<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, 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 July 31, 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>
June 30, December 31,
1996 1995
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 195 $ 259
Accounts receivable, net 6,049 4,621
Inventories (Note 3) 7,558 9,070
Other current assets 2,062 1,886
Total Current Assets 15,864 15,836
PROPERTY, PLANT & EQUIPMENT
Land and buildings 5,714 5,713
Other property, plant & equipment 23,259 21,645
Total Property, Plant & Equipment 28,973 27,358
Less accumulated depreciation & amortization 15,023 14,090
Net Property, Plant & Equipment 13,950 13,268
NON-CURRENT ASSETS
Notes receivable 1,500 1,500
Cash surrender value of life insurance policies 2,194 2,110
Excess of cost over fair value of assets acquired 718 731
Other non-current assets 393 208
Total Non-Current Assets 4,805 4,549
TOTAL ASSETS $34,619 $33,653
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,442 $ 3,689
Accrued expenses and other current liabilities 2,756 2,462
Income taxes payable 600 644
Total Current Liabilities 7,798 6,795
LONG-TERM LIABILITIES
10.375% convertible subordinated debentures 9,500 11,000
Long-term debt 6,520 5,623
Deferred income taxes 0 8
Other long-term liabilities 2,235 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 <2,058> <2,141>
Subtotal 16,232 16,149
Less treasury stock, at cost <7,683> <7,683>
Total Stockholders' Equity 8,549 8,466
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,619 $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 Six Months
Ended June 30,
<S> 1996 1995
REVENUE: <C> <C>
Net sales $26,258 $22,997
Cost of goods sold 18,390 17,085
Gross profit 7,868 5,912
OPERATING EXPENSES:
Selling, general and administrative expense 4,829 4,492
Legal expense 1,103 116
Research and development expense 1,410 1,569
Net interest expense 667 679
Total operating expenses 8,009 6,856
LOSS FROM OPERATIONS <141> <944>
Other income - net 204 300
INCOME <LOSS> FROM OPERATIONS BEFORE TAXES 63 <644>
Income tax benefit 15 123
INCOME <LOSS> BEFORE EXTRAORDINARY GAIN 78 <521>
Extraordinary gain from repurchase of debentures 5 1
NET INCOME <LOSS> $ 83 $ <520>
Earnings per Common Share (Primary & Fully Diluted)
(Note 4):
Income <Loss> before extraordinary gain $ 0.01 $ <0.07>
Extraordinary gain from repurchase of debentures 0.00 0.00
NET INCOME <LOSS> PER SHARE $ 0.01 $ <0.07>
Average number of common and common equivalent
shares outstanding excluding redeemable
common shares (Note 4):
Primary 7,982 7,994
Fully Diluted 7,982 7,997
<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 June 30,
<S> 1996 1995
REVENUE: <C> <C>
Net sales $13,109 $11,977
Cost of goods sold 9,157 9,344
Gross profit 3,952 2,633
OPERATING EXPENSES:
Selling, general and administrative expense 2,456 2,403
Legal expense 798 70
Research and development expense 718 783
Net interest expense 269 339
Total operating expenses 4,241 3,595
LOSS FROM OPERATIONS <289> <962>
Other income - net 121 212
LOSS FROM OPERATIONS BEFORE TAXES AND
MINORITY INTEREST <168> <750>
Income tax benefit 27 190
LOSS BEFORE MINORITY INTEREST <141> <560>
Minority Interest in <earnings> losses
of subsidiary 0 16
LOSS BEFORE EXTRAORDINARY GAIN <141> <544>
Extraordinary gain <loss> from repurchase
of debentures 0 <3>
NET LOSS $ <141> $ <547>
Earnings per Common Share (Primary & Fully Diluted)
(Note 4):
Loss before extraordinary gain $ <0.02> $ <0.07>
Extraordinary gain from repurchase of
debentures 0.00 0.00
NET LOSS PER SHARE $ <0.02> $ <0.07>
Average number of common and common equivalent
shares outstanding, excluding redeemable
common shares (Note 4):
Primary 7,982 7,993
Fully diluted 7,982 7,994
<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,
1996 1995
<S>
Cash was Provided by <Used for>: <C> <C>
OPERATIONS:
Income <loss> before extraordinary gain $ 78 $ <521>
Adjustments to reconcile to net cash provided by
<used for> operations:
Depreciation and amortization 979 844
Deferred income taxes <12> <232>
Changes in:
Accounts receivable <1,428> <1,160>
Inventories 1,513 378
Other current assets <157> <330>
Other noncurrent assets <71> <39>
Accounts payable 754 489
Accrued expenses and other current liabilities 93 <721>
Interest and income taxes payable <143> <129>
Other long-term liabilities 337 133
Other, net <8> 0
Net cash provided by <used for> operations 1,935 <1,288>
INVESTING:
Additions to property, plant and equipment <1,637> <1,061>
Proceeds on disposals of property, plant
and equipment 21 0
Payments received on notes receivable 0 71
Net cash used for investing <1,616> <990>
FINANCING:
Long-term debt proceeds 10,563 6,301
Long-term debt payments <9,616> <2,900>
Repurchase of convertible subordinated debentures <1,330> <1,471>
Net cash <used for> provided by financing <383> 1,930
Net Decrease in Cash and Cash Equivalents <64> <348>
Cash and Cash Equivalents at beginning of period 259 624
Cash and Cash Equivalents at end of period $ 195 $ 276
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 839 $ 831
Income Taxes 144 200
<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. 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 June 30, 1996, the
Consolidated Statements of Operations and the Consolidated Cash
Flow Statements for the interim periods ended June 30, 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 June
30, 1996 and for all periods presented. Certain amounts included
in the consolidated financial statements relating to prior periods
have been reclassified to conform to the current presentation.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
HEALTH-CHEM CORPORATION Part I
(Unaudited) Page 7
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 June
30, 1996 and 1995 are not necessarily indicative of the operating
results for the full years.
2. Taxes on Income (In thousands) For the Six Months
Ended June 30,
1996 1995
The income tax provision <benefit> includes:
State and local income taxes $ <65> $ 58
Federal income taxes 53 <180>
Total $ <12> $ <122>
Taxes on income are comprised of:
Currently payable $ 0 $ 110
Deferred benefit <12> <232>
Total $ <12> $ <122>
Taxes are charged <credited> to:
Operations $ <15> $ <123>
Extraordinary gain on repurchase of
debentures 3 1
Total $ <12> $ <122>
A reconciliation of taxes on income to the federal statutory rate
is as follows:
For the Six Months
Ended June 30,
1996 1995
Tax provision at statutory rate $ 24 $<218>
Increase <decrease> resulting from:
Intangibles and officers life insurance
premiums 28 48
State and local taxes, net of federal tax
benefit 14 38
Settlement of state tax assessments <69> 0
Reversal of valuation allowance <25> 0
Other 16 10
Tax benefit $ <12> $<122>
3. Inventories (In thousands)
June 30, 1996 December 31, 1995
Raw materials $3,836 $4,326
Finished goods and work-in-process 3,722 4,744
Total Inventory $7,558 $9,070
<PAGE>
HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 8
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. Subordinated debentures are anti-
dilutive for all periods presented.
<PAGE>
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 9
Results of Operations
Net sales increased $3.3 million, or 14%, for the six months ended June
30, 1996 as compared to the same period in 1995. The increase is
primarily due to increases in sales of synthetic fabrics, transdermal
nitroglycerin patches and environmental products of $1.5 million, $1.3
million and $.5 million, respectively. The synthetic fabrics sales
increase is primarily due to higher industrial fabrics sales which
includes increased governmental sales. Sales of transdermal
nitroglycerin patches, which are manufactured and marketed by the
Company's 90% owned subsidiary Transderm Laboratories Corporation,
increased primarily due to greater demand from domestic distributors and
to higher selling prices. Environmental products sales increased
primarily due to the introduction of several new insect mating disruptant
products.
Net sales increased $1.1 million, or 9%, for the quarter ended June 30,
1996 as compared to the same period in 1995. The increase is primarily
due to increases in sales of synthetic fabrics, transdermal nitroglycerin
patches and environmental products of $.1 million, $.6 million and $.4
million, respectively. The sales fluctuations are attributable to the
factors noted above.
Gross profit increased $2.0 million, or 33%, for the six months ended
June 30, 1996 as compared to the same period in 1995. The increase is
primarily due to increased gross profits for synthetic fabrics,
transdermal nitroglycerin patches and environmental products of $1.1
million, $.8 million and $.1 million, respectively. Gross profit as a
percentage of net sales recovered from 26% for 1995 to 30% for 1996. In
1995, gross profit as a percentage of sales for the Company's synthetic
fabric products was impaired by additional material costs. The synthetic
fabrics gross profit increase is primarily a result of greater sales
volumes, improved manufacturing variances and lower raw material costs.
Reducing manufacturing variances and lowering raw material costs have
been the primary focus of cost reduction efforts. Transdermal
nitroglycerin patches gross profit increased primarily due to increased
domestic sales volumes. Environmental products gross profit increased
primarily due to increased sales volumes of the new disruptant products.
Gross profit increased $1.3 million, or 50%, for the quarter ended June
30, 1996 as compared to the same period in 1995, primarily due to
increased gross profits for synthetic fabrics, transdermal nitroglycerin
patches and environmental products of $.8 million, $.4 million and $.1
million, respectively. Gross profit as a percentage of net sales
recovered from 22% for 1995 to 30% for 1996. The gross profit
fluctuations are attributable to the factors noted above.
Selling, general and administrative expenses increased $.3 million for
the six months ended June 30, 1996 as compared to the corresponding
period in 1995. The increase is primarily due to higher payroll-related
expenses of $.3 million. Selling, general and administrative expenses
increased $.1 million for the quarter ended June 30, 1996 as compared to
the same period in 1995 primarily due to sales commissions relating to
foreign sales.
Legal expenses for the six months and quarter ended June 30, 1996
increased $1.0 million and $.7 million, respectively, as compared to the
same periods in 1995. The increase in legal expenses is primarily due
to the costs of intensive discovery related to the defense of a patent-
related action brought by Key Pharmaceutical, Inc. against Hercon
Laboratories in August 1995. Discovery is currently scheduled to be
completed by mid August 1996. The trial in this action is scheduled to
begin during the last week in September 1996.
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 10
Research and development expense for the six months and quarter ended
June 30, 1996 decreased $.2 million and $.1 million, respectively. Lower
clinical material expenses related to pharmaceutical products research
contributed to the decrease. The Company expects total research and
development expenses related to pharmaceutical products in 1996 to
approximate 1995 levels.
Net interest expense for the six months and quarter ended June 30, 1996
decreased $12,000 and $70,000, respectively, as compared to the same
periods in 1995 due primarily to capitalized interest related to new
equipment under construction.
Other income for the six months and quarter ended June 30, 1996 each
decreased $.1 million as compared to the same periods in 1995. These
decreases are due to nonrecurring proceeds primarily from entering into
a distribution agreement in the second quarter of 1995.
Income from operations before taxes and minority interest for the six
months and quarter ended June 30, 1996 increased $.7 million and $.6
million, respectively, as compared to the same period in 1995 due
primarily to the factors discussed above. Income tax provision or
benefit varies with the amount of income or loss from operations before
income taxes. At June 30, 1996, the tax benefit was 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
(See Note 2).
The results of operations for the periods ended June 30, 1996 and 1995
are not necessarily indicative of the operating results for the full
years.
Liquidity and Capital Resources
The following measures of liquidity are derived from the Company's
Consolidated Financial Statements:
June 30, December 31,
1996 1995
Working Capital (current assets less current
liabilities, in thousands) $8,066 $9,041
Current Ratio (current assets/current
liabilities) 2.0 2.3
Quick Ratio (cash & receivables/current
liabilities) .8 .7
Working capital decreased $1.0 million from December 31, 1995 to June 30,
1996 reflective of a $1.0 million increase in current liabilities.
Accounts payable and accrued expenses & current liabilities increased $.7
million and $.3 million, respectively. Accounts receivable increased
$1.4 million and inventory decreased $1.5 million as a result of
maintaining a higher level of sales in the first and second quarters of
1996 as compared to the fourth quarter of 1995. Inventory decreases are
also the result of improvements to the material management system at the
Company's Herculite subsidiary and efforts to lower synthetic fabric
inventory levels.
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 11
Cash provided by operations for the six months ended June 30, 1996 was
$1.9 million as compared to cash used for operations of $1.3 million for
the same period in 1995. This increase is due primarily to higher sales
volumes and gross profits for 1996 as compared to 1995. Investing
activities for the six months ended June 30, 1996 and 1995 used cash of
$1.6 million and $1.0 million, respectively, primarily to fund the
Company's tooling and equipment programs. Financing activities for the
six months ended June 30, 1996 used cash of $.4 million primarily to
reduce debt levels as compared to the same period in 1995 which provided
cash by financing of $1.9 million to fund cash requirements. In the
second quarter of 1996, the Company paid $.2 million to Circa
Pharmaceuticals, Inc. (formerly Bolar Pharmaceutical Co., Inc.)
representing the final portion of a 1992 settlement.
The Company expects to meet $.5 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, of which $.1 million were
purchased in 1996, and by the Company's redemption of an additional $.7
million of debentures. In market transactions throughout the first six
months of 1996, the Company purchased $.2 million principal amount of its
subordinated debentures for $.2 million and at June 30, 1996, the Company
called for redemption $.4 million of its subordinated debentures. Any
debentures acquired in excess of the $1.5 million April 15, 1996 sinking
fund requirements 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 June 30, 1996, the Company had borrowed $5.2 million on its $6.0
million line of credit from The First National Bank of Maryland ("First
National"). 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 7.1% at June 30, 1996. In
addition, the Company pays a facility fee of 1/4 of 1% on the amount of
the unused credit facility. The loan agreement as amended to date,
expires on October 15, 1997 and 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 June 30, 1996 the
Company was in compliance with the covenants as amended. Subsequent to
June 30, 1996, the Company paid $.3 million on the line of credit
decreasing the amount borrowed to $4.9 million at July 31, 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 12
At June 30, 1996, Pacific Combining Corporation ("Pacific"), a subsidiary
of the Company, had outstanding $1,625,000 on its term loan from First
National reflecting principal payments of $62,500 in February and May.
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. 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 7.3% at June 30, 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. At
June 30, 1996 the Company was in compliance with the covenants as
amended.
The borrowing base for the line of credit and the term loan combined is
limited to the sum of 80% of eligible accounts receivable and 35% of
eligible inventory. At no time has there been a material difference
between the aggregate maximum credit amount and the eligible amount. The
maximum credit amount at June 30, 1996 and December 31, 1995 was
$7,625,000 and $7,750,000, respectively. Since July 1994, this line has
been 100% available except on June 30, 1996 and December 31, 1995 when
the eligible amounts were approximately 99% and 92%, respectively.
Borrowings under both the line of credit and the term loan are
collateralized by a pledge of substantially all of the assets of the
Company with the exception of real estate.
The Company's debt to equity ratio was 3:1 at June 30, 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 have been amended, effective June 30, 1996,
to extend the limit on capital expenditures for 1996 from $1.2 million
to $2.2 million. At June 30, 1996, the Company had expended $1.6 million
for capital expenditures for property, plant and equipment in 1996
primarily for building a new production line for its Pacific subsidiary.
<PAGE>
<PAGE>
Part II
Item 1
Page 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In May 1996, two of the Company's stockholders commenced an action in
Delaware Chancery Court against Health-Chem, its directors and one former
director seeking, among other things, to enjoin the consummation of the
transactions contemplated under a Stock Purchase Agreement with Marvin
M. Speiser, the Company's Chairman, President and largest stockholder,
including a proposed Subscription Rights Offering to Health-Chem's
stockholders (the "Offering"). A Registration Statement covering the
sale of up to 1,320,000 shares of the Company's Common Stock pursuant to
the Offering was filed with the Securities and Exchange Commission and
became effective on August 2, 1996.
The Complaint, which contains direct and derivative claims and is styled
as both an individual and a class action, alleges that the defendants
have breached their fiduciary duties insofar as the transactions under
the Stock Purchase Agreement unfairly benefit Mr. Speiser to the
detriment of the other stockholders and violate the terms of a 1991
Chancery Court order under which a derivative action was settled.
Plaintiffs sought expedited proceedings and preliminary injunctive
relief. A hearing before the Chancery Court on Plaintiffs' Motion for
a Preliminary Injunction was held on June 24, 1996. In a Memorandum
Opinion dated July 3, 1996, the Vice Chancellor denied the Plaintiffs'
Motion on the basis that the Plaintiffs failed to show irreparable harm
or the likelihood of establishing that the 1991 Chancery Court order was
violated. On July 23, 1996, the Delaware Supreme Court denied the
Plaintiffs' interlocutory appeal of the Vice Chancellor's decision. The
Plaintiffs may still seek money damages after a trial on the merits. No
trial date has been established. The Company continues to believe that
the allegations in the Complaint are without merit and that its directors
have acted scrupulously in the exercise of their fiduciary duties. The
Company also believes that an adverse determination in this proceeding
would not have a material adverse effect on the business or financial
condition of the Company. The Company intends to vigorously resist the
efforts of these Plaintiffs to interfere with the effectuation of the
Offering and the transactions contemplated thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 7, 1996.
The following members were elected to the Company's Board of Directors
to hold office for the ensuing year:
Number of Shares Number of Shares Withheld
Nominee Voted For From Voting For
Martin Benis 6,733,895 662,991
Steven Bernstein 6,733,064 663,822
Matthew Goldstein 6,733,717 663,169
Samuel R. Goodson 6,732,047 664,839
Paul R. Moeller 6,733,217 663,669
Eugene Roshwalb 6,732,365 664,521
Bruce M. Schloss 6,732,863 664,023
Marvin M. Speiser 6,608,410 778,476
Robert D. Speiser 6,606,189 790,697
Milton Y. Zussman 6,715,497 681,389
<PAGE>
Part II
Item 6
Page 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Master Modification Agreement dated as of June
30, 1996 by and between The First National Bank
of Maryland, Marvin M. Speiser, the Company,
Pacific Combining Corporation, Hercon
Laboratories Corporation, Herculite Products,
Inc., Hercon Environmental Corporation and
Transderm Laboratories Corporation, filed
herewith beginning on page 15
(b) During the six months ended June 30, 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
August 6, 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)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 195
<SECURITIES> 0
<RECEIVABLES> 6469
<ALLOWANCES> (420)
<INVENTORY> 7558
<CURRENT-ASSETS> 2062
<PP&E> 28973
<DEPRECIATION> (15023)
<TOTAL-ASSETS> 34619
<CURRENT-LIABILITIES> 7798
<BONDS> 9500
<COMMON> 145
0
0
<OTHER-SE> 8549
<TOTAL-LIABILITY-AND-EQUITY> 34619
<SALES> 26258
<TOTAL-REVENUES> 26258
<CGS> 18390
<TOTAL-COSTS> 18390
<OTHER-EXPENSES> 8009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 667
<INCOME-PRETAX> 63
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<PAGE>
MASTER MODIFICATION AGREEMENT
THIS MASTER MODIFICATION AGREEMENT ("AGREEMENT") is effective
as of June 30, 1996 by and between THE FIRST NATIONAL BANK OF
MARYLAND, a national banking association ("LENDER"); MARVIN M.
SPEISER ("MARVIN SPEISER"); HEALTH-CHEM CORPORATION, a Delaware
corporation ("HEALTH-CHEM"); PACIFIC COMBINING CORP., a California
corporation ("PACIFIC"); and HERCON LABORATORIES CORPORATION, a
Delaware corporation, HERCULITE PRODUCTS, INC., a New York
corporation, HERCON ENVIRONMENTAL CORPORATION, a Delaware
corporation, and TRANSDERM LABORATORIES CORPORATION, a Delaware
corporation (collectively, together with HEALTH-CHEM and PACIFIC,
the "BORROWERS").
RECITALS
Pursuant to the terms and provisions of a Loan and Security
Agreement dated July 15, 1994 by and between the LENDER and the
BORROWERS, as amended by a Modification Agreement dated August 31,
1995 and a Second Modification Agreement dated October 11, 1995
("LOAN AGREEMENT"), the LENDER is providing the BORROWERS with a
revolving line of credit in the maximum principal amount of Six
Million Dollars ($6,000,000.00) ("REVOLVER").
Pursuant to the terms of a Loan Agreement dated as of July 15,
1994 by and between the LENDER and MARVIN SPEISER, the LENDER has
made a term loan to MARVIN SPEISER in the original principal amount
of One Million One Hundred Fifty Thousand Dollars ($1,150,000.00)
("SPEISER LOAN").
Pursuant to the terms and provisions of a Loan and Security
Agreement dated as of October 11, 1995 by and between the LENDER,
PACIFIC, as borrower, and the other BORROWERS, as guarantors
("PACIFIC LOAN AGREEMENT") the LENDER has provided a term loan to
PACIFIC in the original principal amount of One Million Seven
Hundred Fifty Thousand Dollars ($1,750,000.00) ("PACIFIC LOAN").
In accordance with the terms of Section 2.6 of the PACIFIC
LOAN AGREEMENT, PACIFIC is required to make mandatory prepayments
on the PACIFIC LOAN in an amount equal to the net proceeds obtained
by any of the BORROWERS in connection with any sale or offering of
any equity interest in any of the BORROWERS, excluding the net
proceeds obtained in certain specified offerings set forth therein
("EQUITY PROCEEDS"). In addition, pursuant to the terms of Section
2.1 of the LOAN AGREEMENT, the maximum amount of the REVOLVER is to
be reduced by an amount equal to the amount of any EQUITY PROCEEDS
obtained by any of the BORROWERS, minus the amount of EQUITY
PROCEEDS used to make prepayments on the PACIFIC LOAN.
<PAGE>
The SPEISER LOAN is secured by, among other things, a pledge
of 575,000 shares of common stock in HEALTH-CHEM represented by
Stock Certificate No. NB21028 ("PLEDGED SHARES") pursuant to the
terms and provisions of a Stock Pledge Agreement dated July 15,
1994 by and between MARVIN SPEISER and the LENDER ("PLEDGE
AGREEMENT").
HEALTH-CHEM and MARVIN SPEISER desire to enter into a
transaction pursuant to which HEALTH-CHEM shall sell up to
1,320,000 shares of HEALTH-CHEM'S common stock to its stockholders
(the "OFFERING"), and use the net proceeds obtained from the
OFFERING to purchase up to 1,269,820 shares of HEALTH-CHEM'S common
stock from MARVIN SPEISER in accordance with that certain Stock
Purchase Agreement dated as of March 29, 1996 by and between
HEALTH-CHEM and MARVIN SPEISER, as the same may be amended by an
amendment acceptable to the LENDER ("STOCK PURCHASE").
The proceeds obtained by HEALTH-CHEM in connection with the
offering constitute EQUITY PROCEEDS and the BORROWERS have
requested that the LENDER modify the provisions of the LOAN
AGREEMENT and the PACIFIC LOAN AGREEMENT which require: (a) that
the EQUITY PROCEEDS reduce the maximum principal amount of the
REVOLVER by an amount equal to the EQUITY PROCEEDS minus the amount
used to make prepayments on the PACIFIC LOAN; and (b) PACIFIC make
a mandatory prepayment on the PACIFIC LOAN in an amount equal to
the EQUITY PROCEEDS. In addition, it is intended that a portion of
the PLEDGED STOCK shall be acquired by HEALTH-CHEM in connection
with the STOCK PURCHASE.
The parties have agreed to enter into this AGREEMENT in order
to set forth their understanding and agreement in connection with
the OFFERING and the STOCK PURCHASE.
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 LOAN AGREEMENT. The LOAN AGREEMENT
is hereby amended as follows:
a. Section 2.1. Section 2.1 of the LOAN
AGREEMENT is hereby amended by deleting the language "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 interest in Transderm
<PAGE>
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" and substituting in lieu thereof the following:
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 the equity interest in
any of the BORROWERS (excluding net proceeds
obtained in an 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; provided, however, the term
'Equity Proceeds' shall not include proceeds
obtained by Health-Chem Corporation between
June 1, and September 30, 1996 in connection
with the sale of up to 1,320,000 shares of
common stock provided that the net proceeds
(i.e., the total proceeds minus up to $.15 per
share sold) are used by Health-Chem
Corporation to purchase from Marvin M. Speiser
up to 1,269,820 shares of Health-Chem
Corporation common stock in accordance with
that certain Stock Purchase Agreement dated as
of March 29, 1996 by and between Health-Chem
Corporation and Marvin M. Speiser and Marvin
M. Speiser uses all of such proceeds to repay
Marvin M. Speiser's indebtedness to the LENDER
under that certain Promissory Note dated as of
July 15, 1994 in the principal amount of One
Million One Hundred Fifty Thousand Dollars
($1,150,000.00).
b. Section 7.7. Section 7.7 of the LOAN
AGREEMENT is hereby amended by deleting the words and number "Seven
Hundred Fifty Thousand Dollars ($750,000.00)" and substituting in
lieu thereof the words and number "One Million Seven Hundred Fifty
Thousand Dollars ($1,750,000.00)."
c. 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:
<PAGE>
Section 7.13. Loans and Advances. No
BORROWER shall make or permit to exist any
advance or loan to any officer or director of
a BORROWER which would cause the aggregate
amount of all loans and advances made by the
BORROWERS to officers and directors of the
BORROWERS (or any of the BORROWERS) to exceed
in the aggregate amount as to all such loans
or advances, the sum of (a) Six Hundred
Thousand Dollars ($600,000.00) during the
period between the date of this AGREEMENT and
the earlier of September 30, 1996 or the date
on which Health-Chem Corporation sells shares
of its common stock, which sale is undertaken
pursuant to a Stock Purchase Agreement by and
between Health-Chem Corporation and Marvin M.
Speiser dated March 29, 1996, as amended (the
earlier of such date is herein referred to as
the 'REDUCTION DATE'); and (b) at all times
after the REDUCTION DATE, One Hundred Thousand
Dollars ($100,000.00) provided that for one
ninety consecutive day period during any
twelve month period the aggregate amount of
all such loan and advances may exceed One
Hundred Thousand Dollars ($100,000.00) but
shall never exceed Three Hundred Thousand
Dollars ($300,000.00).
Section 3. AMENDMENT TO PACIFIC LOAN AGREEMENT. the PACIFIC
LOAN AGREEMENT is hereby amended as follows:
a. Section 2.6. Section 2.6 of the PACIFIC LOAN
AGREEMENT is hereby amended by deleting its present language in its
entirety and inserting in lieu thereof the following:
Section 2.6. Mandatory Prepayment. The
BORROWER shall make mandatory prepayments on
the LOAN, which prepayments shall be applied
to the principal balance in the inverse order
of scheduled maturities, in amounts equal to
the net proceeds obtained by any COMPANY in
connection with any sale or offering of any
equity interest in any of the COMPANIES,
excluding (a) the net proceeds obtained in the
offering made, or to be made, in 1995 in
connection with equity interests in Transderm
Laboratories Corporation, (b) the net proceeds
obtained by the exercise of any presently
existing stock options for stock in Health-
Chem Corporation, and (c) the net proceeds
(i.e., the total proceeds minus up to $.15 per
<PAGE>
share sold) obtained by Health-Chem
Corporation between June 1 and September 30,
1996 in connection with the sale of up to
1,320,000 shares of common stock provided that
the net proceeds are used by Health-Chem
Corporation to purchase from Marvin M. Speiser
up to 1,269,820 shares of Health-Chem
Corporation common stock in accordance with
that certain Stock Purchase Agreement dated as
of March 29, 1996 by and between Health-Chem
Corporation and Marvin M. Speiser and Marvin
M. Speiser uses all of such proceeds to repay
Marvin M. Speiser's indebtedness to the LENDER
under that certain Promissory Note dated as of
July 15, 1994 in the principal amount of One
Million One Hundred Fifty Thousand Dollars
($1,150,000.00). Each such mandatory
prepayment shall be made within five (5)
calendar days after he receipt by any COMPANY
of any such proceeds.
b. Section 6.7. Section 6.7 of the LOAN
AGREEMENT is hereby amended by deleting the words and number "Seven
Hundred Fifty Thousand Dollars ($750,000.00)" and substituting in
lieu thereof the words and number "One Million Seven Hundred Fifty
Thousand Dollars ($1,750,000.00)."
c. Section 6.14. Article 6 o the PACIFIC LOAN
AGREEMENT is hereby amended by inserting immediately after the
presently existing Section 6.13 the following new section:
Section 6.14. Loans and Advances. No
COMPANY shall make or permit to exist any
advance or loan to any officer or director of
a COMPANY which would cause the aggregate
amount of all loans and advances made by the
COMPANIES to officers and directors of the
COMPANIES (or any of the COMPANIES) to exceed
in the aggregate amount as to all such loans
or advances, the sum of (a) Six Hundred
Thousand Dollars ($600,000.00) during the
period between the date of this AGREEMENT and
the earlier of September 30, 1996 or the date
on which the Health-Chem Corporation sells
shares of its common stock, which sale is
undertaken pursuant to a Stock Purchase
Agreement by and between the Health-Chem
Corporation and Marvin M. Speiser dated March
29, 1996, as amended (the earlier of such date
is herein referred to as the 'REDUCTION
DATE'); and (b) at all times after the
<PAGE>
REDUCTION DATE, One Hundred Thousand Dollars
($100,000.00) provided that for one ninety
consecutive day period during any twelve month
period the aggregate amount of all such loan
and advances may exceed One Hundred Thousand
Dollars ($100,000.00) but shall never exceed
Three Hundred Thousand Dollars ($300,000.00).
Section 4. CONSENT. Pursuant to Section 7.5 of the LOAN
AGREEMENT and Section 6.5 of the PACIFIC LOAN AGREEMENT, the LENDER
hereby consents to he STOCK PURCHASE provided MARVIN SPEISER uses
such proceeds to repay the SPEISER LOAN.
Section 5. PLEDGED STOCK. The LENDER shall not release any
of the PLEDGED STOCK from the lien and security interests created
by the PLEDGE AGREEMENT until such time as the LENDER receives
payment in full of all sums outstanding under the SPEISER LOAN,
except the LENDER agrees that in connection with the STOCK PURCHASE
the LENDER shall release from the lien and security interest
created by the PLEDGE AGREEMENT that number of PLEDGED STOCK equal
to the number obtained by dividing (a) the amount of money obtained
by MARVIN SPEISER from the sale of HEALTH-CHEM'S common stock as a
result of the STOCK PURCHASE which is used by MARVIN SPEISER to
repay principal outstanding under the SPEISER LOAN by (b) Two
Dollars ($2.00).
Section 6. AGREEMENT OF MARVIN SPEISER. MARVIN SPEISER
hereby agrees to use all proceeds obtained in connection with the
STOCK PURCHASE first to repay all sums outstanding under the
SPEISER LOAN and then to use any remaining proceeds to repay the
sums he owes to HEALTH-CHEM under a loan in the approximate amount
of Two Hundred Fifty-Four Thousand Dollars ($254,000.00).
Section 7. OTHER TERMS. Except as specifically modified
herein, all other terms and provisions of the LOAN AGREEMENT, the
PACIFIC LOAN AGREEMENT and all documents evidencing, securing or
otherwise documenting the terms and provisions of the REVOLVER, the
SPEISER LOAN or the PACIFIC LOAN (collectively, together with the
LOAN AGREEMENT and the PACIFIC LOAN AGREEMENT, the "LOAN
DOCUMENTS") remain in full force and effect. MARVIN SPEISER and
each of the BORROWERS hereby ratify and confirm their respective
obligations under the LOAN DOCUMENTS. It is the intention of the
parties hereto that the modifications contained herein shall not
constitute a novation of the BORROWERS' or MARVIN SPEISER'S
respective obligations to the LENDER under the LOAN DOCUMENTS.
Section 8. 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.
<PAGE>
Section 9. 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 10. 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 DOCUMENTS.
IN WITNESS WHEREOF, the parties have executed this AGREEMENT
with the specific intention of creating a document under seal as of
the day and year first above written.
WITNESS/ATTEST: LENDER:
THE FIRST NATIONAL BANK OF MARYLAND,
A National Banking Association
/s/ Jon R. Christmann By: /s/ Garth C. Harding (SEAL)
Name: /s/ Garth C. Harding
Title: Vice President
MARVIN SPEISER:
/s/ Robert Haft /s/ Marvin M. Speiser (SEAL)
MARVIN M. SPEISER
BORROWERS:
HEALTH-CHEM CORPORATION,
A Delaware Corporation
/s/ Robert Haft By: /s/ Bruce M. Schloss (SEAL)
Bruce M. Schloss,
Vice President
HERCON LABORATORIES CORPORATION
A Delaware Corporation
/s/ Robert Haft By: /s/ Bruce M. Schloss (SEAL)
Bruce M. Schloss,
Vice President
<PAGE>
WITNESS/ATTEST: BORROWERS: (Cont'd)
HERCULITE PRODUCTS, INC.,
A New York Corporation
/s/ Robert Haft By: /s/ Bruce M. Schloss (SEAL)
Bruce M. Schloss,
Vice President
PACIFIC COMBINING CORP.,
A California Corporation
/s/ Robert Haft By: /s/ Bruce M. Schloss (SEAL)
Bruce M. Schloss,
Vice President
HERCON ENVIRONMENTAL CORPORATION,
A Delware Corporation
/s/ Robert Haft By: /s/ Bruce M. Schloss (SEAL)
Bruce M. Schloss,
Vice President
TRANSDERM LABORATORIES CORPORATION
A Delaware Corporation
/s/ Robert Haft By: /s/ Bruce M. Schloss (SEAL)
Bruce M. Schloss,
Assistant Secretary
