dated as of March 21, 1995 by and among the Company,
Mallinckrodt Chemical Acquisition, Inc. and The Chase Manhattan Bank, N.A. (incorporated by reference to
Exhibit 10.9 of the March 8-K).
10.7 Consulting Agreement dated as of September, 1993 between the Registrant and Joseph F. Limongelli
(incorporated by reference to Exhibit 10.6 to the 1993 Form 10-K).
10.8 Employment Agreement, dated as of January 1, 1993, between the Registrant and Rosendo Ferran (incorporated by
reference to Exhibit 10.2 to the 1992 Form 10-K).
10.10(1) Halsey Drug Co., Inc. 1984 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3 to
the 1992 Form 10-K).
10.10(2) Halsey Drug Co., Inc. 1995 Stock Option and Restricted Stock Purchase Plan (incorporated by reference to
Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File No. 33-98396).
10.10(3) Halsey Drug Co., Inc. Non-Employee Director Stock Option Plan.
10.11 Leases, effective February 13, 1989 and January 1, 1990, respectively, among the Registrant and Milton J.
Ackerman, Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and Marilyn Weiss (incorporated by reference
to Exhibits 10.6 and 10.7, respectively, to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989).
10.12 Lease, effective as of April 15, 1988, among the Registrant and Milton J. Ackerman, Sue Ackerman, Lee Hinderstein,
Thelma Hinderstein and Marilyn Weiss, and Rider thereto (incorporated by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987).
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10.12(l) Lease, as of October 31, 1994, among Registrant and Milton J. Ackerman, Sue Ackerman, Lee Hinderstein, Thelma
Hinderstein and Marilyn Weiss, together with Modification, Consolidation and Extension Agreement (incorporated by
reference to Exhibit 10. 12(i) to the 1995 Form 10-K).
10.13 Asset Purchase Agreement dated as of March 21, 1995 among Mallinckrodt Chemical Acquisition, Inc. ("Acquisition"),
Mallinckrodt Chemical, Inc., as guarantor and the Registrant (incorporated by reference to Exhibit 10.1 to the
March 8-K).
10.14 Toll Manufacturing Agreement for APAP/Oxycodone Tablets dated as of March 21, 1995 between Acquisition
and the Registrant (incorporated by reference to Exhibit 10.2 to the March 8-K).
10.15 Capsule ANDA Option Agreement dated as of March 21, 1995 between Acquisition and the Registrant
(incorporated by reference to Exhibit 10.3 to the March 8-K).
10.16 Tablet ANDA Noncompetition Agreement dated as of March 21, 1995 between the Registrant and Acquisition
(incorporated by reference to Exhibit 10.4 to the March 8-K).
10.17 Subordinated Non-Negotiable Promissory Term Note in the amount of $1,200,00 dated March 21, 1995 issued by the
Registrant to Acquisition (incorporated by reference to Exhibit 10.5 to the March 8-K).
10.18 Term Note Security Agreement dated as of March 21, 1995 among the Company, Houba, Inc. and Acquisition
(incorporated by reference to Exhibit 10.6 to the March 8-K).
10.19 Amendment dated March 21, 1995 to Subordination Agreement dated as of July 21, 1994 between Mallinckrodt Chemical,
Inc., Mallinckrodt Chemical Acquisition, Inc., the Registrant, The Chase Manhattan Bank (National Association),
Israel Discount Bank of New York, The Bank of New York, and The Chase Manhattan Bank (National Association)
(incorporated by reference to Exhibit 10.8 to the March 8-K).
10.20 Agreement dated as of March 30, 1995 between the Registrant and Zatpack, Inc. (incorporated by reference
to Exhibit 10.10 to the March 8-K).
10.21 Waiver and Termination Agreement dated as of March 30, 1995 between Zuellig Group, W.A., Inc. and Indiana Fine
Chemicals Corporation (incorporated by reference to Exhibit 10.11 to the March 8-K).
10.22 Convertible Subordinated Note of the Registrant dated December 1, 1994 issued to Zatpack, Inc.
(incorporated by reference to Exhibit 10.12 to the March 8-K).
10.23 Agreement dated as of March 30, 1995 among the Registrant, Indiana Fine Chemicals Corporation, Zuellig
Group, N.A., Inc., Houba Inc., Zetapharm, Inc. and Zuellig Botanical, Inc. (incorporated by reference to
Exhibit 10.13 to the March 8-K).
10.24 Supply Agreement dated as of March 30, 1995 between Houba, Inc. and ZetaPharm, Inc. (incorporated by
reference to Exhibit 10.14 to the March 8-K).
10.25 Form of 10% Convertible Subordinated Debenture (incorporated by reference to Exhibit 6(a) to the June 10-Q).
27
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10.26 Form of Redeemable Common Stock Purchase Warrant (incorporated by reference to Exhibit 6(a) to the June 10-Q).
10.27 Form of 10% Convertible Subordinated Debenture (incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K dated December 4, 1995 (the "December 8-K")).
10.28 Form of Redeemable Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the December 8-K).
10.29 Form of 10% Convertible Subordinated Debenture (incorporated by reference to Exhibit 99 to the June 1996 10-Q).
10.30 Form of Redeemable Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to
the June 1996 10-Q).
10.31 Form of 5% Convertible Senior Secured Debenture (incorporated by reference to Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated March 24, 1998 (the "March 1998 8-K")).
10.32 Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the March 1998 8-K).
10.33 Debenture and Warrant Purchase Agreement dated March 10, 1998, by and among the Registrant,
Galen Partners III, L.P. and the other Purchasers listed on the Signature Page thereto
(incorporated by reference to Exhibit 10.1 to the March 1998 8-K).
10.34 Form of General Security Agreement of Halsey Drug Co., Inc. dated March 10, 1998 (incorporated by
reference to Exhibit 10.2 to the March 1998 8-K).
10.35 Form of Agreement of Guaranty of Subsidiaries of Halsey Drug Co., Inc. dated March 10, 1998 (incorporated
by reference to Exhibit 10.3 to the March 1998 8-K).
10.36 Form of Guarantor General Security Agreement dated March 10, 1998 (incorporated by reference to Exhibit
10.4 to the March 1998 8-K).
10.37 Stock Pledge Agreement dated March 10, 1998 by and between the Registrant and Galen Partners III, L.P.,
as agent (incorporated by reference to Exhibit 10.5 to the March 1998 8-K).
10.38 Form of Irrevocable Proxy Agreement (incorporated by reference to Exhibit 10.6 to the March 1998 8-K).
10.39 Agency Letter Agreement dated March 10, 1998 by and among the Purchasers a party to the Debenture and
Warrant Purchase Agreement, dated March 10, 1998 (incorporated by reference to Exhibit 10.7 to the March
1998 8-K).
10.40 Press Release of Registrant dated March 13, 1998 (incorporated by reference to Exhibit 99.1 to the March
1998 8-K).
10.41 Current Report on Form 8-K as filed by the Registrant with the Securities and Exchange Commission on
March 24, 1998.
28
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10.42 Letter Agreement between the Registrant and the U.S. Department of Justice dated March 27, 1998 relating
to the restructuring of the fine assessed by the Department of Justice under the Plea Agreement dated
June 21, 1993.
10.43 Employment Agreement dated as of March 10, 1998 between the Registrant and Michael K. Reicher
(incorporated by reference to Exhibit 10.43 to the Registrant's Annual Report of Form 10-K for the year
ended December 31, 1997 (the "1997 Form 10-K")).
10.44 Employment Agreement dated as of March 10, 1998 between the Registrant and Peter Clemens (incorporated by
reference to Exhibit 10.44 to the 1997 Form 10-K.
10.45 Amended, Restated and Consolidated Bridge Loan Agreement dated as of December 2, 1998 between the
Company, Galen Partners III, L.P., Galen Partners International III, L.P., Galen Employee Fund III, L.P. and the
other signatures thereto (incorporated by reference to Exhibit 10.45 to the 1998 Form 10-K).
10.46 First Amendment to Amended, Restated and Consolidated Bridge Loan Agreement dated December 7, 1998
between the Company and the lenders listed on the signature page thereto (incorporated by reference to
Exhibit 10.46 to the 1998 Form 10-K).
10.47 Second Amendment to Amended, Restated and Consolidated Bridge Loan Agreement dated March 8, 1999 between
the Company and the lenders listed on the signature page thereto (incorporated by reference to Exhibit
10.47 to the 1998 Form 10-K).
10.48 Form of 10% Convertible Secured Note due May 30, 1999 (incorporated by reference to Exhibit 10.48 to the
1998 Form 10-K).
10.49 Form of Common Stock Purchase Warrant issued pursuant to be Amended, Restated and Consolidated Bridge
Loan Agreement (incorporated by reference to Exhibit 10.49 to the 1998 Form 10-K).
10.50 Amended and Restated General Security Agreement dated December 2, 1998 between the Company and Galen
Partners III, L.P., as Agent (incorporated by reference to Exhibit 10.50 to the 1998 Form 10-K).
10.51 Subordination Agreement dated December 2, 1998 between the Registrant and Galen Partners III, L.P., as
Agent (incorporated by reference to Exhibit 10.51 to the 1998 Form 10-K).
10.52 Agency Letter Agreement dated December 2, 1998 by and among the lenders a party to the Amended, Restated
and Consolidated Bridge Loan Agreement, as amended (incorporated by reference to Exhibit 10.52 to the
1998 Form 10-K).
10.53 Lease Agreement dated March 17, 1999 between the Registrant and Par Pharmaceuticals, Inc. (incorporated
by reference to Exhibit 10.53 to the 1998 Form 10-K).
10.54 Lease Agreement dated September 1, 1998 between the Registrant and Crimson Ridge Partners (incorporated
by reference to Exhibit 10.54 to the 1998 Form 10-K).
10.55 Manufacturing and Supply Agreement dated March 17, 1999 between the Registrant and Par Pharmaceuticals,
Inc. (incorporated by reference to Exhibit 10.55 to the 1998 Form 10-K).
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10.56 Halsey Drug Co., Inc. 1998 Stock Option Plan (incorporated by ] reference to Exhibit 10.56 to the 1998 Form 10-K).
10.57 Loan Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc. (incorporated by
reference to Exhibit 10.57 to the Registrant's Current Report on Form 8-K dated March 29, 2000 (the "March 2000
8-K")). +
10.58 Amendment to Loan Agreement dated March 31, 2000 between the Registrant and Watson Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.58 to the March 2000 8-K).
10.59 Secured Promissory Note in the principal amount of $17,500,000 issued by the Registrant, as the maker, in favor of
Watson Pharmaceuticals, Inc. dated March 31, 2000. (incorporated by reference to Exhibit 10.59 to the March 2000
8-K).
10.60 Watson Security Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.60 to the March 2000 8-K).
10.61 Stock Pledge Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc. (incorporated
by reference to Exhibit 10.61 to the March 2000 8-K).
10.62 Watson Guarantee dated March 29, 2000 between Houba, Inc. and Watson Pharmaceuticals, Inc., as the guarantors, in
favor of Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.62 to the March 2000 8-K).
10.63 Watson's Guarantors Security Agreement dated March 29, 2000 between Halsey Pharmaceuticals, Inc., Houba, Inc. and
Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.63 to the March 2000 8-K).
10.64 Subordination Agreement dated March 29, 2000 by and among the Registrant, Watson Pharmaceuticals, Inc. and the
holders of the Registrant's outstanding 5% convertible debentures due March 10, 2003. (incorporated by reference to
Exhibit 10.64 to the March 2000 8-K).+
10.65 Real Estate Mortgage dated March 29, 2000 between Houba, Inc. and Watson Pharmaceuticals, Inc. (incorporated by
reference to Exhibit 10.65 to the March 2000 8-K).
10.66 Subordination Agreement by and among Houba, Inc., Galen Partners, III, L.P., Oracle Strategic Partners, L.P. and
Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.66 to the March 2000 8-K).
10.67 Product Purchase Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.67 to the March, 2000 8-K). +
10.68 Finished Goods Supply Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.68 to the March 2000 8-K). +
10.69 Active Ingredient Supply Agreement dated March 29, 2000 between the Registrant and Watson Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.69 to the March 2000 8-K). +
30
[Download Table]
EXHIBIT
NUMBER DOCUMENT
------ --------
10.70 Right of First Negotiation Agreement dated March 29, 2000
between the Registrant and Watson Pharmaceuticals, Inc.
(incorporated by reference to Exhibit 10.70 to the March 2000
8-K). +
10.71 Finished Goods Supply Agreement (Core Products) dated March
29, 2000 between the Registrant and Watson Pharmaceuticals,
Inc. (incorporated by reference to Exhibit 10.71 to the March
2000 8-K). +
*10.72 Debenture and Warrant Purchase Agreement dated May 26, 1999 by
and among the Registrant, Oracle Strategic Partners, L.P. and
the other purchasers listed on the signature page thereto (the
"Oracle Purchase Agreement").
*10.73 Form of 5% Convertible Senior Secured Debenture issued
pursuant to the Oracle Purchase Agreement.
*10.74 Form of Common Stock Purchase Warrant issued pursuant to the
Oracle Purchase Agreement.
*10.75 Lease Termination and Settlement Agreement dated March 20, 2000
between the Registrant and Atlantic Properties Company in
respect of the Registrant's Brooklyn, New York leased facility.
21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 22 to the 1993 Form 10-K).
*23.1 Consent of Grant Thornton LLP, independent certified public accountants.
*27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for informational
purposes only and not filed.
* Filed herewith.
+ A portion of this exhibit has been omitted pursuant to an application for
confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HALSEY DRUG CO., INC.
By: /s/ MICHAEL REICHER
-------------------
Michael Reicher, President and
Chief Executive Officer (Principal Executive
Officer)
Date: April 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
[Enlarge/Download Table]
/s/ WILLIAM G. SKELLY Chairman and Director April 14, 2000
-----------------------------------
William G. Skelly
/s/ MICHAEL REICHER President, Chief Executive Officer April 14, 2000
----------------------------------- and Director (Principal Executive
Michael Reicher Officer)
/s/ PETER CLEMENS Vice President, Chief Financial Officer April 14, 2000
----------------------------------- (Principal Financial and accounting
Peter Clemens Officer) and Director
/s/ ALAN J. SMITH Director April 14, 2000
-----------------------------------
Alan J. Smith
/s/ BRUCE F. WESSON Director April 14, 2000
-----------------------------------
Bruce F. Wesson
/s/ WILLIAM SUMNER Director April 14, 2000
-----------------------------------
William Sumner
/s/ SRINI CONJEEVARAM Director April 14, 2000
-----------------------------------
Srini Conjeevaram
/s/ ZUBEEN SHROFF Director April 14, 2000
-----------------------------------
Zubeen Shroff
/s/ Joel Liffman Director April 14, 2000
-----------------------------------
Joel Liffman
32
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8 - F-25
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3 - F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity F-6 - F-8
Consolidated Statements of Cash Flows F-9 - F-10
Notes to Consolidated Financial Statements F-11 - F-34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
HALSEY DRUG CO., INC.
We have audited the accompanying consolidated balance sheets of Halsey Drug Co.,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Halsey Drug Co.,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
GRANT THORNTON LLP
New York, New York
March 30, 2000
F-2
Halsey Drug Co., Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands)
[Download Table]
1999 1998
------- -------
CURRENT ASSETS
Cash $ 786 $ 1,850
Accounts receivable - trade, net of allowances
for doubtful accounts of $425 and $280
in 1999 and 1998, respectively 2,716 1,439
Inventories 3,502 6,354
Prepaid expenses and other current assets 213 148
------- -------
Total current assets 7,217 9,791
PROPERTY, PLANT AND EQUIPMENT, NET 3,013 4,787
DEFERRED PRIVATE OFFERING COSTS 1,623 1,700
OTHER ASSETS AND DEPOSITS 642 135
------- -------
$12,495 $16,413
======= =======
The accompanying notes are an integral part of these statements.
F-3
Halsey Drug Co., Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31,
(in thousands)
[Download Table]
1999 1998
-------- --------
CURRENT LIABILITIES
Notes payable $ 4,038 $ 10,850
Accounts payable 2,283 1,834
Accrued expenses 5,777 3,972
Department of Justice Settlement 300 300
-------- --------
Total current liabilities 12,398 16,956
CONVERTIBLE SUBORDINATED DEBENTURES,
NET 41,096 26,186
OTHER LIABILITIES 549
DEPARTMENT OF JUSTICE SETTLEMENT 1,375 1,675
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized,
80,000,000 shares; issued 14,829,511 shares
and 14,443,212 shares in 1999 and 1998,
respectively 148 144
Additional paid-in capital 35,751 29,113
Accumulated deficit (77,284) (57,221)
-------- --------
(41,385) (27,964)
Less treasury stock - at cost
(439,603 shares) (989) (989)
-------- --------
(42,374) (28,953)
-------- --------
$ 12,495 $ 16,413
======== ========
The accompanying notes are an integral part of these statements.
F-4
Halsey Drug Co., Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
(in thousands, except per share data)
[Download Table]
1999 1998 1997
-------- -------- --------
Net sales $ 11,420 $ 8,841 $ 9,088
Cost of goods sold 15,316 12,712 15,406
-------- -------- --------
Gross margin (3,896) (3,871) (6,318)
Operating costs
Research and development 1,075 651 979
Selling, general and administrative expenses 7,383 8,078 6,308
Plant shutdown costs 3,220
-------- -------- --------
Total operating costs (11,678) (8,729) (7,287)
-------- -------- --------
Loss from operations (15,574) (12,600) (13,605)
Other income(expense)
Interest expense (2,851) (1,285) (1,017)
Amortization of deferred debt discount and
private offering costs (1,825) (661) (127)
Other 187 1,822 (264)
-------- -------- --------
(4,489) (124) (1,408)
-------- -------- --------
NET LOSS $(20,063) $(12,724) $(15,013)
======== ======== ========
Basic and diluted loss per common share $ (1.40) $ (.92) $ (1.12)
======== ======== ========
Weighted average number of outstanding shares 14,326 13,813 13,434
======== ======== ========
The accompanying notes are an integral part of these statements.
F-5
Halsey Drug Co., Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(in thousands)
[Enlarge/Download Table]
Common stock, Treasury stock,
$.01 par value Additional at cost
--------------------- paid-in Accumulated ---------------------
Shares Amount capital deficit Shares Amount Total
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 13,176 $ 131 $ 23,316 $(29,484) (475) $ (1,044) $ (7,081)
Issuance of common stock -
conversion of debentures 643 7 1,529 1,536
Issuance of shares as payment of
Interest 69 1 224 225
Sale of treasury stock 25 45 35 55 100
Exercise of warrants of convertible
debentures 22 72 72
Stock options exercised 95 1 303 304
Net loss for the year ended
December 31, 1997 (15,013) (15,013)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997
(carried forward) 14,030 140 25,489 (44,497) (440) (989) (19,857)
F-6
Halsey Drug Co., Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Years ended December 31, 1999, 1998 and 1997
(in thousands)
[Enlarge/Download Table]
Common stock, Treasury stock,
$.01 par value Additional at cost
--------------------- paid-in Accumulated ---------------------
Shares Amount capital deficit Shares Amount Total
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997
(brought forward) 14,030 $ 140 $ 25,489 $(44,497) (440) $ (989) $(19,857)
Issuance of common stock -
conversion of notes payable 110 1 213 214
Issuance of shares as payment of
interest 263 3 592 595
Issuance of common stock -
settlement of trade payables 40 55 55
Deferred debt discount on warrants
issued with convertible
debentures 2,764 2,764
Net loss for the year ended
December 31, 1998 (12,724) (12,724)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998
(carried forward) 14,443 144 29,113 (57,221) (440) (989) (28,953)
F-7
Halsey Drug Co., Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
Years ended December 31, 1999, 1998 and 1997
(in thousands)
[Enlarge/Download Table]
Common stock, Treasury stock,
$.01 par value Additional at cost
--------------------- paid-in Accumulated ---------------------
Shares Amount capital deficit Shares Amount Total
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998
(brought forward) 14,443 $ 144 $ 29,113 $(57,221) (440) $ (989) $(28,953)
Issuance of shares as payment of
interest 322 3 524 527
Deferred debt discount on warrants
and private issuance costs 5,641 5,641
Warrants issued for acquisition of 350 350
ANDA
Exercise of warrants 29 1 49 50
Issuance of common stock as payment
of legal fees 26 50 50
Issuance of common stock as payment 10 24 24
of payables
Net loss for the year ended
December 31, 1999 (20,063) (20,063)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999 14,830 $ 148 $ 35,751 $(77,284) (440) $ (989) $(42,374)
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
F-8
Halsey Drug Co., Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(in thousands)
[Enlarge/Download Table]
1999 1998 1997
-------- -------- --------
Cash flows from operating activities
Net loss $(20,063) $(12,724) $(15,013)
-------- -------- --------
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 914 1,113 1,606
Amortization of deferred debt discount and private
offering costs 1,825 661 127
Provision for losses on accounts receivable 145 (262) 118
Loss on disposal of assets 1,709 170 38
Stock issued for legal expense 50
Stock issued for trade payables 24
Debentures and stock issued for interest expense 939
Changes in assets and liabilities
Accounts receivable (1,422) (1,115) 45
Inventories 2,852 (3,898) 1,302
Prepaid expenses and other current assets (65) 126 165
Other assets and deposits (157)
Accounts payable 399 (4,197) 1,851
Deferred gain (1,900)
Other liabilities (549)
Accrued expenses 1,444 (2,665) 4,553
-------- -------- --------
Total adjustments 8,108 (11,967) 9,805
-------- -------- --------
Net cash used in operating activities (11,955) (24,691) (5,208)
-------- -------- --------
Cash flows from investing activities
Capital expenditures (918) (1,545) (85)
Net proceeds from sale of assets 69 96
Collection of notes receivable 1,000
-------- -------- --------
Net cash provided by(used in) investing activities (849) (1,449) 915
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of notes payable 4,000 6,495 3,881
Reissuance of treasury stock 70
Payments to Department of Justice (300) (178)
Bank overdraft (159) (127)
Due to banks (2,476)
Payments on notes payable, net (9,464)
Proceeds from issuance of convertible subordinated
Debentures 17,862 25,800
Proceeds from exercise of stock warrants 49 377
Deferred private offering costs (407) 1,518
-------- -------- --------
Net cash provided by financing activities 11,740 27,964 4,201
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,064) 1,824 (92)
Cash and cash equivalents at beginning of year 1,850 26 118
-------- -------- --------
Cash and cash equivalents at end of year $ 786 $ 1,850 $ 26
======== ======== ========
F-9
Halsey Drug Co., Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended December 31,
(in thousands)
Supplemental disclosures of noncash activities:
Year ended December 31, 1999
1. The Company issued 321,777 shares of common stock as payment for $526,779
in accrued interest.
2. The Company issued 26,106 shares of common stock as payment for $50,500
in legal fees and 9,846 shares of common stock as payment for $24,000 in
trade payables.
3. The Company issued approximately 3,608,604 warrants (Note G) valued and
recorded in the aggregate as $5,234,000 of unamortized debt discount and
a reduction in the amount of the related obligation.
4. The Company converted approximately $6,609,000 of notes payable and
approximately $428,000 of accrued interest on notes payable into
convertible subordinated debentures.
5. The Company converted approximately $939,000 of accrued interest due from
convertible subordinated debentures into additional debentures.
6. The Company issued 1,022,284 warrants for funding fees valued and
recorded as $907,000 in deferred private issuance costs.
7. The Company issued 500,000 warrants to Barr Laboratories, Inc.(to
purchase of the rights to 50 pharmaceutical products) valued and recorded
as $350,000 for the acquisition of certain product rights.
Year ended December 31, 1998
1. The Company issued 262,836 shares of common stock as payment for $593,313
in accrued interest.
2. The Company reissued 20,000 shares of common stock as payment for $25,000
in legal fees and 20,000 shares of common stock as payment for $30,000 in
trade payables.
3. The Company issued 110,658 shares of common stock as payment of
outstanding notes payable in amounts of $214,000 and $1,782 in accrued
interest.
4. The Company issued approximately 5,500,086 warrants (Note G) valued and
recorded in the aggregate as $2,263,434 of unamortized debt discount and
a reduction in the amount of the related obligation.
Year ended December 31, 1997
1. The Company issued 25,000 shares of common stock as payment for $225,452
in accrued interest.
2. The Company issued 642,407 shares of common stock to Zatpack, Inc. as
payment for an outstanding note payable in the amount of $1,536,000.
3. The Company reissued 25,000 shares of treasury stock as payment for
$30,000 in consulting fees and the receipt of $70,000 in cash.
4. The Company recorded the satisfaction of $1,400,000 of subordinated
promissory notes, related accrued interest of $200,000 and accounts
payable of $300,000 due to a supplier, in lieu of the supplier paying
$1,900,000 owed to the Company as described in Note K.
The accompanying notes are an integral part of these statements.
F-10
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Halsey Drug Co., Inc. (the "Company" or "Halsey"), a New York corporation
established in 1935, and its subsidiaries are engaged in the manufacture,
sale and distribution of generic drugs. The Company sells its generic drug
products under its Halsey label and under private-label arrangements with
drug store chains and drug wholesalers throughout the United States.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows.
1. Principles of Consolidation and Basis of Presentation
The consolidated financial statements include 100% of the accounts of
the Company and its wholly-owned subsidiaries, Blue Cross Products Co.,
Inc., Houba, Inc., Halsey Pharmaceuticals, Inc., Indiana Fine Chemicals
Corporation, Cenci Powder Products, Inc., H.R. Cenci Laboratories,
Inc., and The Medi-Gum Corporation. Except for Houba, Inc., all of the
other subsidiaries are inactive. All material intercompany accounts and
transactions have been eliminated.
2. Inventories
Inventories are stated at the lower of cost or market; cost is
determined using the first-in, first-out method.
3. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
provided for in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives, principally on
a straight-line basis. The estimated lives used in determining
depreciation and amortization are:
[Download Table]
Buildings 25 years
Machinery and equipment 5 - 10 years
Leasehold improvements were written off during the year. (See Note J).
F-11
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A (CONTINUED)
4. Deferred Debt Discount and Private Issuance Costs
Debt discount resulting from the issuance of stock warrants in
connection with the issuance of subordinated debt (Note G) is recorded
as a reduction of the related obligations and is amortized over the
remaining life of the related obligations. Debt discount is determined
by a calculation which is based, in part, by the fair valued ascribed
to such warrants determined by an independent valuation or management's
use of the Black-Scholes valuation model. Deferred private issuance
costs resulting from the issuance of warrants in connection with the
extension of bridge loan maturity dates are recorded as deferred assets
and amortized as additional interest expense over the remaining life of
the related obligations.
5. Income Taxes
The Company accounts for income taxes utilizing an asset liability
method for financial accounting and reporting for income taxes. Under
this method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
6. Statements of Cash Flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents. The Company paid no
substantial income taxes for the years ended December 31, 1999, 1998
and 1997. In addition, the Company paid interest of approximately
$720,000, $1,946,000 and $1,113,000, respectively, for the years ended
December 31, 1999, 1998 and 1997.
7. Use of Estimates in Consolidated Financial Statements
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management makes estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-12
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE A (CONTINUED)
8. Research and Development Costs
All research and development costs, including payments related to
licensing agreements on products under development and research
consulting agreements are expensed when incurred.
9. Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. See Note J for the impairment charge related
to the write-off of leasehold improvements of the Company's Brooklyn
New York Plant.
10. Stock-Based Compensation
The Company accounts for stock-based compensation under Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting
for Stock-Based Compensation," and continues to apply APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans (Note M).
Equity instruments issued to nonemployees in exchange for goods and/or
services are accounted for under the fair value method of SFAS No. 123.
11. 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 presented, and is
equal to basic earnings per share for all years presented as the effect
of other potentially dilutive securities would be antidilutive (Note
M).
12. Revenue Recognition
Revenue is recognized from sales when title to product passes to
customers.
13. Reclassifications
Certain reclassifications have been made to the 1998 and 1997
presentations to conform to the 1999 presentation.
F-13
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE B - LIQUIDITY MATTERS
At December 31, 1999, the Company had a working capital deficiency of
approximately $5,181,000, had an accumulated deficit of approximately
$77,284,000 and had incurred a loss of approximately $20,063,000 for the
year then ended.
During 1999 the Company used the net proceeds from its 1999 private
issuances of debentures and warrants (Note G) to satisfy the principal and
accrued interest requirements of prior issued debentures and in addition,
used such proceeds to fund working capital, including the purchase of raw
materials, payroll expenses and other Company operating expenses.
On March 29, 2000, the Company completed various strategic alliance
transactions with Watson Pharmaceuticals, Inc. ("Watson"). The transactions
with Watson provided for (i) Watson's purchase, for $13,500,000, of a
certain pending ANDA from the Company, (ii) Watson's rights to negotiate
for Halsey to manufacture and supply certain identified future products to
be developed by Halsey, (iii) Watson's marketing and sale of the Company's
core products and (iv) Watson's extension of a $17,500,000 term loan to the
Company.
The net proceeds from the Watson Term Loan has permitted the Company to
satisfy its current liabilities and accounts payable. In addition,
management believes the net proceeds from the Watson Term Loan combined
with the payments to be received by the Company from Watson under each of
the Product Acquisition Agreement and the Core Products Supply Agreement
will provide the Company with sufficient working capital to fund operations
for at least the next twelve months.
NOTE C - FAIR VALUE OF FINANCIAL INSTRUMENTS
Long-term and Short-term Debt and senior convertible subordinated
debentures
The fair value of the Company's long-term and short-term debt and Senior
Convertible Subordinated Debentures cannot be made without incurring
excessive costs.
F-14
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE D - INVENTORIES
Inventories consist of the following:
[Download Table]
December 31,
-------------------------
1999 1998
------ ------
(in thousands)
Finished goods $ 725 $2,675
Work-in-process 720 1,166
Raw materials 2,057 2,513
------ ------
$3,502 $6,354
====== ======
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
[Download Table]
December 31,
--------------------
1999 1998
------- -------
(in thousands)
Machinery and equipment $12,893 $12,278
Leasehold improvements 325 6,103
Building 747 747
Land 44 44
------- -------
14,009 19,172
Less accumulated depreciation and amortization 10,996 14,385
------- -------
$ 3,013 $ 4,787
======= =======
Depreciation and amortization expense for the years ended December 31,
1999, 1998 and 1997 was approximately $914,000, $1,113,000 and $1,606,000,
respectively.
F-15
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE F- ACCRUED EXPENSES
Accrued expenses are summarized as follows:
[Download Table]
December 31,
------------------------
1999 1998
------ ------
(in thousands)
Payroll taxes payable $1,503 $1,714
Rent 1,454
Interest 764 619
Accrued payroll 736 92
Professional fees 362 539
Other 958 1,008
------ ------
$5,777 $3,972
====== ======
At December 31, 1999, payroll taxes payable include approximately
$1,467,000 and $31,000 of delinquent payroll taxes (including penalties and
interest) due to the Internal Revenue Service and the State of New York,
respectively, all of which liability was incurred in 1997 and 1996. The
Company expects that the Federal liability will be partially offset by
income tax refund claims which were filed and are pending before the IRS.
Until such time as the IRS completes its review, the Company has not
recorded any expected tax refund claims. The Company has negotiated a
payment plan with the State of New York and the balance will be paid by the
end of 2000.
F-16
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE G - CONVERTIBLE SUBORDINATED DEBENTURES AND STOCK WARRANTS
At December 31, 1999 and 1998 convertible subordinated debentures
outstanding and related debt discount related to the following issuances
are discussed below:
[Download Table]
December 31,
-----------------------
1999 1998
-------- --------
Issuance of debentures (in thousands)
----------------------
Debentures - August 1996 (a) $ 2,500 $ 2,500
Debentures - March 1998 (b) 20,800 20,800
Debentures - issued in lieu of interest for March 1998 (b) 667
Debentures - June 1998 (c) 5,000 5,000
Debentures - issued in lieu of interest for June 1998 (c) 158
Debentures - May 1999 (d) 12,862
Debentures - issued in lieu of interest for May 1999 (d) 114
Debentures - July 1999 (e) 5,000
-------- --------
47,101 28,300
Less: Debt discount (6,005) (2,114)
-------- --------
$ 41,096 $ 26,186
======== ========
(a) On August 6, 1996, the Company issued 250 units, at $10,000 per unit,
in a private placement of its securities ("August Private
Placement"). Each unit consisted of: (i) a 10% convertible
subordinated debenture due August 6, 2001 in the principal amount of
$10,000, interest payable quarterly, and convertible into shares of
the Company's common stock at a conversion price of $3.25 per share,
subject to dilution, and (ii) 461 redeemable common stock purchase
warrants ("warrants"). Each warrant entitled the holder to purchase
one share of common stock for $3.25, subject to adjustment during the
five-year period commencing August 6, 1996.
(b) On March 10, 1998, the Company completed a private offering (the
"Offering") of securities to an investor group ("Galen") consisting
of 5% convertible senior secured debentures due March 15, 2003, and
common stock purchase warrants (with a 7 year life) exercisable for
2,244,667 shares of the Company's common stock at an exercise price
of $1.404 and 2,189,511 shares at an exercise price of $2.279. The
debentures are convertible into shares of the Company's common stock
at a conversion price of $1.404. The net proceeds to the Company from
the Offering, after the deduction of related offering expenses of
$1,518,000 for legal and investment banker fees, was approximately
$19,300,000. These related offering costs are being amortized over
the remaining five year life of the related debentures.
F-17
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE G (CONTINUED)
(c) In accordance with the terms of the Offering, during June 1998,
Galen invested an additional $5,000,000 in the Company in exchange
for debentures and warrants having terms identical to those issued in
the Offering (539,583 and 526,325 common stock purchase warrants with
an exercise price of $1.404, respectively).
(d) On May 26, 1999, the Company consummated a private offering of
securities for an aggregate purchase price of up to $22,800,000 (the
"Oracle Offering"). The securities issued in the Oracle Offering
consisted of 5% convertible senior secured debentures (the "1999
Debentures") and common stock purchase warrants (the "1999
Warrants"), each of which are substantially similar to the debentures
and warrants issued by the Company in the Galen Offering completed in
March, 1998. Of the $22,800,000 to be invested pursuant to the Oracle
Offering, $5,000,000 was funded by Oracle Strategic Partners, L.P.
("Oracle") on May 26, 1999, the closing date of the Oracle Offering,
with an additional $10,000,000 to be funded by Oracle in two
installments of $5,000,000 each. The first $5,000,000 installment of
the additional $10,000,000 Oracle investment was funded on July 27,
1999. Pursuant to an agreement reached between the Company and Oracle
on March 20, 2000, the final $5,000,000 investment has been waived.
The 1999 Debentures were issued at par and will become due and
payable as to principle on March 15, 2003. Approximately $12,800,000
in principle amount of the 1999 Debentures were issued on May 26,
1999. Interest on the principle of the 1999 Debentures is accrued at
the rate of 5% per annum and is payable on a quarterly basis.
The 1999 Debentures are convertible into shares of the Company's
common stock at a conversion price of $1.404 per share, for an
aggregate of up to approximately 12,678,063 shares of the Company's
common stock. The 1999 Warrants are exercisable for an aggregate of
approximately 4,618,702 shares of the Company's common stock. Of such
warrants, 2,309,351 warrants are exercisable at $1.404 per share and
the remaining 2,309,351 warrants are exercisable at $2.279 per share.
The 1999 Debentures and 1999 Warrants are convertible and
exercisable, respectively, for an aggregate of approximately
17,296,765 shares of the Company's common stock.
F-18
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE G (CONTINUED)
(e) Approximately $7,037,000 of the 1999 Debentures issued pursuant to
the Oracle Offering were issued in exchange for the surrender of a
like amount of principal and accrued interest outstanding under the
Company's convertible promissory notes issued pursuant to various
bridge loan transactions with Galen Partners III, L.P., Galen
Partners International III, L.P., Galen Employee Fund III, L.P.
(collectively, "Galen") and certain other investors in the aggregate
amount of $10,104,110 during the period from August 1998 through and
including May, 1999 (the "1999 Galen Bridge Loans"). In exchange for
Galen and other investors granting extensions to maturity dates of
the Company's convertible promissory notes, the Company issued
1,022,284 common stock purchase warrants at exercise prices ranging
from $1.18 to $2.32. These warrants resulted in deferred private
offering costs which are being amortized over the remaining 5 year
life of the related obligations. The remaining balance of the 1999
Galen Bridge Loans in the principal amount of $3,495,000 plus accrued
and unpaid interest was paid on July 27, 1999.
(f) In connection with certain 1995 amendments to a line of credit
agreement then existing with a bank, the Company issued stock
warrants to the bank, expiring July 17, 2000, to purchase shares of
the Company's common stock at various exercise prices per share,
subject to certain antidilution provisions. At December 31, 1999 the
number of common stock warrants, as adjusted, equal 955,509 shares at
exercise prices ranging from $1.48 to $1.51 per share. In March 1998,
the Company completely satisfied its bank indebtedness and terminated
the line of credit agreement.
F-19
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE G (CONTINUED)
Debt discount resulting from the issuance of stock warrants in connection
with the issuance of subordinated debt is recorded as a reduction of the
related obligations at the warrants relative fair value and is amortized as
additional interest expense over the remaining life of the related
obligations. At December 31, 1999 outstanding warrants giving rise to debt
discount for related debentures are as follows:
[Enlarge/Download Table]
Accumulated Unamortized
Warrants Amortization debt discount
related to Original at at Remaining
debentures Exercise Number of debt December 31, December 31, life
above prices Warrants discount 1999 1999 (months)
----- ------ -------- -------- ---- ---- --------
(in thousands)
(a) $3.25 $ 115,250 $ 355 $ 237 $ 118 20
$1.404 and
(b) $2.279 4,434,178 2,263 793 1,470 39
$1.404 and
(c) $2.279 1,065,908 1,200 248 952 46
$1.404 and
(d) $2.279 3,608,604 4,034 569 3,465 39
$1.48 to
(f) $1.51 955,509 200 200 - -
----------- ------ ------ ------
$10,179,449 $8,052 $2,047 $6,005
=========== ====== ====== ======
At December 31, 1999 outstanding warrants giving rise to deferred private
offering costs are as follows:
[Enlarge/Download Table]
Unamortized
Accumulated Private
Original Amortization issuance costs
deferred at at Remaining
Exercise Number of private December 31, December 31, life
Warrants prices Warrants issuance costs 1999 1999 (months)
-------- ------ -------- -------------- ---- ---- --------
(in thousands)
$1.18 to
(e) $2.32 $1,022,284 $ 907 $181 $726 48
F-20
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE H -NOTES PAYABLE
At December 31, 1999 and 1998, notes payable consisted of the following:
[Download Table]
December 31,
--------------------
1999 1998
------- -------
(in thousands)
Unsecured promissory demand notes (a) $ 2,529 $ 2,817
Bridge Loans (b) 1,509 8,033
------- -------
$ 4,038 $10,850
======= =======
(a) At December 31, 1999 unsecured promissory demand notes consisted of
$2,379,000 due to Mylan and $150,000 due to a former employee. During
the period from May 1997 through July 1997, the Company borrowed
approximately $3 million from Mylan Laboratories, Inc. ("Mylan")
pursuant to five unsecured, demand promissory notes. The advances made
by Mylan Laboratories, Inc. were part of a proposed investment by Mylan
in the Company, including the proposed purchase of the Company's
Indiana facility as well as a partial tender offer for the Company's
common stock. To date, $620,000 has been paid by the Company to Mylan
against such indebtedness in the form of product deliveries to Mylan.
Pursuant to an agreement reached between the parties, the Company is
required to satisfy interest on the outstanding indebtedness on an
annual basis while the indebtedness remains outstanding and to satisfy
the principal amount of such indebtedness in the form of product
deliveries to Mylan until such time as the indebtedness is satisfied in
full.
(b) In addition to the 1999 Galen Bridge Loans discussed in Note G, the
Company secured bridge financing from Galen order to provide necessary
working capital prior to the completion of the Watson Term Loan as
described in Note Q. These bridge loans aggregated approximately
$3,300,000 and were funded through six separate bridge loan
transactions during the period from December 8, 1999 through March 29,
2000 (collectively, the "2000 Galen Bridge Loans"). At December 31,
1999 $1,509,000 relating to such bridge loans was outstanding. On March
31, 1999 the total principal amount of the 2000 Galen Bridge Loans and
accrued and unpaid interest were satisfied in full with a portion of
the proceeds of the Watson Term. Prior to repayment, the 2000 Galen
Bridge Loans accrued interest at the rate of 18% per annum and were
secured by a first lien on all of the Company's assets. In
consideration for the extension of the 2000 Galen Bridge Loans, the
Company issued common stock purchase warrants to Galen to purchase an
aggregate of 125,000 shares of the Company's common stock.
F-21
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE H (CONTINUED)
The warrants issued pursuant to the 2000 Galen Bridge Loans have an
exercise price equal to the fair market value of the Company's common
stock on the date of issuance and are substantially identical to those
issued by the Company in the Oracle Offering (Note G).
NOTE I- INCOME TAXES
The actual income tax expense varies from the Federal statutory rate
applied to consolidated operations as follows:
[Enlarge/Download Table]
Year ended December 31,
---------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
AMOUNT % Amount % Amount %
------- ---- ------- ---- ------- ----
(in thousands)
Federal statutory rate $(6,116) (34%) $(4,326) (34.0)% $(5,105) (34.0)%
Loss for which no tax benefit
was provided 5,997 33.8% 4,247 33.8 4,924 32.8
Losses of subsidiaries with
no tax benefit
Amortization of warrants 24 .2
Goodwill amortization 12 .1
Department of Justice
settlement 31 .1 42 .1
Other 88 .1 37 .1 145 .9
------- ---- ------- ---- ------- ----
Actual tax expense $ -- --% $ -- --% $ -- --%
======= ==== ======= ==== ======= ====
The Company has net operating loss carryforwards aggregating approximately
$58,796,146, expiring during the years 2011 through 2019. In addition,
certain of the Company's subsidiaries filed separate Federal income tax
returns in prior years and have separate net operating loss carryforwards
aggregating approximately $4,062,758 expiring during the years 1999 through
2018.
F-22
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE I (CONTINUED)
The tax loss carryforwards of the Company and its subsidiaries are subject
to limitation by Section 382 of the Internal Revenue Code with respect to
the amount utilizable each year. This limitation reduces the Company's
ability to utilize net operating loss carryforwards included above each
year. The amount of the limitation has not been quantified by the Company.
The components of the Company's deferred tax assets (liabilities), pursuant
to SFAS No. 109, are summarized as follows:
[Download Table]
December 31,
-----------------------
1999 1998
-------- --------
(in thousands)
Deferred tax assets
Net operating loss carryforwards $ 27,349 $ 21,831
Allowance for doubtful accounts 50 75
Research and development tax credit 212 212
Reserve for inventory 218 169
Reserve for chargebacks 21
Shutdown costs 1,352
Severance package 242
Litigation settlement 44 73
Rent 44 231
Reserve for Medicaid 93 71
Capital loss carryforwards 210
Reserve for contingencies 14
Charitable contribution carryforwards 1
Other 26 15
-------- --------
Gross deferred tax assets 29,876 22,677
-------- --------
Deferred tax liabilities
Depreciation (430) (332)
Installment sale gain
Other (42) (42)
-------- --------
(472) (374)
-------- --------
Net deferred tax assets before
valuation allowance 29,404 22,303
Valuation allowance (29,404) (22,303)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
F-23
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE I (CONTINUED)
SFAS No. 109 requires a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets may not be realized. The valuation
allowance at December 31, 1999 primarily pertains to uncertainties with
respect to future utilization of net operating loss carryforwards.
NOTE J - CESSATION AND RELOCATION OF BROOKLYN, NY PLANT
OPERATIONS
The Company's formal decision to discontinue its Brooklyn operations was
initiated in the fourth quarter of 1999 with notification to its union. The
total charge of approximately $3,220,000 resulting from eliminating the
Brooklyn operation includes the lease termination payment of $1,150,000, a
provision of $200,000 for plant repairs, the write-off of leasehold
improvements of $1,778,000, severance and other costs for terminated
employees of $730,000, less deferred rent previously expensed of $638,000.
At December 31, 1999 the Company was obligated to pay rent through December
31, 2005 pursuant to a noncancellable lease obligation for its facility in
Brooklyn, New York. Under a termination and settlement agreement
consummated on March 22, 2000 (the "Settlement Agreement"), in exchange for
a termination payment of $1,150,000, the termination of the lease has been
accelerated to August 31, 2000. The total base rent payments that would
have been required from September 1, 2000 to December 31, 2005, were
approximately $6,715,000. The agreement does allow the Company to continue
to lease the facility beyond August 31, 2000, but requires the Company to
vacate the premises no later than March 31, 2001. In addition, the
Settlement agreement provides for the advance payment of rent through
August 31, 2000 and a restoration escrow deposit of $200,000 for plant
repairs. The Company also deposited in escrow with its counsel $390,600
which represents rental payments for the period September 1, 2000 through
March 31, 2001. Such escrow amount will be returned to the Company in the
event it vacates the Brooklyn facility on or prior to August 31, 2000. The
Company funded the termination fee payment, the advance rental payment
obligations and restoration amount required pursuant to the Settlement
Agreement with the proceeds received from the Watson Term Loan (Note Q).
F-24
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE K - SALE AND ACQUISITION OF ABBREVIATED NEW DRUG APPLICATIONS
("ANDA")
Sale of ANDA
On March 21, 1995, the Company sold its ANDA for 5mg Oxycodone HCL/325mg
Acetaminophen Tablets ("Tablets") and certain equipment used in the
production of the tablets. Pursuant to the agreement the Company recognized
the final portion of the gain, $1,900,000, as other income in March 1998.
Acquisition of Barr Laboratories, Inc. ANDA
On April 16, 1999, the Company completed an acquisition agreement with Barr
Laboratories, Inc. ("Barr") providing for the Company's purchase of the
rights to 50 pharmaceutical products (the "Barr Products"). Under the terms
of the acquisition agreement with Barr, the Company acquired all of Barr's
rights in the Barr Products, including all related governmental approvals
(including ANDAs) and related technical data and information. In
consideration for the acquisition of the Barr Products, the Company issued
to Barr a common stock purchase warrant exercisable for 500,000 shares of
the Company's common stock having an exercise price of $1.0625 per share
(the fair value of the Common Stock on the date of issuance) and having a
term of five years. The Company valued the warrants at $350,000 using the
Black Scholes option pricing model. Accordingly, the Company recorded a
deferred charge to be amortized as an expense to the Company's operations
over a 10 year period which is the estimated life of the related ANDA. The
acquisition agreement with Barr also allows Barr to purchase any of the
Barr Products manufactured by the Company for a period of five years.
NOTE L - PENSION EXPENSE
1. Management Pension Plan
The Company had maintained a defined benefit plan covering
substantially all nonunion employees which was terminated in November
1996. Subsequently, all Plan assets were converted to cash and held in
a money market fund (to continue the Trust) from which all vested
participant interests were to be paid. In 1998, the Company received
approval to terminate the Plan by the Pension Benefit Guarantee
Corporation, all assets were distributed to the vested participants,
the Trust was terminated and a final filing was made with the Internal
Revenue Service.
F-25
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE L (CONTINUED)
2. Employees' Pension Plan
The Company contributed approximately $67,872, $421,000, and $407,000,
in 1999, 1998 and 1997, respectively, to a multiemployer pension plan
for employees covered by collective bargaining agreements. This plan is
not administered by the Company and contributions are determined in
accordance with provisions of negotiated labor contracts. Information
with respect to the Company's proportionate share of the excess, if
any, of the actuarially computed value of vested benefits over the
total of the pension plan's net assets is not available from the plan's
administrator.
The Multiemployer Pension Plan Amendments Act of 1980 (the "Act")
significantly increased the pension responsibilities of participating
employers. Under the provision of the Act, if the plans terminate or
the Company withdraws, the Company could be subject to a "withdrawal
liability."
NOTE M - STOCK OPTION PLAN
In June 1998, the stockholders of the Company approved the adoption of a
stock option and restricted stock purchase plan (the "1998 Option Plan).
The 1998 Option Plan provides for the granting of (i) nonqualified options
to purchase the Company's common stock at not less than the fair market
value on the date of the option grant and (ii) incentive stock options to
purchase the Company's common stock at not less than the fair market value
on the date of the option grant. As of December 31, 1999, there was no
exercise of any options to purchase any common stock under the 1998 Option
Plan. The total number of shares which may be sold pursuant to options and
rights granted under the 1998 Option Plan is 3,600,000. No option can be
granted under the 1998 Option Plan after April, 2008 and no option can be
outstanding for more than ten years after its grant.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation." It applies APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its plans and
does not recognize compensation expense for its stock-based compensation
plans other than for restricted stock. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed by
SFAS No. 123, the Company's net income and earnings per share would be
reduced to the pro forma amounts indicated below:
F-26
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE M (CONTINUED)
[Download Table]
Year ended December 31,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
(thousands, except per share amounts)
Net loss
As reported $ (20,063) $ (12,724) $ (15,013)
Pro forma (20,954) (13,663) (15,323)
Loss per share
As reported $ (1.40) $ (.92) $ (1.12)
Pro forma (1.46) (.98) (1.14)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expenses
related to grants made before 1995. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for the years ended
December 31, 1999, 1998 and 1997, respectively: expected volatility of 73%,
67%, and 65%; risk-free interest rates of 6.8%, 5.6%, and 6.0%; and
expected lives of 10 years, 10 years, and 4 years. At the date of grant,
all exercise prices equaled the market value of the stock.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair market estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
F-27
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE M (CONTINUED)
Transactions involving stock options are summarized as follows:
[Download Table]
Weighted Weighted
Stock average average
options exercise fair
outstanding Price value
---------- -------- --------
Balance at December 31, 1996 656,007 3.53
Exercised (89,300) 3.22 $3.39
Cancelled (84,968) 5.16 3.39
----------
Balance at December 31, 1997 481,739 3.60
==========
Granted 2,254,850 2.37 1.71
Cancelled (511,303) 3.16 2.08
----------
Balance at December 31, 1998 2,225,286 2.46
==========
Granted 503,500 1.19 .80
Cancelled (118,567) 3.08 2.00
----------
Balance at December 31, 1999 2,610,219 2.19
==========
The following table summarizes information concerning currently outstanding and
exercisable stock options:
[Enlarge/Download Table]
Options outstanding Options exercisable
--------------------------------------------- -----------------------------
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Ranges of December 31, contractual exercise December 31, exercise
exercise prices 1999 Life(years) price 1999 price
--------------- -------------- ----------- -------- -------------- --------
$1.00 - $2.00 518,100 9.09 $1.17 86,250 $1.30
2.01 - 3.00 2,023,850 8.21 2.40 918,463 2.39
3.01 - 4.88 68,269 6.23 3.78 62,019 3.64
---------- ---------
2,610,219 1,066,732
========== =========
F-28
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE N - COMMITMENTS
The Company occupies plant and office facilities under noncancellable
operating leases which expire in December 2005. These operating leases
provide for scheduled base rent increases over the term of the lease,
however, the total amount of the base rent payments will be charged to
operations using the straight-line method over the term of the lease. The
leases provide for payment of real estate taxes based upon a percentage of
the annual increase. In addition, the Company rents certain equipment under
operating leases, generally for terms of four years. Total rent expense for
the years ended December 31, 1999, 1998 and 1997 was approximately
$1,574,000, $1,243,000, $884,000, respectively. See Note J for information
relating to the shutdown of the Brooklyn, New York facility.
Lease of Congers, New York Facility
Effective March 22, 1999, the Company leased, as sole tenant, a
pharmaceutical manufacturing facility located in Congers, New York (the
"Congers Facility") from Par Pharmaceutical, Inc. ("Par") pursuant to an
Agreement to Lease (the "Lease"). The Congers Facility contains office,
warehouse and manufacturing space. The Lease provides for a term of three
years, with a two-year renewal option and provides for annual fixed rent of
$500,000 per year during the primary term of the Lease and $600,000 per
year during the option period. The Lease also covers certain manufacturing
and related equipment previously used by Par in its operations at the
Congers Facility (the "Leased Equipment"). In connection with the execution
of the Lease, the Company and Par entered into a certain Option Agreement
pursuant to which the Company may purchase the Congers Facility and the
Leased Equipment at any time during the lease term for $5,000,000.
As part of the execution of the Lease, the Company and Par entered into a
certain Manufacturing and Supply Agreement (the "M&S Agreement") having a
term of two years. The M&S Agreement provides for the Company's contract
manufacture of certain designated products. The M&S Agreement also provides
that Par will purchase a minimum of $1,150,000 in product during the
initial 18 months of the Agreement. The M&S Agreement further provides that
the Company will not manufacture, supply, develop or distribute the
designated products to be supplied by the Company to Par under the M&S
Agreement to or for any other person for a period of three years.
F-29
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE N (CONTINUED)
As of December 31, 1999, the approximate minimum rental commitments under
these operating leases are as follows:
[Download Table]
Twelve months ending December 31, (in thousands)
2000 $1,360
2001 509
2002 104
2003 and thereafter 7
------
Total minimum payments required $1,980
======
Employment Contracts
During March 1998, the Company entered into employment contracts with each
of two new officers/employees of the Company which cover a five-year and a
three-year period, respectively. The contracts provide for, among other
things: (i) annual salaries of $170,000 and $140,000 to be paid over the
five-year and three-year periods, respectively and (ii) an aggregate of
1,300,000 options (included in the 1998 grants - Note M) to purchase the
Company's stock at an exercise price of $2.38 per common share that vest
evenly over a three-to-five-year service period and expire in ten years.
NOTE O - CONTINGENCIES
American Stock Exchange
The Company has been advised by the American Stock Exchange ("Amex") that
the Amex has determined to delist the Common Stock of the Company (stock
symbol "HDG") as it does not meet the Amex's criteria for continued
listing. Such criteria include minimum levels of shareholders' equity and
the absence of years of net losses from continuing operations. In response
to the Amex notice, the Company has exercised its right to appeal the
Amex's decision and has requested a formal hearing in order to further
consider the decision. There can be no assurance that the Company's common
stock will remain listed on the Amex. In the event the Company is
unsuccessful in its appeal to maintain the listing of the Company's Common
Stock on the Amex, it is anticipated that the Company's Common Stock will
trade on the Over the Counter Bulletin Board. In such event, a shareholder
may find it more difficult to dispose of, or to obtain accurate quotations
as to the market value of the Common Stock.
F-30
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE O (CONTINUED)
Department of Justice ("DOJ") Settlement
On June 21, 1993, the Company entered into a Plea Agreement with the DOJ to
resolve the DOJ's investigation into the manufacturing and record keeping
practices of the Company's Brooklyn plant. The Plea Agreement required the
Company to pay a fine of $2,500,000 over five years in quarterly
installments of $125,000, commencing on or about September 15, 1993.
As of February 28, 1998, the Company was in default of the payment terms of
the Plea Agreement and had made payments aggregating $350,000. On March 27,
1998, the Company and the DOJ signed the Letter Agreement serving to amend
the Plea Agreement relating to the terms of the Company's satisfaction of
the fine assessed under the Plea Agreement. Specifically, the Letter
Agreement provided that the Company will satisfy the remaining $2,150,000
of the fine through the payment of $25,000 on a monthly basis commencing
June 1, 1998, plus interest on such outstanding balance (at the rate
calculated pursuant to 28 U.S.C Section 1961)(currently 5.319%). Such
payment schedule will result in the full satisfaction of the DOJ fine in
December, 2005. The Letter Agreement also provides certain restrictions on
the payment of salary or compensation to any individual in excess of
$150,000 without the written consent of the DOJ. In addition, the Letter
Agreement requires the repayment of the outstanding fine to the extent of
25% of the Company's after-tax profit or the remaining balance owed and 25%
of the net proceeds received by the Company on any sale of a capital asset
for a sum in excess of $10,000. At December 31, 1999, the Company is
current in its payment obligations with a remaining obligation of
$1,675,000.
Other Legal Proceedings
Beginning in 1992, actions were commenced against the Company and numerous
other pharmaceutical manufacturers in the Pennsylvania Court of Common
Pleas, Philadelphia Division, in connection with the alleged exposure to
diethylstilbestrol ("DES"). The defense of all of such matters was assumed
by the Company's insurance carrier, and a substantial number have been
settled by the carrier. Currently, several actions remain pending with the
Company as a defendant, and the insurance carrier is defending each action.
Similar actions were brought in Ohio, and have been dismissed based on Ohio
law. The Company and its legal counsel do not believe any of such actions
will have a material impact on the Company's financial condition. The
ultimate outcome of these lawsuits cannot be determined at this time, and
accordingly, no adjustment has been made to the consolidated financial
statements.
F-31
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE O (CONTINUED)
The Company has been named as a defendant in one additional action which
has been referred to the Company's carrier and has been accepted for
defense. This action, Alonzo v. Halsey Drug Co., Inc. and K-Mart Corp. was
commenced on November 5, 1995 and involves a claim for unspecified damages
relating to the alleged ingestion of "Doxycycline 100." The ultimate
outcome of these lawsuits cannot be determined at this time, and
accordingly, no adjustment has been made to the consolidated financial
statements.
NOTE P - SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Company sells its products to a large number of customers who are
primarily drug distributors, drugstore chains and wholesalers and are not
concentrated in any specific region. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral.
During 1999, the Company had net sales to one customer in excess of 10% of
total sales, aggregating 16.3% of total sales. During 1998, the Company had
net sales to one customer in excess of 10% of total sales, accounting for
17.6% of total sales. During 1997, the Company had net sales to one
customer in excess of 10% of total sales, aggregating 22.3% of total sales.
During 1999 and 1998, the Company purchased approximately $1,107,000 and
$2,583,000, respectively, of its raw materials, representing approximately
15% and 29%, respectively, of total raw material purchases from one
supplier.
NOTE Q - SUBSEQUENT EVENT - STRATEGIC ALLIANCE WITH
WATSON PHARMACEUTICALS
On March 29, 2000, the Company completed various strategic alliance
transactions with Watson Pharmaceuticals, Inc. ("Watson"). The transactions
with Watson provided for Watson's purchase of a certain pending ANDA from
the Company, for Watson's rights to negotiate for Halsey to manufacture and
supply certain identified future products to be developed by Halsey, for
Watson's marketing and sale of the Company's core products and for Watson's
extension of a $17,500,000 term loan to the Company.
F-32
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE Q (CONTINUED)
The product acquisition portion of the transactions with Watson provided
for Halsey's sale of a pending ANDA and related rights (the "Product") to
Watson for aggregate consideration of $13,500,000 (the "Product Acquisition
Agreement"). As part of the execution of the Product Acquisition Agreement,
the Company and Watson executed ten year supply agreements covering the
active pharmaceutical ingredient ("API") and finished dosage form of the
Product pursuant to which Halsey, at Watson's discretion, will manufacture
and supply Watson's requirements for the Product API and, where the Product
API is sourced from the Company, finish dosage forms of the Product. The
purchase price for the Product is payable in three approximately equal
installments as certain milestones are achieved. Management expects the
last of these milestones to be achieved by no later than the end of the
second fiscal quarter of year 2000.
The Company and Watson also executed a right of first negotiation agreement
providing Watson with a first right to negotiate the terms under which the
Company would manufacture and supply certain specified APIs and finished
dosage products to be developed by the Company. The right of first
negotiation agreement provides that upon Watson's exercise of its right to
negotiate for the supply of a particular product, the parties will
negotiate the specific terms of the manufacturing and supply arrangement,
including price, minimum purchase requirements, if any, territory and term.
In the event Watson does not exercise its right of first negotiation upon
receipt of written notice from the Company as to its receipt of applicable
governmental approval relating to a covered product, or in the event the
parties are unable to reach agreement on the material terms of a supply
arrangement relating to such product within sixty days of Watson's exercise
of its right to negotiate for such product, the Company may negotiate with
third parties for the supply, marketing and sale of the applicable product.
The right of first negotiation agreement has a term of ten years, subject
to extension in the absence of written notice from either party for two
additional periods of five years each. The right of first negotiation
agreement applies only to API and finished dosage products identified in
the agreement and does not otherwise prohibit the Company from developing
other APIs or finished dosage products for itself or third parties.
The Company and Watson also completed a manufacturing and supply agreement
providing for Watson's marketing and sale of the Company's existing core
products portfolio (the "Core Products Supply Agreement"). The Core
Products Supply Agreement obligates Watson to purchase a minimum amount of
approximately $18,363,000 (the "Minimum Purchase Amount") in core products
from the Company, in equal quarterly installments over a period of 18
months (the "Minimum Purchase Period"). At the expiration of the Minimum
Purchase Period, if Watson does not continue to satisfy the
F-33
Halsey Drug Co., Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999, 1998 and 1997
NOTE Q (CONTINUED)
Minimum Purchase Amount, the Company may market and sell the core products
on its own or through a third party. Pending the Company's development and
receipt of regulatory approval for its APIs and finished dosage products
currently under development, including, without limitation, the Product
sold to Watson, and the marketing and sale of same, of which there can be
no assurance, substantially all the Company's revenues expect to be derived
from the Core Products Supply Agreement with Watson.
The final component of the Company's strategic alliance with Watson
provided for Watson's extension of a $17,500,000 term loan to the Company.
The loan will be funded 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. 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 on March 31, 2003.
F-34
Dates Referenced Herein and Documents Incorporated By Reference
| Referenced-On Page |
|---|
| This 10-K405 Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 12/22/92 | | 25 |
| | 12/31/92 | | 25 |
| | 1/1/93 | | 26 |
| | 6/21/93 | | 4 | | 64 |
| | 6/29/93 | | 4 |
| | 6/30/93 | | 25 |
| | 9/15/93 | | 64 |
| | 12/31/93 | | 25 |
| | 1/12/94 | | 25 |
| | 3/31/94 | | 25 |
| | 5/31/94 | | 25 |
| | 6/30/94 | | 25 |
| | 7/21/94 | | 27 |
| | 10/31/94 | | 27 |
| | 12/1/94 | | 27 |
| | 3/21/95 | | 25 | | 58 |
| | 3/30/95 | | 27 |
| | 6/30/95 | | 26 | | | | | 10-Q/A |
| | 7/10/95 | | 26 |
| | 11/5/95 | | 65 |
| | 11/7/95 | | 15 |
| | 11/16/95 | | 26 |
| | 12/4/95 | | 28 |
| | 12/31/95 | | 5 | | 26 | | | 10-K/A |
| | 6/30/96 | | 26 | | | | | 10-Q/A, 10-Q |
| | 8/6/96 | | 26 | | 50 | | | 8-K |
| | 10/23/96 | | 4 |
| | 12/19/96 | | 5 |
| | 12/31/96 | | 5 | | 17 | | | 10-K/A, 10-K, NT 10-K |
| | 3/25/97 | | 26 |
| | 7/2/97 | | 14 |
| | 9/26/97 | | 5 |
| | 11/26/97 | | 5 |
| | 12/31/97 | | 17 | | 67 | | | NT 10-K, 10-K/A, 10-K |
| | 1/22/98 | | 5 |
| | 2/28/98 | | 4 | | 64 |
| | 3/5/98 | | 14 |
| | 3/10/98 | | 7 | | 50 | | | 8-K, 3 |
| | 3/13/98 | | 28 | | | | | 3 |
| | 3/24/98 | | 28 | | | | | 8-K, SC 13G |
| | 3/27/98 | | 4 | | 64 |
| | 6/1/98 | | 4 | | 64 |
| | 7/24/98 | | 5 |
| | 9/1/98 | | 29 |
| | 12/2/98 | | 29 |
| | 12/7/98 | | 29 |
| | 12/31/98 | | 17 | | 67 | | | 10-K/A, 10-K |
| | 3/8/99 | | 29 |
| | 3/15/99 | | 11 |
| | 3/17/99 | | 29 |
| | 3/22/99 | | 9 | | 62 |
| | 3/31/99 | | 54 | | | | | 10-Q/A, 10-Q, 4, 10-K |
| | 4/16/99 | | 8 | | 58 | | | PRE 14A |
| | 5/26/99 | | 7 | | 51 |
| | 5/28/99 | | 6 |
| | 5/30/99 | | 29 |
| | 7/21/99 | | 6 |
| | 7/27/99 | | 8 | | 52 |
| | 12/8/99 | | 21 | | 54 |
| For The Period Ended | | 12/31/99 | | 1 | | 67 | | | NT 10-K |
| | 3/20/00 | | 8 | | 51 |
| | 3/22/00 | | 8 | | 57 | | | 8-K |
| | 3/29/00 | | 6 | | 65 | | | 8-K |
| | 3/30/00 | | 35 | | | | | NT 10-K |
| | 3/31/00 | | 1 | | 30 | | | 10-Q |
| Filed On / Filed As Of | | 4/14/00 | | 32 |
| | 6/30/00 | | 14 | | | | | 10-Q |
| | 7/17/00 | | 52 |
| | 8/31/00 | | 8 | | 57 |
| | 9/1/00 | | 8 | | 57 |
| | 3/31/01 | | 8 | | 57 | | | 10-Q |
| | 8/6/01 | | 50 |
| | 3/21/02 | | 14 |
| | 3/10/03 | | 30 | | | | | SC 13D/A |
| | 3/15/03 | | 7 | | 51 |
| | 3/31/03 | | 7 | | 67 | | | 10-Q, NT 10-Q, NT 10-K |
| | 12/31/05 | | 8 | | 57 | | | 10-K |
| |
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