<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995 Commission File Number 1-6787
HEALTH-CHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2682801
(State of Incorporation) (I.R.S. Employer Identification
No.)
1212 Avenue of the Americas, 24th Floor, New York, NY 10036
(Address of principal executive offices)
Registrant's Telephone Number: 212-398-0700
The registrant 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, and has
been subject to such filing requirements for the past 90 days.
As of October 31, 1995, 7,982,424 shares of Common Stock, $.01 Par Value were
outstanding.
Page 1<PAGE>
<PAGE>
<TABLE>
HEALTH-CHEM CORPORATION Part I
CONSOLIDATED BALANCE SHEETS Item 1
(In thousands) Page 2
<CAPTION>
September 30, December 31,
ASSETS 1995 1994
<S> (Unaudited)
CURRENT ASSETS <C> <C>
Cash and cash equivalents $ 287 $ 624
Accounts receivable, net 6,394 5,224
Inventories (Note 3) 8,413 9,540
Other current assets 1,962 1,097
Total Current Assets 17,056 16,485
PROPERTY, PLANT & EQUIPMENT
Land and buildings 5,713 5,696
Other Property, Plant & Equipment 20,026 18,087
Total Property, Plant & Equipment 25,739 23,783
Less accumulated depreciation & amortization 13,626 12,419
Net Property, Plant & Equipment 12,113 11,364
NON-CURRENT ASSETS
Notes receivable 1,500 1,500
Cash surrender value of life insurance policies 1,888 1,808
Excess of cost over fair value of assets acquired 737 755
Other non-current assets 211 265
Total Non-Current Assets 4,336 4,328
TOTAL ASSETS $33,505 $32,177
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,912 $ 4,215
Accrued expenses and other current liabilities 2,829 3,069
Deferred and other income taxes payable 623 1,022
Total Current Liabilities 7,364 8,306
LONG-TERM LIABILITIES
10.375% Convertible Subordinated Debentures 11,000 12,500
Long-term bank debt (Note 6) 4,917 1,519
Other long-term debt 466 400
Deferred and other long-term income taxes 1,250 741
STOCKHOLDERS' EQUITY
Convertible special stock 7 7
Common stock 145 145
Additional paid in capital 18,287 18,281
Less stockholder notes receivable <148> <188>
Accumulated deficit <2,100> <1,851>
Subtotal 16,191 16,394
Less treasury stock, at cost <7,683> <7,683>
Total Stockholders' Equity 8,508 8,711
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,505 $32,177
<FN>
See Notes to Consolidated Financial Statements.<PAGE>
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except per share amounts) Page 3
<CAPTION> For The Nine Months
Ended September 30,
1995 1994
<S>
REVENUE: <C> <C>
Net sales $36,009 $34,771
Cost of goods sold 25,986 23,659
Gross profit 10,023 11,112
OPERATING EXPENSES:
Selling, general and administrative expense 7,024 6,396
Research and development expense 2,539 2,612
Net interest expense 1,038 1,065
Total operating expenses 10,601 10,073
INCOME <LOSS> FROM OPERATIONS <578> 1,039
Other income - net 389 517
INCOME <LOSS> FROM OPERATIONS BEFORE TAXES <189> 1,556
Income tax provision 63 610
INCOME <LOSS> BEFORE EXTRAORDINARY GAIN <252> 946
Extraordinary gain from repurchase of
debentures 3 3
NET INCOME <LOSS> $ <249> $ 949
Earnings per Common Share (Primary & Fully Diluted)
(Note 4):
Income <loss> before extraordinary gain $ <.03> $ .12
Extraordinary gain from repurchase of
debentures .00 .00
NET INCOME <LOSS> PER SHARE $ <.03> $ .12
Average number of common and common equivalent
shares outstanding excluding redeemable common
shares in 1994 (Note 4):
Primary 7,992 7,603
Fully Diluted 7,994 7,603
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except per share amounts) Page 4
<CAPTION>
For The Three Months
Ended September 30,
1995 1994
<S>
REVENUE: <C> <C>
Net sales $13,012 $11,811
Cost of goods sold 8,901 8,039
Gross profit 4,111 3,772
OPERATING EXPENSES:
Selling, general and administrative expense 2,416 2,096
Research and development expense 970 697
Net interest expense 359 358
Total operating expenses 3,745 3,151
INCOME FROM OPERATIONS 366 621
Other income - net 89 114
INCOME FROM OPERATIONS BEFORE TAXES 455 735
Income tax provision 186 318
INCOME BEFORE EXTRAORDINARY GAIN 269 417
Extraordinary gain from repurchase of
debentures 2 1
NET INCOME $ 271 $ 418
Earnings per Common Share (Primary & Fully Diluted)
(Note 4):
Income before extraordinary gain $ .03 $ .05
Extraordinary gain from repurchase of
debentures .00 .00
NET INCOME PER SHARE $ .03 $ .05
Average number of common and common equivalent
shares outstanding, excluding redeemable
common shares in 1994 (Note 4):
Primary 7,988 7,910
Fully diluted 7,988 7,910
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION Part I
CONSOLIDATED CASH FLOW STATEMENTS Item 1
(Unaudited) Page 5
(In thousands)
<CAPTION> For The Nine Months
Ended September 30,
1995 1994
<S>
Cash was Provided by <Used for>: <C> <C>
OPERATIONS:
Income <loss> from operations $ <252> $ 946
Adjustments to reconcile to net cash <used by>
provided by operations:
Depreciation and amortization 1,302 1,196
Deferred income taxes <104> 231
Changes in:
Accounts receivable <1,171> <711>
Inventories 1,127 <2,067>
Other current assets <619> 495
Other noncurrent assets <79> 109
Accounts payable <303> 670
Accrued expenses and other current liabilities 54 <744>
Interest and income taxes payable <463> 310
Other long term liabilities 266 0
Other, net 11 <110>
Net cash provided by <used for> operations <231> 325
INVESTING:
Additions to property, plant and equipment <2,007> <1,153>
Payments received on notes receivable 71 258
Proceeds on disposals of property, plant and equipment 11 11
Net cash used for investing <1,925> <884>
FINANCING:
Long-term debt proceeds 8,067 5,107
Long-term debt payments <4,669> <4,064>
Repurchase of convertible subordinated debentures <1,584> <384>
Purchase of redeemable common stock 0 <1,104>
Issuance of treasury stock 0 1,113
Stock options exercised 5 0
Net cash provided by financing 1,819 668
Net Increase <Decrease> in Cash and Cash Equivalents <337> 109
Cash and Cash Equivalents at beginning of period 624 460
Cash and Cash Equivalents at end of period $ 287 $ 569
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 945 $ 807
Cash paid during the period for income taxes 235 481
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 6
1. Basis of Presentation and Subsidiary Reorganization
The Consolidated Balance Sheet as of September 30, 1995, the Consolidated
Statements of Operations and the Consolidated Cash Flow Statements for the
interim periods ended September 30, 1995 and 1994 have been prepared by
the Company, without audit. In the opinion of the Company, all necessary
adjustments, consisting of normal recurring items, have been made to
present fairly the financial position, results of operations and cash
flows at September 30, 1995 and for all periods presented.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's December 31, 1994 Annual Report on Form 10-K. The results of
operations for the periods ended September 30, 1995 and 1994 are not
necessarily indicative of the operating results for the full years.
In April 1995, the Company's Board of Directors approved a plan to
realign certain of its business operations in order to separate its
transdermal pharmaceutical business from its hospital and industrial
laminated fabrics and environmental chemical business. As part of
such realignment, Hercon Laboratories Corporation ("Hercon")
effectively transferred its environmental chemical business to a
subsidiary of Health-Chem, Hercon Environmental Corporation.
Following the completion of the transfer of the environmental
business, the Company and its subsidiaries Transderm Laboratories
Corporation ("Transderm") and Herculite Products, Inc. ("Herculite")
entered into a Plan of Reorganization and Asset Exchange Agreement
effective August 31, 1995.
The Plan of Reorganization and Asset Exchange Agreement required:
. The transfer to Transderm of the manufacturing
facility in which Hercon's operations are conducted
and the 985 shares of Hercon common stock owned by
Herculite in exchange for the issuance by Transderm of
1,000,000 shares of its Redeemable Preferred Stock,
$10.00 par value, representing all of the authorized
preferred shares.
. Hercon to issue to the Company a $7,000,000, 9%
Subordinated Promissory Note in exchange for the
Company's long-term debt.
. Transderm to issue 40,000,000 shares of its authorized
60,000,000 shares of common stock, $.001 par value, in
exchange for the previously issued 50 shares of its
$.01 par value common stock.
. Transderm to pay the Company as it uses its net
operating loss and tax credit carryforwards to offset
future taxable income as a result of entering into a
Tax Sharing Agreement.
<PAGE>
HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
Transactions between Transderm, the Company, and the Company's
subsidiaries were properly eliminated in consolidation. At September
30, 1995 the above transactions had no effect on the consolidated
balance sheet and consolidated statements of operations.
2. Taxes on Income (In thousands) For the Nine Months
Ended September 30,
1995 1994
The income tax provision <benefit> includes:
State and local income taxes $ 102 $ 160
Federal income taxes <38> 451
Total $ 64 $ 611
Taxes on income are comprised of:
Currently payable $ 168 $ 380
Deferred <benefit> payable <104> 231
Total $ 64 $ 611
Taxes are charged to:
Continuing operations $ 63 $ 610
Extraordinary gain on repurchase of debentures 1 1
Total $ 64 $ 611
A reconciliation of taxes on income to the federal statutory rate is as
follows:
For the Nine Months
Ended September 30,
1995 1994
Tax provision <benefit> at statutory rate $ <63> $ 530
Increase <decrease> resulting from:
Proceeds from officers life insurance 0 <81>
Intangibles and officers life insurance
premiums 46 59
State and local taxes, net of federal tax benefit 66 100
Other 15 3
Tax provision $ 64 $ 611
<PAGE>
HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 8
3. Inventories (In thousands)
September 30, 1995 December 31, 1994
Raw materials $ 5,212 $ 5,222
Finished goods and work-in-process 3,201 4,318
Total Inventories $ 8,413 $ 9,540
4. Earnings Per Share
Primary and fully diluted earnings per share are based upon the
weighted average number of common and common equivalent shares
outstanding. Shares issuable upon exercise of dilutive stock options
are included in the number of common and common equivalent shares
outstanding for 1995 and 1994. Subordinated debentures are anti-
dilutive for all periods presented. Accretion of discount on
redeemable common stock (redeemed in July 1994) of $45,000 for the
nine months ended September 30, 1994 has been deducted from net income
and income before extraordinary gain for the purposes of computing
earnings per share for the respective periods.
5. Rights Offering
On September 18, 1995, the Securities and Exchange Commission declared
effective a registration statement covering subscription rights for shares
representing 10% of the outstanding common stock of Transderm. In
September 1995, subsequent to September 18, 1995, subscription rights to
purchase up to 4,000,000 shares of Transderm common stock for $.10 per
share were issued to holders of the Company's Common Stock. The Rights
Offering expired on November 10, 1995. A preliminary count indicated that
shareholders had subscribed to only approximately 2,960,000 shares of
Transderm pursuant to Basic Subscription Rights. However, rights to
purchase in excess of 5,560,000 additional shares were exercised pursuant
to Oversubscription privileges. Oversubscriptions are in the process of
being prorated.
Expenses of the Rights Offering are expected to consume all of the
proceeds to be received ($400,000). Expenses incurred through
September 30, 1995 ($397,000) have been deferred and are classified as
an other current asset.
6. Subsequent Event
On October 11, 1995, Pacific Combining Corporation ("Pacific"), a
subsidiary of Health-Chem, obtained a $1,750,000 term loan from The
First National Bank of Maryland ("FNBM"). Borrowings under the term
loan, as with the Company's $6,000,000 line of credit with FNBM, are
secured by a pledge of substantially all of the assets with the
exception of real estate of Pacific, the Company, and its other
operating subsidiaries. Unless Pacific elects otherwise in accordance
with the loan documents, borrowings under the term loan will bear
interest at the lender's prime rate plus .375%. The term loan
requires quarterly principal payments starting February 1996 through
November 2000 and expires on November 15, 2000 and is subject to
various financial covenants which are similar to the covenants of the
line of credit agreement.
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 9
Liquidity
The following measures of liquidity are derived from the Company's
Consolidated
Financial Statements:
September 30, December 31,
1995 1994
Working capital (current assets less current
liabilities, in thousands) $9,692 $8,179
Current ratio (current assets/current
liabilities) 2.3 2.0
Quick ratio (cash & receivables/current
liabilities) .9 .7
Working capital increased $1.5 million from December 31, 1994 to September 30,
1995 due to a $.6 million increase in current assets and a $.9 million
decrease in current liabilities. Increases in working capital were primarily
the result of increases in accounts receivable, net, and other current assets
of $1.2 million and $.9 million, respectively, along with decreases in
accounts payable, accrued expenses and other current liabilities, and deferred
and other income taxes payable of $.3 million, $.2 million and $.4 million,
respectively. These increases to working capital were partially offset by
decreases to cash & cash equivalents and inventory of $.3 million and $1.1
million, respectively. Synthetic fabric inventory has been reduced $1.5
million as compared to December 31, 1994 reflecting improved material
management from the implementation of the new computer system .
Cash used by operations and investing activities of $.2 million and $1.9
million, respectively, was partially offset by cash provided by financing
activities of $1.8 million for the nine months ended September 30, 1995.
The Company expects to fund $.7 million of debenture interest payments each
April and October and other periodic interest payments out of working capital.
The required $1.5 million sinking fund payment on the Company's subordinated
debentures due on April 15. 1995 was satisfied by application of $.5 million
debentures previously repurchased and by calling for redemption the remaining
$1 million. The Company owns an additional $.6 million of debentures which
may be used to meet the 1996 sinking fund requirement.
The Company has not paid cash dividends on its common stock and does not
anticipate doing so in the foreseeable future.
<PAGE>
Part I
Item 2
Page 10
Capital Resources
At September 30, 1995, the Company had borrowed $4.9 million on its $6.0
million line of credit from FNBM. The line of credit bears interest, at the
Company's option, at either the bank's prime rate or the London Inter-Bank
Offer Rate and is secured by the Company's assets with the exception of real
estate. The line of credit, which expires on October 15, 1997, is subject to
various financial covenants. At September 30, 1995, the Company was in
compliance with the covenants. It is the Company's practice to utilize the
line of credit to fund current obligations when required and to pay down the
line of credit when funds become available. Subsequent to September 30, 1995,
the Company paid $.8 million on the line of credit.
On October 11, 1995, Pacific borrowed $.8 million against the $1.8 million
term loan from FNBM (See Note 6). Proceeds from the term loan are being used
to finance capital expenditures and inventory associated with a new production
line Pacific is presently installing. Pacific intends to borrow the remaining
$1.0 million by the end of 1995.
During the nine months ended September 30, 1995, the Company purchased in
market transactions $.6 million principal amount of its 10.375% convertible
subordinated debentures for approximately $.6 million. The Company may
repurchase and retire or, if debentures are not available for purchase, the
Company may call for redemption the amount required to meet sinking fund
requirements.
The Company's debt to equity ratio was 3:1 at September 30, 1995 unchanged
from December 31, 1994.
Management believes 1995 capital expenditures, debenture repurchases, research
and development costs and other operating expenses will be funded with cash
generated from operations, supplemented by the utilization of the line of
credit and term loan. The Company estimates that 1995 capital expenditures
for property, plant and equipment will be approximately $3.0 million to $3.5
million. These capital expenditures will primarily consist of manufacturing
tooling and equipment and leasehold improvements.
Results of Operations
Sales increased $1.2 million, or 4%, for the nine months ended September 30,
1995 as compared to the same period in 1994. Sales of transdermal
nitroglycerin patches increased $1.4 million, offset by sales decreases of $.1
million each for synthetic fabrics and environmental products. Transdermal
nitroglycerin patch sales increased due partially to increased market demand
and partially due to distributors adjusting their inventories. Synthetic
fabrics sales are lower due primarily to timing of customer demand for certain
fabrics related to foreign and governmental sales. The environmental product
sales decrease is due primarily to the loss of a customer for the Japanese
Beetle Lures.
<PAGE>
Part I
Item 2
Page 11
Sales increased $1.2 million, or 10%, for the quarter ended September 30, 1995
as compared to the same period in 1994. Sales of transdermal nitroglycerin
patches, synthetic fabrics and environmental products increased $.9 million,
$.2 million and $.1 million, respectively. Transdermal nitroglycerin patch
sales increased due partially to market demand and partially due to
distributors adjusting their inventories. Synthetic fabrics sales are higher
due primarily to increased sales of fabrics used for general industrial
manufacturing, tents and awnings, partially offset by decreased sales related
to foreign and governmental sales. Environmental products sales increased due
primarily to an increase in sales of the Company's insecticides and lures.
Gross profit decreased $1.1 million, or 10%, and gross profit as a percentage
of sales decreased to 28% from 32% for the nine months ended September 30,
1995 as compared to the same period in 1994. Gross profit for synthetic
fabrics and environmental products decreased $2.1 million and $.1 million,
respectively, while transdermal nitroglycerin patch gross profit increased
$1.1 million as compared to the same period last year. Gross profit for
synthetic fabrics was lower due primarily to cost of sales increases of $1.7
million reflecting unfavorable manufacturing variances, rising raw material
costs and $.4 million for increased plant overhead. Transdermal nitroglycerin
patch gross profit increased due primarily to increased sales volumes of
higher margin products.
Gross profit increased $.3 million, or 9%, and gross profit as a percentage of
sales was unchanged at 32% for the three months ended September 30, 1995 as
compared to the same period in 1994. Gross profit for transdermal
nitroglycerin patches and environmental products increased $.6 million and $.1
million, respectively, while synthetic fabrics gross profit decreased $.3
million. These increases and decreases in gross profit were attributable to
the factors noted above for the nine months ended September 30, 1995.
Selling, general and administrative expenses increased $.6 million for the
nine months ended September 30, 1995 as compared to the same period in 1994.
The increase is due primarily to increases in payroll-related expenses of $.6
million. The remaining increase is partially due to a non-recurring reduction
to 1994 expenses from a receipt for life insurance proceeds relating to a
former officer. For the quarter ended September 30, 1995, selling, general
and administrative expenses increased $.3 million due primarily to increases
for payroll-related expenses of $.2 million.
Research and development expenses decreased $.1 million for the nine months
ended September 30, 1995 as compared to the same period in 1994. These
decreases are due primarily to lower outside testing expenses partially offset
by higher payroll related costs related to pharmaceutical product research.
The Company believes this decrease is temporary and anticipates research and
development expenses in 1995 related to pharmaceutical products to equal or
exceed 1994 levels as new studies for patch applications are developed from
initial formulation work through commercial scale-up and current studies
advance through various phases of completion.
Research and development expenses increased $.3 million for the three months
ended September 30, 1995 as compared to the same period in 1994. The increase
is due primarily to higher outside testing and payroll related expenses
related to pharmaceutical product research.
<PAGE>
Part I
Item 2
Page 12
Interest expense decreased slightly for the nine months ended September 30,
1995 and is approximately the same for the three months ended September 30,
1995 as compared to the same periods in 1994. Total debt has increased $2.1
at September 30, 1995 as compared to September 30, 1994, however the average
interest rate is lower. The balance on the Company's long-term line of credit
increased $3.9 million while the balance of the Company's subordinated
debentures decreased $1.8 million at September 30, 1995 as compared to
September 30, 1994.
Other income - net decreased $.1 million for the nine months ended September
30, 1995 and decreased slightly for the three months ended September 30, 1995
as compared to the same periods in 1994. The decrease was due primarily to
non-recurring income producing items in 1994.
Income from operations before taxes decreased $1.7 million and $.3 million for
the nine months and three months ended September 30, 1995, respectively as
compared to the same periods in 1994 due primarily to the factors discussed
above. Income tax provision or benefit varies with the amount and nature of
the components of income or loss from operations before income taxes (See Note
2). For the nine months ended September 30, 1995 the Company reported a $.1
million tax provision. Even though the Company reported a loss from
operations for the nine months ended September 30, 1995, the federal tax
benefit resulting from this loss was offset by the provision for state taxes
and non-deductible expenses. The provision for state taxes was generated from
income associated with the sale of transdermal nitroglycerin patches (See Note
2).
The results of operations for the periods ended September 30, 1995 and 1994
are not necessarily indicative of the operating results for the full years.
<PAGE>
<PAGE>
Part II
Item 1
Page 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
1. In August 1995, Key Pharmaceuticals, Inc., a subsidiary of Schering-
Plough Corporation ("Key"), commenced an action against the Company's
Hercon Laboratories Corporation subsidiary ("Hercon") in the United
States District Court for the District of Delaware alleging that
Hercon's submission to the United States Food and Drug Administration
("FDA") of three Abbreviated New Drug Applications ("ANDAs") relating
to some of Hercon's improved transdermal nitroglycerin products for
which the Company is awaiting FDA approval constitutes infringement of
Key's patent for its Nitro-Dur(R) products. Key seeks certain
injunctive relief, monetary damages if commercial manufacture, use or
sale occurs, and a judgment that the effective date for FDA approval
of the above-referenced ANDAs be not earlier than February 16, 2010,
the expiration date of Key's patent.
By Answer and Counterclaim dated August 28, 1995, Hercon denied the
material allegations of the complaint, asserting, among other things,
that the Key patent is invalid and unenforceable and that Hercon has
not infringed and does not infringe any claim of the patent. In its
counterclaim against Key, Hercon seeks a declaratory judgment of
patent noninfringement, invalidity and unenforceability. Discovery in
this action has recently commenced. In the opinion of management,
Key's claims are without merit.
2. In October 1995, Gershon Yormack, a stockholder of the Company,
initiated an action in the Delaware Chancery Court (New Castle County)
against the Company, its directors and its subsidiary, Transderm
Laboratories Corporation ("Transderm"), seeking injunctive and
declaratory relief with respect to certain options to purchase
Transderm common stock to be granted to each of Marvin M. Speiser, the
Company's Chairman of the Board and President, and Robert D. Speiser,
the Company's Executive Vice President, in 1995.
Pursuant to Employment Agreements entered into in April 1995, the
Company is obligated to cause Transderm to issue an option to purchase
shares of Transderm's common stock at an exercise price of $.10 per
share to each of Marvin M. Speiser and Robert D. Speiser. The
plaintiff alleges that this exercise price, which is the same per
share price as the subscription price for Transderm common stock
currently being offered by the Company to stockholders under a
registered subscription rights offering (via a prospectus dated
September 18, 1995), is substantially less than the fair market value
of such Transderm common stock. The plaintiff does not seek to enjoin
or otherwise to interfere with the rights offering or its
consummation. After preliminary review, the Company believes that the
action is entirely without merit and intends to defend it vigorously.
<PAGE> Part II
Item 6
Page 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Modification Agreement dated August 31, 1995 by and between The
First National Bank of Maryland, the Company, Hercon, Herculite
Products, Inc. ("Herculite"), Pacific Combining Corporation
("Pacific"), Hercon Environmental Corporation ("Environmental")
and Transderm Laboratories Corporation ("Transderm"), filed as
Exhibit 10.6(b) to Amendment No. 1 filed with the Commission on
September 6, 1995 ("Amendment No. 1") to Transderm's Registration
Statement on Form S-1 No. 33-95080 filed with the Commission on
July 28, 1995 and incorporated herein by reference.
10.2 $7,000,000 principal amount Subordinated Promissory Note of
Hercon, filed as Exhibit 10.8 to Amendment No. 1 and incorporated
herein by reference.
10.3 Corporate Services Agreement dated as of August 31, 1995 between
the Company and Transderm, filed as Exhibit 10.9 to Amendment No.
1 and incorporated herein by reference.
10.4 Tax Sharing Agreement dated as of August 31, 1995 between the
Company and Transderm filed as Exhibit 10.10 Amendment No. 1 and
incorporated herein by reference.
10.5 Second Modification Agreement dated as of October 11, 1995 by and
between the Company, Hercon, Herculite, Pacific, Environmental and
Transderm, filed herewith beginning on page 15.
10.6 Loan and Security Agreement dated as of October 11, 1995 by and
between Pacific, the Company, Hercon, Herculite, Environmental and
Transderm and The First National Bank of Maryland, filed as
Exhibit 1 to the Company's October 11, 1995 Current Report on Form
8-K and incorporated herein by reference.
b. During the three months ended September 30, 1995, the Company did not file
any reports on Form 8-K. On October 24, 1995, the Company filed a report
on Form 8-K with respect to a term loan obtained by Pacific from The First
National Bank of Maryland and guaranteed by the Company, Hercon,
Herculite, Environmental and Transderm.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH-CHEM CORPORATION
November 13, 1995 /s/ Marvin M. Speiser
By: Marvin M. Speiser
Chairman of the Board and
President (Principal
Executive Officer)
/s/ Paul R. Moeller
By: Paul R. Moeller
Vice President - Finance
(Principal Financial Officer)
</TABLE>
SECOND MODIFICATION AGREEMENT
THIS SECOND MODIFICATION AGREEMENT ("AGREEMENT") is made as
of the 11th day of October, 1995 by and between HEALTH-CHEM
CORPORATION, a Delaware corporation, HERCON LABORATORIES
CORPORATION, a Delaware corporation, HERCULITE PRODUCTS, INC.,
a New York corporation, PACIFIC COMBINING CORP., a California
corporation, HERCON ENVIRONMENTAL CORPORATION, a Delaware
corporation and TRANSDERM LABORATORIES CORPORATION, a Delaware
corporation (collectively, "BORROWERS") and THE FIRST NATIONAL
BANK OF MARYLAND, a national banking association ("LENDER").
RECITALS
Pursuant to the terms and provisions of a Loan And Security
Agreement dated July 15, 1994 by and between the LENDER,
HEALTH-CHEM CORPORATION, HERCON LABORATORIES CORPORATION,
HERCULITE PRODUCTS, INC., and PACIFIC COMBINING CORP., as
amended pursuant to the terms of a Modification Agreement dated
August 31, 1995 by and between the BORROWERS and the LENDER
("LOAN AGREEMENT"), the LENDER is providing the BORROWERS a
revolving line of credit in the maximum principal amount of Six
Million Dollars ($6,000,000.00) ("LOAN"). The LOAN is
evidenced by an Amended and Restated Promissory Note dated
August 31, 1995 from the BORROWERS to the order of the LENDER
in the stated principal amount of Six Million Dollars
($6,000,000.00) ("NOTE").
The BORROWERS have requested that the LENDER: (a) extend
the maturity date of the REVOLVER; and (b) modify certain of
the covenants contained in the LOAN AGREEMENT. The LENDER is
willing to consent to the BORROWERS' request subject to the
terms and provisions contained in this AGREEMENT.
NOW, THEREFORE, in consideration of the premises, and other
good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties agree as follows:
SECTION 1. RECITALS. The parties hereto acknowledge the
accuracy of the above recitals and hereby incorporate the
recitals into this AGREEMENT.
SECTION 2. AMENDMENT TO NOTE. The NOTE is hereby
amended by deleting the date "July 15, 1997" from the first
paragraph of the NOTE, which paragraph commences with the words
"FOR VALUE RECEIVED," and substituting in lieu thereof the date
"October 15, 1997." It is the intention of the parties that
the "MATURITY DATE," as that term is used in the NOTE, shall be
October 15, 1997.
<PAGE>
SECTION 3. AMENDMENT TO LOAN AGREEMENT. The LOAN
AGREEMENT is hereby amended as follows:
(a) Section 1.18. Section 1.18 of the LOAN AGREEMENT
is hereby amended by deleting its present language in its
entirety and substituting in lieu thereof the following:
Section 1.18. Fixed Charge Coverage. The term
"FIXED CHARGE COVERAGE" means, for the four fiscal
quarters of determination, the number obtained by
dividing: (a) the sum of the consolidated net
profits (before minority interests) of the
BORROWERS (minus dividends) plus consolidated
depreciation expense, consolidated interest
expense and consolidated lease expense, by (b) the
sum of (i) consolidated interest expense, (ii)
consolidated lease expense and (iii) consolidated
prospective current portion of long-term debt,
including payments to be made to the sinking fund
for the SUBORDINATED INDENTURE, provided that for
purposes of determining the prospective current
portion of long-term debt for this definition any
prepayments on long-term debt (except for up to
Five Hundred Thousand Dollars ($500,000.00) of
either early sinking fund payments under the
SUBORDINATED INDENTURE or purchases of portions of
the INDEBTEDNESS under the SUBORDINATED INDENTURE,
during the period between July 1, 1995 and
September 30, 1996, inclusive) shall be deemed to
be applied in the inverse order of scheduled
maturities.
(b) Section 1.48. Article 1 of the LOAN AGREEMENT is
hereby amended by inserting after the presently existing
Section 1.47 the following new section:
Section 1.48. Term Loan. The term "TERM LOAN"
means the term loan in the maximum principal
amount of One Million Seven Hundred Fifty Thousand
Dollars ($1,750,000.00) being provided by the
LENDER to PACIFIC COMBINING CORP., a California
corporation, pursuant to the terms and provisions
of a Loan And Security Agreement dated October 11,
1995, as the same may be hereafter amended or
modified.
(c) Section 2.1. Section 2.1 of the LOAN AGREEMENT is
hereby amended by deleting its present language in its entirety
and substituting in lieu thereof the following:
Section 2.1. Advances of Loan Proceeds. Subject
to the continued satisfaction of all conditions
precedent to the making of advances hereunder, and
the continued absence of any event, circumstance,
<PAGE>
act or omission which with the giving of notice,
the passage of time, or both would constitute an
EVENT OF DEFAULT, the LENDER shall advance to the
BORROWERS by depositing into the COMMERCIAL
ACCOUNT from time to time such sums as any
BORROWER may request, provided that the aggregate
outstanding principal balance of the LOAN at any
one time shall never exceed the lesser of: (a)
Six Million Dollars ($6,000,000.00) ("DOLLAR
CAP"); or (b) the sum of (i) eighty percent (80%)
of the face amount of billed ELIGIBLE ACCOUNTS,
plus (ii) thirty-five percent (35%) of the value
(i.e., the lower of the BORROWERS' manufacturing
costs and the lowest selling price) of the
BORROWERS' INVENTORY, minus (iii) the principal
balance outstanding under the TERM LOAN minus Five
Hundred Thousand Dollars ($500,000.00). The
amount of the DOLLAR CAP shall be reduced, from
time to time, by the aggregate amount of "Equity
Proceeds" (as hereafter defined) received by any
BORROWER, each such reduction to occur five (5)
calendar days after a BORROWER'S receipt of Equity
Proceeds. As used herein, the term "Equity
Proceeds" means an amount equal to (a) the net
proceeds obtained by any BORROWER in connection
with any sale or offering of any equity interest
in any of the BORROWERS (excluding net proceeds
obtained in the offering made, or to be made, in
1995 in connection with equity interests in
Transderm Laboratories Corporation and net
proceeds obtained by the exercise of any presently
existing stock options for stock in Health-Chem
Corporation), minus (b) the portion of such net
proceeds which have been paid to the LENDER to
prepay all or a portion of the TERM LOAN. The
BORROWERS shall not request any advance under the
LOAN which would cause the aggregate amount of
advances made to or for the BORROWERS and
outstanding under the LOAN DOCUMENTS to exceed the
limitations as to the maximum amount of advances
as herein set forth, or as set from time to time
by the LENDER. In the event the principal amount
outstanding under the LOAN ever exceeds the
maximum amount which may be outstanding pursuant
to the above limitations the BORROWERS shall
immediately, upon demand of the LENDER, reduce the
principal amount outstanding under the LOAN to an
amount which does not exceed the above
limitations. Any termination of the LOAN pursuant
to the terms of this AGREEMENT, shall relieve the
LENDER of the LENDER'S obligation to lend money or
to make financial accommodations to or for the
BORROWERS and the BORROWER'S account, and shall in
no way release, terminate, discharge or excuse the
<PAGE>
BORROWERS from their absolute duty to pay and
perform the obligations.
(d) Section 2.3. Section 2.3 of the LOAN AGREEMENT is
hereby amended by deleting the date "July 15, 1997" and
substituting in lieu thereof the date "October 15, 1997."
(e) Section 2.5.a. Article 2 of the LOAN AGREEMENT is
hereby amended by inserting immediately after the presently
existing Section 2.5 the following new section:
Section 2.5.a. Quarterly Fee. The BORROWERS shall
pay to the LENDER a quarterly fee equal to one-
quarter of one percent (.25%) per annum of the
DOLLAR CAP as of the end of each fiscal quarter of
the BORROWERS in which the FIXED CHARGE COVERAGE
of the BORROWERS for the immediately preceding
four fiscal quarters is less than 1.25. Such
quarterly fee is payable on the same date the
certificate described in Section 6.17.c is
required to be delivered to the LENDER.
(f) Subsection 6.24.c. Subsection 6.24.c of the LOAN
AGREEMENT is hereby amended by deleting its present language in
its entirety and substituting in lieu thereof the following:
Subsection 6.24.c. Fixed Charge Coverage. As of
the end of each fiscal quarter of the BORROWERS,
the BORROWERS shall maintain on a consolidated
basis a FIXED CHARGE COVERAGE for the immediately
preceding four fiscal quarters of not less than:
i) 1.0 as of the end of the fiscal quarter ending
September 30, 1995; ii) 1.05 as of the end of the
fiscal quarters ending December 31, 1995 and March
31, 1996; iii) 1.2 as of the end of the fiscal
quarters ending June 30, 1996 and September 30,
1996; and iv) 1.25 as of the end of each fiscal
quarter after June 30, 1996.
(g) Section 7.7. Section 7.7 of the LOAN AGREEMENT is
hereby amended by deleting its present language in its entirety
and substituting in lieu thereof the following:
Section 7.7. Capital Expenditures. The
BORROWERS, on a consolidated basis, shall not make
any CAPITAL EXPENDITURES in excess of: (a) Four
Million Two Hundred Thousand Dollars
($4,200,000.00) in the BORROWERS' 1995 FISCAL
YEAR; (b) Seven Hundred Fifty Thousand Dollars
($750,000.00) in the BORROWERS' 1996 FISCAL YEAR;
and (c) One Million Five Hundred Thousand Dollars
($1,500,000.00) in any of the BORROWERS' FISCAL
YEARS after 1996; provided, however, that in the
<PAGE>
event that the BORROWERS do not make CAPITAL
EXPENDITURES in an aggregate amount up to the
maximum amount permitted above in any one FISCAL
YEAR, the difference between the maximum amount
permitted above and the actual amount of CAPITAL
EXPENDITURES made by the BORROWERS may be spent on
CAPITAL EXPENDITURES in the immediately succeeding
FISCAL YEAR in addition to the maximum amount set
forth above.
(h) Section 7.13. Article 7 of the LOAN AGREEMENT is
hereby amended by inserting immediately after the presently
existing Section 7.12 the following new section:
Section 7.13. Subordinated Indenture. The
BORROWERS shall not prepay any INDEBTEDNESS under
the SUBORDINATED INDENTURE or acquire portions of
such INDEBTEDNESS which would result in the
aggregate amount of such prepayments and
acquisitions to exceed the amount of One Million
Five Hundred Thousand Dollars ($1,500,000.00)
(excluding prepayments and acquisitions which have
reduced previously due payments on the sinking
fund established by the SUBORDINATED INDENTURE).
SECTION 4. OTHER TERMS. Except as specifically modified
herein, all other terms and provisions of the NOTE, the LOAN
AGREEMENT and all documents and agreements evidencing, securing
or otherwise documenting the LOAN (collectively, "LOAN
DOCUMENTS") remain in full force and effect and are hereby
ratified and confirmed. It is the specific intention of the
parties hereto that the modifications contained herein shall
not constitute a novation of any of the BORROWERS' obligations
to the LENDER.
SECTION 5. WARRANTIES AND REPRESENTATIONS. As an
inducement to the LENDER to enter into this AGREEMENT, the
BORROWERS make the following representations and warranties to
the LENDER and acknowledge the LENDER'S justifiable reliance
thereon:
(a) No BORROWER is in default under any of the LOAN
DOCUMENTS;
(b) The LOAN DOCUMENTS, as modified and amended
herein, are the valid and binding obligations of each of the
BORROWERS and are fully enforceable in accordance with their
terms; and
(c) The LENDER'S security interests and liens set
forth in the LOAN DOCUMENTS in the assets of each of the
BORROWERS (excluding real estate) secure all of each BORROWER'S
obligations, whether now existing or hereafter incurred, to the
LENDER under the LOAN DOCUMENTS, as amended and modified
herein.
<PAGE>
SECTION 6. ENFORCEABILITY. This AGREEMENT shall be
binding and enforceable upon and inure to the benefit of the
LENDER, the BORROWERS and their respective successor and
assigns.
SECTION 7. FEES AND EXPENSES. The BORROWERS shall pay
all of the fees, costs and expenses, including the LENDER'S
counsel fees and expenses, in connection with the negotiation
and preparation of this AGREEMENT.
SECTION 8. CHOICE OF LAW. This AGREEMENT and all of the
LOAN DOCUMENTS shall be governed by and enforced pursuant to,
the internal laws of the State of Maryland, and the parties
hereto consent to the non-exclusive jurisdiction and venue of
the Circuit Court of any county in the State of Maryland, the
Circuit Court for the City of Baltimore and the State of
Maryland, or the U.S. District Court for the District of
Maryland.
SECTION 9. WAIVER OF JURY TRIAL. The parties hereto
each hereby waive the right to a trial by jury in any action,
suit or proceeding arising out of or related to the LOAN or
this AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this SECOND
MODIFICATION AGREEMENT with the specific intention of creating
a document under seal as of the day and year first above
written.
WITNESS/ATTEST: BORROWERS:
HEALTH-CHEM CORPORATION,
A Delaware Corporation
_________________________ By: _______________________(SEAL)
Marvin M. Speiser,
Chairman of the Board
HERCON LABORATORIES CORPORATION,
A Delaware Corporation
_________________________ By: _______________________(SEAL)
Marvin M. Speiser,
Chairman of the Board
HERCULITE PRODUCTS, INC.,
A New York Corporation
_________________________ By: _______________________(SEAL)
Marvin M. Speiser,
Chairman of the Board
<PAGE>
WITNESS/ATTEST: PACIFIC COMBINING CORP.,
A California Corporation
_________________________ By: _______________________(SEAL)
Name: __________________
Title: __________________
HERCON ENVIRONMENTAL CORPORATION,
A Delaware Corporation
_________________________ By: _______________________(SEAL)
Name: __________________
Title: __________________
TRANSDERM LABORATORIES CORPORATION,
A Delaware Corporation
_________________________ By: _______________________(SEAL)
Name: __________________
Title: __________________
LENDER:
THE FIRST NATIONAL BANK OF MARYLAND,
A National Banking Association
_________________________ By: _______________________(SEAL)
Name:____________________
Title:___________________
ACKNOWLEDGMENTS
STATE OF MARYLAND, CITY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY that on this _____ day of October, 1995,
before me, the undersigned Notary Public of the State
aforesaid, personally appeared _____________________, and
acknowledged himself to be the ___________________ of HEALTH-
CHEM CORPORATION, a Delaware corporation, and that he, as such
_____________ being authorized so to do, executed the foregoing
<PAGE>
instrument for the purposes therein contained by signing the
name of HEALTH-CHEM CORPORATION by himself as _________.
IN WITNESS MY Hand and Notarial Seal.
___________________________(SEAL)
NOTARY PUBLIC
My Commission Expires:
_____________________
STATE OF MARYLAND, CITY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY that on this _____ day of October, 1995,
before me, the undersigned Notary Public of the State
aforesaid, personally appeared MARVIN M. SPEISER, and
acknowledged himself to be the Chairman of the Board of HERCON
LABORATORIES CORPORATION, a Delaware corporation, and that he,
as such Chairman of the Board being authorized so to do,
executed the foregoing instrument for the purposes therein
contained by signing the name of HERCON LABORATORIES
CORPORATION by himself as Chairman of the Board.
IN WITNESS MY Hand and Notarial Seal.
___________________________(SEAL)
NOTARY PUBLIC
My Commission Expires:
_____________________
STATE OF MARYLAND, CITY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY that on this _____ day of October, 1995,
before me, the undersigned Notary Public of the State
aforesaid, personally appeared MARVIN M. SPEISER, and
acknowledged himself to be the Chairman of the Board of
HERCULITE PRODUCTS, INC., a New York corporation, and that he,
as such Chairman of the Board being authorized so to do,
executed the foregoing instrument for the purposes therein
contained by signing the name of HERCULITE PRODUCTS, INC. by
himself as Chairman of the Board.
IN WITNESS MY Hand and Notarial Seal.
___________________________(SEAL)
NOTARY PUBLIC
My Commission Expires:
_____________________
<PAGE>
STATE OF MARYLAND, CITY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY that on this _____ day of October, 1995,
before me, the undersigned Notary Public of the State
aforesaid, personally appeared _____________________, and
acknowledged himself to be the ___________________ of PACIFIC
COMBINING CORP., a California corporation, and that he, as such
_____________ being authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the
name of PACIFIC COMBINING CORP. by himself as _________.
IN WITNESS MY Hand and Notarial Seal.
___________________________(SEAL)
NOTARY PUBLIC
My Commission Expires:
_____________________
STATE OF MARYLAND, CITY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY that on this _____ day of October, 1995,
before me, the undersigned Notary Public of the State
aforesaid, personally appeared _____________________, and
acknowledged himself to be the ______________________ of HERCON
ENVIRONMENTAL CORPORATION, a Delaware corporation, and that he,
as such _____________ being authorized so to do, executed the
foregoing instrument for the purposes therein contained by
signing the name of HERCON ENVIRONMENTAL CORPORATION by himself
as _______________.
IN WITNESS MY Hand and Notarial Seal.
___________________________(SEAL)
NOTARY PUBLIC
My Commission Expires:
_____________________
STATE OF _______________, CITY/COUNTY OF _______________, TO
WIT:
I HEREBY CERTIFY that on this _____ day of October, 1995,
before me, the undersigned Notary Public of the State
aforesaid, personally appeared _____________________, and
acknowledged himself to be the ______________________ of
TRANSDERM LABORATORIES CORPORATION, a Delaware corporation, and
that he, as such _____________ being authorized so to do,
executed the foregoing instrument for the purposes therein
<PAGE>
contained by signing the name of TRANSDERM LABORATORIES
CORPORATION by himself as _________________.
IN WITNESS MY Hand and Notarial Seal.
___________________________(SEAL)
NOTARY PUBLIC
My Commission Expires:
_____________________
STATE OF MARYLAND, CITY OF BALTIMORE, TO WIT:
I HEREBY CERTIFY, that on this ____ day of October, 1995,
before me, the undersigned a Notary Public of the State of
Maryland, personally appeared GARTH C. HARDING, who
acknowledged himself to be a Vice President of THE FIRST
NATIONAL BANK OF MARYLAND, a national banking association, and
acknowledged that he, as such Vice President, being authorized
so to do, executed the foregoing instrument for the purposes
therein contained by signing the name of THE FIRST NATIONAL
BANK OF MARYLAND by himself as Vice President.
IN WITNESS MY Hand and Notarial Seal.
___________________________(SEAL)
NOTARY PUBLIC
My Commission Expires:
_____________________
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 287
<SECURITIES> 0
<RECEIVABLES> 6759
<ALLOWANCES> (365)
<INVENTORY> 8413
<CURRENT-ASSETS> 17056
<PP&E> 25739
<DEPRECIATION> (13626)
<TOTAL-ASSETS> 33505
<CURRENT-LIABILITIES> 7364
<BONDS> 11844
<COMMON> 145
0
0
<OTHER-SE> 8508
<TOTAL-LIABILITY-AND-EQUITY> 33505
<SALES> 36009
<TOTAL-REVENUES> 36009
<CGS> 25986
<TOTAL-COSTS> 25986
<OTHER-EXPENSES> 9563
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1038
<INCOME-PRETAX> (189)
<INCOME-TAX> 63
<INCOME-CONTINUING> (252)
<DISCONTINUED> 0
<EXTRAORDINARY> 3
<CHANGES> 0
<NET-INCOME> (249)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
