<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 March 31, 1996 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 April 30, 1996, 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>
March 31, December 31,
ASSETS 1996 1995
<S> (Unaudited)
CURRENT ASSETS <C> <C>
Cash and cash equivalents $ 269 $ 259
Accounts receivable, net 6,911 4,621
Inventories (Note 3) 8,655 9,070
Other current assets 2,002 1,886
Total Current Assets 17,837 15,836
PROPERTY, PLANT & EQUIPMENT
Land and buildings 5,713 5,713
Other Property, Plant & Equipment 22,612 21,645
Total Property, Plant & Equipment 28,325 27,358
Less accumulated depreciation & amortization <14,559> <14,090>
Net Property, Plant & Equipment 13,766 13,268
NON-CURRENT ASSETS
Notes receivable 1,500 1,500
Cash surrender value of life insurance policies 2,151 2,110
Excess of cost over fair value of assets acquired 724 731
Other non-current assets 339 208
Total Non-Current Assets 4,714 4,549
TOTAL ASSETS $36,317 $33,653
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,577 $ 3,689
Accrued expenses and other current liabilities 3,027 2,462
Income taxes payable 648 644
Total Current Liabilities 9,252 6,795
LONG-TERM LIABILITIES
10.375% Convertible Subordinated Debentures 11,000 11,000
Long-term debt 5,313 5,623
Deferred income taxes 0 8
Other long-term liabilities 2,045 1,744
Minority Interest 17 17
STOCKHOLDERS' EQUITY
Convertible special stock 7 7
Common stock 145 145
Additional paid in capital 18,286 18,286
Less stockholder notes receivable <148> <148>
Accumulated deficit <1,917> <2,141>
Subtotal 16,373 16,149
Less treasury stock <7,683> <7,683>
Total Stockholders' Equity 8,690 8,466
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,317 $33,653
<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 Three Months
<S> Ended March 31,
1996 1995
REVENUE: <C> <C>
Net sales $13,149 $11,020
Cost of goods sold 9,233 7,741
Gross profit 3,916 3,279
OPERATING EXPENSES:
Selling, general and administrative expense 2,678 2,135
Research and development expense 691 786
Net interest expense 398 340
Total operating expenses 3,767 3,261
INCOME FROM OPERATIONS 149 18
Other income - net 83 87
INCOME FROM OPERATIONS BEFORE TAXES AND MINORITY
INTEREST 232 105
Income tax provision 12 67
INCOME BEFORE MINORITY INTEREST 220 38
Minority Interest in earnings of subsidiary 0 <16>
INCOME BEFORE EXTRAORDINARY GAIN 220 22
Extraordinary gain from repurchase of debentures,
net of tax 4 4
NET INCOME $ 224 $ 26
Earnings per common share (Primary & Fully Diluted)
(Note 4):
Income before extraordinary gain $ .03 $ .00
Extraordinary gain from repurchase of debentures,
net of tax .00 .00
NET INCOME PER SHARE $ .03 $ .00
Average number of common and common equivalent
shares outstanding, excluding redeemable
common shares (Note 4)
Primary 7,982 7,996
Fully Diluted 7,982 8,000
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION Part I
CONSOLIDATED CASH FLOW STATEMENTS Item 1
(Unaudited) Page 4
(In thousands)
<CAPTION>
<S> For The Three Months
Ended March 31,
1996 1995
Cash was Provided by: <C> <C>
OPERATIONS:
Income before extraordinary gain $ 220 $ 22
Adjustments to reconcile to net cash provided by
<used for> operations:
Depreciation and amortization 494 421
Deferred income taxes 8 6
Minority interest 0 16
Changes in:
Accounts receivable <2,291> <608>
Inventories 416 <1,170>
Other current assets <65> <199>
Other noncurrent assets <29> <38>
Accounts payable 1,888 515
Accrued expenses and other current liabilities 792 <687>
Interest and income taxes payable <402> 289
Long-term liabilities 168 0
Other, net <5> 0
Net cash provided by <used for> operations 1,194 <1,433>
INVESTING:
Additions to property, plant and equipment <990> <399>
Proceeds on disposals of property, plant and equipment 21 0
Payments received on notes receivable 0 31
Net cash used for investing <969> <368>
FINANCING:
Long-term debt proceeds 3,938 3,077
Long-term debt payments <4,047> <1,150>
Repurchase of convertible subordinated debentures <106> <515>
Net cash <used for> provided by financing <215> 1,412
Net Increase <Decrease> in Cash and Cash Equivalents 10 <389>
Cash and Cash Equivalents at beginning of period 259 624
Cash and Cash Equivalents at end of period $ 269 $ 235
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 157 $ 58
Income taxes 101 119
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 5
1. Principles of consolidation
The consolidated financial statements include the accounts of Health-
Chem Corporation ("Health-Chem") and all of its subsidiaries
(collectively the "Company").
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
Laboratories") 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,
among other things:
. The transfer from Herculite to Transderm of the manufacturing
facility in which Hercon Laboratories' operations are conducted
and the 985 shares of Hercon Laboratories' common stock owned by
Herculite in exchange for 1,000,000 shares of Transderm's
redeemable preferred stock, $10.00 par value.
. Hercon Laboratories' issuance to the Company of a $7,000,000, 9%
Subordinated Promissory Note evidencing the approximate amount of
intercompany advances owed to the Company by Hercon Laboratories.
. Transderm's issuance of 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's payment to 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.
Transactions between the Company and its subsidiaries have been
eliminated in consolidation.
The Consolidated Balance Sheet as of March 31, 1996, the Consolidated
Statements of Operations and the Consolidated Cash Flow Statements for
the interim periods ended March 31, 1996 and 1995 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 March 31, 1996 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, 1995 Annual Report on Form 10-K. The
results of operations for the periods ended March 31, 1996 and 1995
are not necessarily indicative of the operating results for the full
years.
<PAGE>
HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 6
2. Taxes on Income (In thousands) For the Three Months
Ended March 31,
1996 1995
Taxes on income include provision <benefit> for:
Federal income taxes $ 85 $ 61
State and local income taxes <71> 8
Total $ 14 $ 69
Taxes on income are comprised of:
Currently payable $ 6 $ 63
Deferred payable 8 6
Total $ 14 $ 69
Charged to:
Income before extraordinary gain $ 12 $ 67
Extraordinary gain on repurchase of debentures 2 2
Total $ 14 $ 69
A reconciliation of taxes on income to the federal statutory rate is as
follows:
For the Three Months
Ended March 31,
1996 1995
Tax provision at statutory rate $ 81 $ 38
Increase <decrease> resulting from:
Intangibles and officers life insurance premiums 14 22
State and local taxes, net of federal tax benefit 6 4
Settlement of state tax assessments <69> 0
Reversal of valuation allowance <25> 0
Other 7 5
Tax provision $ 14 $ 69
3. Inventories (In thousands)
March 31, 1996 December 31, 1995
Raw materials $4,052 $4,326
Finished goods and work-in-process 4,603 4,744
Total Inventory $8,655 $9,070
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 1996 and 1995. Subordinated debentures are anti-
dilutive for all periods presented.
5. Subscription Rights Offering
On March 26, 1996, the Board of Directors of the Company approved the
Company's entering into a stock purchase agreement with Marvin M.
Speiser (the "Stock Purchase Agreement") relating to 1,782,689 shares
of Common Stock owned by him subject to the Company's option to
repurchase. Pursuant to the Stock Purchase Agreement, in April 1996,
the Company filed a registration statement with Securities and
Exchange Commission under the Securities Act of 1933, as amended, for
a subscription rights offering to Health-Chem stockholders other than
Mr. Speiser of up to 1,320,000 shares of Health-Chem Common Stock.
This registration statement has not yet been declared effective.
<PAGE>
<PAGE>
HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
The Stock Purchase Agreement provides that Mr. Speiser will sell to
the Company such number of shares of Common Stock as are subscribed to
in the offering at a per share price equal to the combined weighted
average exercise price per share of: (i) 1,207,689 shares of Common
Stock which the Company has the right to acquire pursuant to an option
agreement, dated as of December 28, 1990 and amended on August 30,
1991, between Mr. Speiser and the Company (the "1991 Option Shares");
and (ii) 575,000 shares of Common Stock which the Company has the
right to acquire pursuant to a Stock Purchase and Option Agreement,
dated as of July 15, 1994, between Mr. Speiser and the Company (the
"1994 Option Shares"). Mr. Speiser will not receive any subscription
rights in the offering but the total number of shares being offered
will reflect his retention of such number of shares as would have been
offered to him, pro rata. The excess, if any, of the aggregate
subscription price received by the Company over the aggregate purchase
price paid to Mr. Speiser will be retained by the Company to be
applied against the expenses of the transaction and for other
corporate purposes. The Stock Purchase Agreement also provides that
upon the conclusion of the offering, the agreements relating to the
1991 Option Shares and the 1994 Option Shares and all further rights
of the Company to purchase said Option Shares shall be terminated.
<PAGE>
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 8
Results of Operations
Sales increased $2.1 million, or 19% for the three months ended March 31, 1996
as compared to the same period for 1995. The increase is due primarily to
increases in sales of synthetic fabrics, transdermal nitroglycerin patches and
environmental products of $1.4 million, $.6 million and $.1 million,
respectively. The synthetic fabrics sales increase is due primarily to higher
governmental sales and greater demand for certain fabrics. Sales of
transdermal nitroglycerin patches, which are manufactured and marketed by the
Company's 90% owned subsidiary Transderm Laboratories Corporation, have
increased due primarily to greater demand from domestic distributors and to
higher selling prices. Environmental product sales increased due primarily to
the introduction of several new disruptant products.
Gross profit increased $.6 million, or 19% for the three months ended March
31, 1996 as compared to the same period in 1995. The increase is due
primarily to increased gross profits for synthetic fabrics and transdermal
nitroglycerin patches of $.3 million and $.4 million, respectively, offset by
decreased gross profit for environmental products of $.1 million. Gross
profit as a percent of sales was 30% for each of the three month periods ended
March 31, 1996 and March 31, 1995. The synthetic fabrics gross profit
increase is primarily a result of greater sales volumes and improving
manufacturing variances. Transdermal nitroglycerin patch gross profit
increased primarily due to increased domestic sales volumes. Environmental
gross profit decreased due primarily to decreased sales of higher margin
products.
Selling, general and administrative expenses increased $.5 million for the
three months ended March 31, 1996 as compared to the corresponding period in
1995. The increase is due primarily to higher payroll-related expenses of $.3
million and legal expenses of $.2 million. The increase in legal expenses is
due primarily to the defense of an action brought by Key Pharmaceutical, Inc.
against Hercon Laboratories in August 1995.
Research and development expense decreased $.1 million for the three months
ended March 31, 1996 as compared to the same period in 1995 due primarily to
lower clinical material expenses related to pharmaceutical product research.
The Company anticipates research and development expenses related to
pharmaceutical products in 1996 to equal or exceed 1995 levels. In 1996, new
studies for patch applications are being developed and current studies are
advancing through various phases of completion.
Interest expense increased $.1 million for the three months ended March 31,
1996 as compared to the same period in 1995 due primarily to interest related
to a settlement with a local taxing authority of disputed tax assessments
pertaining to prior years.
Other income - net was approximately the same for the three months ended March
31, 1996 as compared to the corresponding period in 1995.
Income from operations before taxes and minority interest increased $.1
million for the three months ended March 31, 1996 as compared to the
corresponding period in 1995. Income tax provision or benefit varies with the
amount of income or loss from operations before income taxes. At March 31,
1996, the effective tax rate was 6% due primarily to adjustments to reserves
for a settlement with a local taxing authority of disputed tax assessments
pertaining to prior years of $69,000 and a reversal of a portion of the
valuation allowance amounting to $25,000.
The results of operations for the periods ended March 31, 1996 and 1995 are
not necessarily indicative of the operating results for the full years.
<PAGE>
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 9
Liquidity and Capital Resources
The following measures of liquidity are derived from the Company's
Consolidated Financial Statements:
March 31, December 31,
1996 1995
Working Capital (current assets less current
liabilities, in thousands) $ 8,585 $ 9,041
Current Ratio (current assets/current
liabilities) 1.9 2.3
Quick Ratio (cash & receivables/current
liabilities) .8 .7
Working capital decreased $.5 million from December 31, 1995 to March 31, 1996
due to a $2.5 million increase in current liabilities, partially offset by a
$2.0 million increase in current assets. Decreases in working capital were
primarily the result of increases in accounts payable and accrued expenses and
other current liabilities of $1.9 million and $.6 million, respectively,
partially offset by a $2.3 million increase in accounts receivable, net.
The increase in accounts receivable, net was due primarily to sales increases
of $2.6 million in the first quarter of 1996 as compared to the fourth quarter
of 1995. Cash generated from operations for the quarter ended March 31, 1996
was $1.2 million.
The Company expects to meet $.6 million of debenture interest payments on its
10.375% convertible subordinated debentures 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,
1996 was satisfied by application of $.8 million debentures previously
repurchased and by the Company's redemption of an additional $.7 million of
debentures. In market transactions throughout the first quarter of 1996, the
Company purchased $.1 million principal amount of its subordinated debentures
for $.1 million which may be used to meet the 1997 sinking fund requirements.
Additional debentures may be repurchased and retired or if debentures are not
available for purchase, the Company has an option to call for redemption the
amount required to meet sinking fund requirements.
The Company has not paid cash dividends and does not anticipate paying such
dividends on its Common Stock in the foreseeable future.
At March 31, 1996, the Company had borrowed $3.9 million on its $6.0 million
line of credit from The First National Bank of Maryland ("First National").
The line of credit's borrowing base is limited to the sum of 80% of eligible
accounts receivable and 35% of eligible inventory. Borrowings under the line
of credit are collateralized by a pledge of substantially all of the assets of
the Company with the exception of real estate. At the Company's option,
borrowings under the line of credit bear interest at the lender's prime rate
or the London Inter-Bank Offer Rate. The weighted average interest rate was
7.2% at March 31, 1996. In addition, the Company pays a facility fee of 1/4
of 1% on the amount of the unused credit facility. The borrowing agreement,
which expires on October 15, 1997, contains various covenants which, among
other things, require the Company to maintain specified ratios of debt to
tangible net worth and fixed charge coverage, and minimum levels of tangible
net worth and limits capital additions. At March 31, 1996 the Company was in
compliance with the covenants as amended. Subsequent to March 31, 1996, the
Company borrowed an additional $.3 million on the line of credit increasing
the balance to $4.2 million at April 30, 1996. 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 10
At March 31, 1996, Pacific Combining Corporation ("Pacific"), a subsidiary of
the Company, had outstanding $1,687,500 on its term loan from First National
reflecting a principal payment in February of $62,500. The term loan requires
quarterly principal payments commencing with the $62,500 in February 1996,
increasing to $87,500 in 1997 and $95,833 from 1998 through November 2000.
Borrowings under the term loan, as with the Company's $6,000,000 line of
credit with First National, are collateralized 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 weighted average interest
rate was 7.51% at March 31, 1996. The term loan, which expires on November
15, 2000, is subject to various financial covenants which are similar to the
covenants of the line of credit agreement.
The Company's debt to equity ratio was 3:1 at March 31, 1996 and at December
31, 1995.
Management believes anticipated expenditures in 1996 such as capital
expenditures, debenture repurchasing, 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. Capital expenditures
will primarily consist of manufacturing tooling and equipment and leasehold
improvements. The terms of the Company's line of credit with First National
limit the Company to $1.2 for capital expenditures in 1996. At March 31,
1996, the Company had expended $1.0 million for capital expenditures for
property, plant and equipment in 1996. The Company anticipates additional
capital expenditures of at least $700,000 in support of its tooling and
equipment programs for 1996 and intends to seek First National's consent to
such increase from the line of credit terms.
<PAGE>
<PAGE>
Part II
Item 1
Page 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in any pending legal proceedings in the
quarter ended March 31, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) During the three months ended March 31, 1996 the Company did not file any
reports on Form 8-K.
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
May 7, 1996 /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)
(Principal Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 269
<SECURITIES> 0
<RECEIVABLES> 7179
<ALLOWANCES> (268)
<INVENTORY> 8655
<CURRENT-ASSETS> 17837
<PP&E> 28325
<DEPRECIATION> (14559)
<TOTAL-ASSETS> 33317
<CURRENT-LIABILITIES> 9252
<BONDS> 11631
<COMMON> 145
0
0
<OTHER-SE> 8698
<TOTAL-LIABILITY-AND-EQUITY> 33617
<SALES> 13149
<TOTAL-REVENUES> 13149
<CGS> 9233
<TOTAL-COSTS> 9233
<OTHER-EXPENSES> 3767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 398
<INCOME-PRETAX> 232
<INCOME-TAX> 12
<INCOME-CONTINUING> 220
<DISCONTINUED> 0
<EXTRAORDINARY> 4
<CHANGES> 0
<NET-INCOME> 224
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
