<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 June 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 July 31, 1995, 7,980,424 shares of Common Stock, $.01 Par Value were
outstanding.
Page 1
<PAGE> HEALTH-CHEM CORPORATION Part I
<TABLE> CONSOLIDATED BALANCE SHEETS Item 1
(In thousands) Page 2
<CAPTION>
June 30, December 31,
<S> 1995 1994
ASSETS (Unaudited)
CURRENT ASSETS <C> <C>
Cash and cash equivalents $ 276 $ 624
Accounts receivable, net 6,384 5,224
Inventories (Note 3) 9,163 9,540
Other current assets 1,388 1,097
Total Current Assets 17,211 16,485
PROPERTY, PLANT & EQUIPMENT
Land and buildings 5,696 5,696
Other Property, Plant & Equipment 19,147 18,087
Total Property, Plant & Equipment 24,843 23,783
Less accumulated depreciation & amortization 13,219 12,419
Net Property, Plant & Equipment 11,624 11,364
NON-CURRENT ASSETS
Notes receivable 1,500 1,500
Cash surrender value of life insurance policies 1,846 1,808
Excess of cost over fair value of assets acquired 743 755
Other non-current assets 227 265
Total Non-Current Assets 4,316 4,328
TOTAL ASSETS $33,151 $32,177
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,704 $ 4,215
Accrued expenses and other current liabilities 2,528 3,069
Deferred and other income taxes payable 599 1,022
Total Current Liabilities 7,831 8,306
LONG-TERM LIABILITIES
10.375% Convertible Subordinated Debentures 11,000 12,500
Long-term bank debt 4,920 1,519
Other long-term debt 200 400
Deferred and other long-term income taxes 836 741
Other long-term liabilities 133 0
REDEEMABLE COMMON STOCK 0 0
STOCKHOLDERS' EQUITY
Convertible special stock 7 7
Common stock 145 145
Additional paid in capital 18,281 18,281
Less stockholder notes receivable <148> <188>
Accumulated deficit <2,371> <1,851>
Subtotal 15,914 16,394
Less treasury stock, at cost <7,683> <7,683>
Total Stockholders' Equity 8,231 8,711
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,151 $32,177
<FN>
See Notes to Consolidated Financial Statements.<PAGE>
<PAGE> HEALTH-CHEM CORPORATION Part I
</TABLE>
<TABLE> CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except per share amounts) Page 3
<CAPTION>
For The Six Months
Ended June 30,
<S> 1995 1994
REVENUE: <C> <C>
Net sales $22,997 $22,960
Cost of goods sold 17,085 15,620
Gross profit 5,912 7,340
OPERATING EXPENSES:
Selling, general and administrative expense 4,608 4,300
Research and development expense 1,569 1,915
Net interest expense 679 707
Total operating expenses 6,856 6,922
INCOME <LOSS> FROM OPERATIONS <944> 418
Other income - net 300 403
INCOME <LOSS> FROM OPERATIONS BEFORE TAXES <644> 821
Income tax provision <benefit> <123> 292
INCOME <LOSS> BEFORE EXTRAORDINARY ITEM <521> 529
Extraordinary gain from repurchase of debentures 1 2
NET INCOME <LOSS> $ <520> $ 531
Earnings per Common Share (Primary & Fully Diluted)
(Note 4):
Income <Loss> before extraordinary item $ <0.07> $ 0.07
Extraordinary gain from repurchase of debentures 0.00 0.00
NET INCOME <LOSS> PER SHARE $ <0.07> $ 0.07
Average number of common and common equivalent
shares outstanding excluding redeemable
common shares in 1994 (Note 4):
Primary 7,994 7,450
Fully Diluted 7,997 7,450
<FN>
See Notes to Consolidated Financial Statements.
<PAGE> HEALTH-CHEM CORPORATION Part I
</TABLE>
<TABLE> CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except per share amounts) Page 4
<CAPTION>
For The Three Months
Ended June 30,
<S> 1995 1994
REVENUE: <C> <C>
Net sales $11,977 $12,196
Cost of goods sold 9,344 8,224
Gross profit 2,633 3,972
OPERATING EXPENSES:
Selling, general and administrative expense 2,473 2,350
Research and development expense 783 849
Net interest expense 339 372
Total operating expenses 3,595 3,571
INCOME <LOSS> FROM OPERATIONS <962> 401
Other income - net 212 203
INCOME <LOSS> FROM OPERATIONS BEFORE TAXES
AND MINORITY INTEREST <750> 604
Income tax provision <benefit> <190> 268
INCOME <LOSS> BEFORE MINORITY INTEREST <560> 336
Minority interest in losses of subsidiary 16 0
INCOME <LOSS> BEFORE EXTRAORDINARY ITEM <544> 336
Extraordinary gain <loss> from repurchase
of debentures <3> 1
NET INCOME <LOSS> $ <547> $ 337
Earnings per Common Share (Primary & Fully Diluted)
(Note 4):
Income <Loss> before extraordinary item $ <0.07> $ 0.04
Extraordinary gain <loss> from repurchase of
debentures 0.00 0.00
NET INCOME <LOSS> PER SHARE $ <0.07> $ 0.04
Average number of common and common equivalent
shares outstanding, excluding redeemable
common shares in 1994 (Note 4):
Primary 7,993 7,433
Fully diluted 7,994 7,433
<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 Six Months
Ended June 30,
1995 1994
<S>
Cash was Provided by <Used for>: <C> <C>
OPERATIONS:
Income <Loss> before extraordinary item $ <521> $ 529
Adjustments to reconcile to net cash provided by
<used for> operations:
Depreciation and amortization 844 817
Deferred income taxes <232> 67
Changes in:
Accounts receivable <1,160> <1,350>
Inventories 378 <1,303>
Other current assets <330> 299
Other non-current assets <39> 117
Accounts payable 489 1,199
Accrued expenses and other current liabilities <721> <205>
Interest and income taxes payable <129> <46>
Other long-term liabilities 133 0
Other, net 0 <109>
Net cash provided by <used for> operations <1,288> 15
INVESTING:
Additions to property, plant and equipment <1,061> <851>
Proceeds on disposals of property, plant and equipment 0 11
Payments received on notes receivable 71 258
Net cash used for investing <990> <582>
FINANCING:
Long-term debt proceeds 6,301 2,600
Long-term debt payments <2,900> <1,200>
Repurchase of convertible subordinated debentures <1,471> <225>
Net cash provided by financing 1,930 1,175
Net Increase <Decrease> in Cash and Cash Equivalents <348> 608
Cash and Cash Equivalents at beginning of period 624 460
Cash and Cash Equivalents at end of period $ 276 $ 1,068
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for interest $ 831 $ 780
Cash paid during the period for income taxes 200 310
<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
The Consolidated Balance Sheet as of June 30, 1995, the Consolidated
Statements of Operations and the Consolidated Cash Flow Statements for the
interim periods ended June 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 June
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 June 30, 1995 and 1994 are not necessarily indicative of the operating
results for the full year.
2. Taxes on Income (In thousands) For the Six Months
Ended June 30,
1995 1994
The income tax provision <benefit> includes:
State and local income taxes $ 58 $ 77
Federal income taxes <180> 216
Total $ <122> $ 293
Taxes on income are comprised of:
Currently payable $ 110 $ 226
Deferred <benefit> payable <232> 67
Total $ <122> $ 293
Taxes are charged <credited> to:
Operations $ <123> $ 292
Extraordinary gain on repurchase of debentures 1 1
Total $ <122> $ 293
<PAGE>
HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
A reconciliation of taxes on income to the federal statutory rate is as
follows:
For the Six Months
Ended June 30,
1995 1994
Tax provision <benefit> at statutory rate $<218> $ 280
Increase <decrease> resulting from:
Proceeds from officers life insurance 0 <81>
Intangibles and officers life insurance premiums 48 41
State and local taxes, net of federal tax benefit 38 51
Other 10 2
Tax provision <benefit> $<122> $ 293
3. Inventories (In thousands)
June 30, 1995 December 31, 1994
Raw materials $5,450 $5,222
Finished goods and work-in-process 3,713 4,318
Total Inventory $9,163 $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 six months ended June 30, 1994 and $22,500 for the quarter
ended June 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. Subsequent Event
On July 28, 1995 a registration statement covering subscription rights for
shares representing 10% of the outstanding common stock of the Company's
Transderm Laboratories Corporation subsidiary was filed with the Securities
and Exchange Commission. Expenses of the registration statement are
expected to consume all of the proceeds to be received ($400,000). Expenses
incurred through June 30, 1995 ($205,000) have been deferred and are
classified as an other current asset. Following the effectiveness of the
registration statement under the Securities Act of 1933, it is anticipated
that Transderm Laboratories Corporation's stock will trade on the over the
counter market. Transderm Laboratories is the parent company of Hercon
Laboratories, which develops and manufactures transdermal pharmaceutical
products.
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 8
Liquidity
The following measures of liquidity are derived from the Company's
Consolidated
Financial Statements:
June 30, December 31,
1995 1994
Working Capital (current assets less current
liabilities, in thousands) $9,380 $8,179
Current Ratio (current assets/current
liabilities) 2.2 2.0
Quick Ratio (cash & receivables/current
liabilities) .9 .7
Working capital increased $1.2 million from December 31, 1994 to June 30, 1995
due to a $0.7 million increase in current assets and a $.5 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 $.3 million, respectively, along with decreases in accrued
expenses and other current liabilities, and deferred and other income taxes
payable of $.5 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 $.4 million, respectively along with an
increase in accounts payable of $.5 million.
Cash used by operations and cash generated by financing activities for the six
months ended June 30, 1995 was $1.3 million and $1.9 million, respectively.
The Company expects to meet $.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 $.5 million of debentures which
may be used to meet the 1996 sinking fund requirement.
The Company has not paid cash dividends and does not anticipate paying such
dividends on its common stock in the foreseeable future.
Capital Resources
At June 30, 1995, the Company had borrowed $4.9 million on its $6.0 million
line of credit from the First National Bank of Maryland. The credit line
bears interest, at the Company's option, at either the bank's prime rate or
the London Inter-Bank Offer Rate, is collaterized by the Company's assets with
the exception of real estate, and expires in July of 1997. Subsequent to June
30, 1995, the Company paid $0.5 million on the line of credit during the month
of July. 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.
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 9
During the six months ended June 30, 1995, the Company purchased in market
transactions, $.5 million principal amount of its 10.375% convertible
subordinated debentures for $.5 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 June 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. 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 were approximately the same for the six months ended June 30, 1995 as
compared to the same period in 1994. Sales of transdermal nitroglycerin
patches increased $.4 million, offset by sales decreases of synthetic fabrics
of $.3 million and environmental products of $.1 million. The transdermal
nitroglycerin patch sales increase is 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.
Sales decreased $.2 million, or 2% for the quarter ended June 30, 1995 as
compared to the same period in 1994. Sales of transdermal nitroglycerin
patches and synthetic fabrics decreased $.2 million and $.1 million,
respectively, while environmental product sales increased $.1 million.
Transdermal nitroglycerin patch sales decreased for the quarter due primarily
to decreased market demand and distributors adjusting their inventories.
Synthetic fabrics sales decreased for the same reasons described above for the
six months ended June 30, 1995. The environmental product sales increase is
due primarily to increased sales of disruptants and insecticides.
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 10
Gross profit decreased $1.4 million, or 19% and gross profit as a percentage
of sales decreased to 26% from 32% for the six months ended June 30, 1995 as
compared to the same period in 1994. Gross profit for synthetic fabric and
environmental products decreased $1.8 million and $.1 million, respectively
while transdermal nitroglycerin patch gross profit increased $.5 million as
compared to the same period last year. Gross profit for synthetic fabrics was
lower due primarily to cost of sales increases reflecting $1.5 million for
additional material costs, including rising raw material costs and $.3 million
for increased plant overhead. Selling prices could not be increased to offset
these rising costs because of market conditions. Transdermal nitroglycerin
patch gross profit increased due primarily to increased sales volumes of
higher margin product.
Gross profit decreased $1.3 million, or 34% and gross profit as a percentage
of sales decreased to 22% from 33% for the three months ended June 30, 1995 as
compared to the same period in 1994. Gross profit for synthetic fabric
products and transdermal nitroglycerin patches decreased $1.3 million and $.1
million, respectively while gross profit for environmental products increased
$.1 million as compared to the same period last year. Gross profit for
synthetic fabrics decreased due primarily to the same reasons as mentioned for
the six months ended June 30 1995. Transdermal nitroglycerin patch gross
profit decreased due primarily to decreased sales volumes of higher margin
products. Environmental products gross profit increased due primarily to
increased sales volumes of higher margin products.
Selling, general and administrative expenses increased $.3 million for the six
months ended June 30, 1995 as compared to the same period in 1994. The
increase is due primarily to increases in payroll related expenses and a non-
recurring reduction to 1994 expenses from a receipt for life insurance
proceeds relating to a former officer. These increases were offset, in part,
by a decrease in commission expenses related to lower synthetic fabrics sales.
For the quarter ended June 30, 1995, selling, general and administrative
expenses increased $.1 million due primarily to the same reasons described
above.
Research and development expenses decreased $.3 million and $.1 million for
the six months and quarter ended June 30, 1995, respectively as compared to
the corresponding periods in 1994. These decreases are due primarily to lower
outside testing expenses 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.
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 11
Interest expense is approximately the same for the six months ended June 30,
1995 and for the quarter ended June 30, 1995 as compared to the same periods
in 1994. Total debt has increased $1.5 million at June 30, 1995 as compared
to June 30, 1994, however the average interest rate is lower. The balance on
the Company's long-term line of credit increased $3.4 million while the
balance of the Company's subordinated debentures decreased $1.8 million at
June 30, 1995 as compared to June 30, 1994.
Other income - net decreased $.1 million for the six months ended and was
approximately the same for the quarter ended June 30, 1995 as compared to the
same periods for 1994.
Income from operations before taxes decreased $1.5 million and $1.4 million
for the six months and quarter ended June 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).
The results of operations for the periods ended June 30, 1995 and 1994 are not
necessarily indicative of the operating results for the full years.
<PAGE>
<PAGE> Part II
Item 1
Page 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 11, 1995. The
following members were elected to the Company's Board of Directors to hold
office for the ensuing year:
Nominee In Favor Withheld
Steven Bernstein 6,323,763 929,085
Matthew Goldstein 6,322,799 930,049
Samuel R. Goodson 6,323,676 929,172
Paul R. Moeller 6,323,763 929,085
Eugene Roshwalb 6,323,155 929,693
Bruce M. Schloss 6,323,763 929,085
Gregory P. Speiser 6,320,801 932,047
Marvin M. Speiser 6,311,665 941,183
Robert D. Speiser 6,320,947 931,901
Milton Y. Zussman 6,321,376 931,472
The results of the voting on the adoption of the 1995 Performance
Equity Plan were as follows:
For Against Abstained Broker Non-Vote
3,737,691 1,214,600 175,492 1,778,457
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
2 Plan of Reorganization and Asset Exchange Agreement dated as of June 30,
1995, by and among Health-Chem Corporation, Herculite Products, Inc. and
Transderm Laboratories Corporation. Incorporated herein by reference to
Exhibit 2 to Registration Statement on Form S-1 (Reg. No. 33-95080) for
Transderm Laboratories Corporation, as filed with the Commission on July
28, 1995.
10.1 Asset Acquisition Agreement dated April 28, 1995 between Hercon
Environmental Corporation and Hercon Laboratories Corporation.
Incorporated herein by reference to Exhibit 10.7 to Registration
Statement on Form S-1 (Reg. No. 33-95080) for Transderm Laboratories
Corporation, as filed with the Commission on July 28, 1995.
(b) During the six months ended June 30, 1995 the Company did not file any
reports on Form 8-K.
<PAGE>
<PAGE>
Page 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH-CHEM CORPORATION
August 8, 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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 276
<SECURITIES> 0
<RECEIVABLES> 6705
<ALLOWANCES> (321)
<INVENTORY> 9163
<CURRENT-ASSETS> 17211
<PP&E> 24843
<DEPRECIATION> (13219)
<TOTAL-ASSETS> 33151
<CURRENT-LIABILITIES> 7831
<BONDS> 11959
<COMMON> 145
0
0
<OTHER-SE> 8231
<TOTAL-LIABILITY-AND-EQUITY> 33151
<SALES> 22997
<TOTAL-REVENUES> 22997
<CGS> 17085
<TOTAL-COSTS> 17085
<OTHER-EXPENSES> 6856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 300
<INCOME-PRETAX> (644)
<INCOME-TAX> (123)
<INCOME-CONTINUING> (521)
<DISCONTINUED> 0
<EXTRAORDINARY> 1
<CHANGES> 0
<NET-INCOME> (520)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
