<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997 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, 1997, 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 (Unaudited) Item 1
(In thousands) Page 2
September 30, December 31,
1997 1996
ASSETS
<S>
CURRENT ASSETS <C> <C>
Cash and cash equivalents $ 129 $ 134
Accounts receivable, net 5,877 5,337
Inventories (Note 3) 7,305 7,343
Deferred taxes-current 512 554
Other current assets 1,438 1,285
Total Current Assets 15,261 14,653
PROPERTY, PLANT & EQUIPMENT
Land and buildings 5,721 5,713
Other property, plant & equipment 23,916 23,788
Total Property, Plant & Equipment 29,637 29,501
Less accumulated depreciation & amortization 17,261 15,934
Net Property, Plant & Equipment 12,376 13,567
NON-CURRENT ASSETS
Notes receivable 975 1,200
Cash surrender value of life insurance
policies 1,138 1,138
Excess of cost over fair value of assets
acquired 688 706
Deferred taxes-non-current 1,783 675
Other non-current assets 284 474
Total Non-Current Assets 4,868 4,193
TOTAL ASSETS $ 32,505 $ 32,413
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,922 $ 5,026
Accrued expenses and other current liabilities 2,854 2,132
Income taxes payable 570 568
Short-term bank debt 9,045 0
Total Current Liabilities 17,391 7,726
LONG-TERM LIABILITIES
10.375% convertible subordinated debentures 8,000 9,500
Long-term debt 0 6,082
Other long-term liabilities 2,383 1,949
Minority interest 13 12
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 <5,889> <3,463>
Subtotal 12,401 14,827
Less treasury stock <7,683> <7,683>
Total Stockholders' Equity 4,718 7,144
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,505 $ 32,413
<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
For the Nine Months
Ended September 30,
<S> 1997 1996
REVENUE: <C> <C>
Net sales $29,033 $37,838
Cost of goods sold 22,167 26,356
Gross profit 6,866 11,482
OPERATING EXPENSES:
Selling, general and administrative expense 6,990 7,173
Legal expense 375 2,089
Research and development expense 2,102 2,082
Net interest expense 1,210 924
Total operating expenses 10,677 12,268
LOSS FROM OPERATIONS <3,811> <786>
Other income - net 323 387
LOSS FROM OPERATIONS BEFORE TAXES
AND MINORITY INTEREST <3,488> <399>
Income tax benefit 1,064 211
LOSS BEFORE MINORITY INTEREST <2,424> <188>
Minority Interest in <earnings> of subsidiary <1> 0
LOSS BEFORE EXTRAORDINARY GAIN <2,425> <188>
Extraordinary <loss> gain from repurchase
of debentures <1> 5
NET LOSS $<2,426> $ <183>
Earnings per common share (primary & fully
diluted) (Note 4):
Loss before extraordinary gain $ <.30> $ <.02>
Extraordinary gain from repurchase of
debentures .00 .00
NET LOSS PER SHARE $ <.30> $ <.02>
Average number of common and common equivalent
shares outstanding (primary & fully diluted)
(Note 4): 7,982 7,982
<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 4
For the Three Months
Ended September 30,
<S> 1997 1996
REVENUE: <C> <C>
Net sales $ 9,957 $11,580
Cost of goods sold 7,589 7,966
Gross profit 2,368 3,614
OPERATING EXPENSES:
Selling, general and administrative expense 2,385 2,343
Legal expense 100 986
Research and development expense 855 673
Net interest expense 421 257
Total operating expenses 3,761 4,259
LOSS FROM OPERATIONS <1,393> <645>
Other income - net 65 183
LOSS FROM OPERATIONS BEFORE TAXES <1,328> <462>
Income tax benefit 361 196
NET LOSS $ <967> $ <266>
Earnings per common share (primary & fully
diluted) (Note 4):
NET LOSS PER SHARE $ <.12> $ <.03>
Average number of common and common equivalent
shares outstanding (primary & fully diluted)
(Note 4): 7,982 7,982
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE> HEALTH-CHEM CORPORATION Part I
CONSOLIDATED CASH FLOW STATEMENTS (Unaudited) Item 1
(In thousands) Page 5
For the Nine Months
Ended September 30,
<S> 1997 1996
Cash was <Used for> Provided by:
<C> <C>
OPERATIONS:
Loss before extraordinary gain $<2,425> $ <188>
Adjustments to reconcile to net cash <used for>
provided by operations:
Depreciation and amortization 1,480 1,457
Gain on disposal of property, plant and equipment 1 0
Provision for doubtful accounts receivable 35 65
Deferred income taxes <1,066> <203>
Minority interest 1 0
Changes in:
Accounts receivable <575> <1,265>
Inventories 39 1,112
Other current assets <153> <965>
Other non-current assets <139> 848
Accounts payable <105> 1,905
Accrued expenses and other current liabilities 120 <350>
Interest and income taxes payable 236 110
Other long-term liabilities 408 505
Other, net <1> <4>
Net cash <used for> provided by operations <2,144> 3,027
INVESTING:
Additions to property, plant and equipment <297> <2,010>
Proceeds on disposals of property, plant and
equipment 132 21
Investment in life insurance policies - net 264 <84>
Payments received on notes receivable 225 0
Net cash provided by <used for> investing 324 <2,073>
FINANCING:
Long-term debt proceeds 8,508 14,375
Long-term debt payments <5,551> <14,105>
Repurchase of convertible subordinated debentures <1,142> <1,330>
Net cash provided by <used for> financing 1,815 <1,060>
Net Increase <Decrease> in Cash and Cash Equivalents <5> <106>
Cash and Cash Equivalents at beginning of period 134 259
Cash and Cash Equivalents at end of period $ 129 $ 153
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,061 $ 932
Income Taxes 6 170
Supplemental Disclosures of Noncash Investing
and Financing:
Acquisition of fixed assets through capital
lease obligations $ 45 $ 0
<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").
The Consolidated Balance Sheet as of September 30, 1997, the
Consolidated Statements of Operations and the Consolidated Cash Flow
Statements for the interim periods ended September 30, 1997 and 1996
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, 1997 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.
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, 1996 Annual Report on Form 10-K. The results of
operations for the periods ended September 30, 1997 and 1996 are not
necessarily indicative of the operating results for the full years.
2. Taxes on Income (In thousands) For the Nine Months
Ended September 30,
1997 1996
The income tax <benefit> provision includes:
State and local income taxes $ 24 $ <91>
Federal income taxes <1,089> <117>
Total $<1,065> $ <208>
Taxes on income are comprised of:
Currently payable $ 1 $ <5>
Deferred benefit <1,066> <203>
Total $<1,065> $ <208>
Taxes are charged <credited> to:
Operations $<1,065> $ <211>
Extraordinary gain on repurchase of
debentures 0 3
Total $<1,065> $ <208>
A reconciliation of taxes on income to the federal statutory rate is as
follows:
For the Nine Months
Ended September 30,
1997 1996
Tax provision at statutory rate $<1,186> $ <133>
Increase <decrease> resulting from:
Intangibles and officers life insurance
premiums 77 6
State and local taxes, net of federal
tax benefit 24 <10>
Settlement of state tax assessments 0 <69>
Reversal of valuation allowance 0 <25>
Other 20 23
Tax benefit $<1,065> $ <208>
<PAGE> HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
3. Inventories (In thousands)
September 30, 1997 December 31, 1996
Raw materials $3,835 $3,979
Finished goods and work-in-process 3,470 3,364
Total $7,305 $7,343
4. Earnings Per Share
Primary and fully diluted earnings per share are computed 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. Subordinated debentures are anti-dilutive for all
periods presented.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128). SFAS 128 establishes standards for computing and presenting
earnings per share and applies to entities with publicly-held common
stock or potential common stock. SFAS 128 simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share," by replacing the presentation of primary earnings
per share with a presentation of basic earnings per share. It also
requires dual presentation of basic and diluted earnings per share on
the face of the income statement for all entities with complex capital
structures.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Earlier application
is not permitted; however, restatement of all prior-period earnings per
share data is required upon adoption. The impact of adopting SFAS 128
on the Company's earnings per share data is not expected to be
significant.
5. Litigation
In August 1995, Key Pharmaceuticals, Inc. a subsidiary of Schering-
Plough Corporation ("Key") commenced an action against Hercon in the
United States District Court for the District of Delaware ("Delaware
District Court") 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 transdermal
nitroglycerin products, for which the Company is seeking FDA approval,
constituted infringement of Key's patent for its Nitro-Dur (R) products.
Key sought 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 no earlier than
February 16, 2010, the expiration date of Key's patent. Hercon denied
the material allegations of the complaint, asserting, among other
things, that the Key patent is invalid and unenforceable and that Hercon
had not infringed and did not infringe any claim of the patent. Hercon
counterclaimed against Key for declaratory judgment of patent
noninfringement, invalidity and unenforceability. A two-week, non-jury
trial was completed on October 10, 1996. On September 30, 1997, the
Delaware District Court ruled in favor of Key: (a) on its infringement
claim; and (b) on Hercon's claim that Key's patent is invalid and
unenforceable. On October 29, 1997, Hercon filed an appeal against the
Delaware District Court's judgment with the United States District Court
for the Federal Circuit in Washington, DC. Management believes that
Hercon has strong grounds for appeal.<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
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
remarks regarding important factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. The following discussion
includes certain forward-looking statements. Such forward-looking statements
are subject to a number of factors, including material risks and
uncertainties, including those referred to herein and in the Company's Reports
on Form 10-K and Form 10-Q, which could cause actual results to differ
materially from the forward-looking statements.
Net sales decreased $8.8 million, or 23% for the nine months ended September
30, 1997 as compared to the same period in 1996. The decrease is due
primarily to decreases in sales of transdermal nitroglycerin patches and
synthetic fabrics of $6.5 million and $2.3 million, respectively. Sales of
transdermal nitroglycerin patches, manufactured and marketed by the Company's
Hercon Laboratories subsidiary ("Hercon Laboratories"), decreased due
primarily to the absence of sales to a former domestic distributor in 1997 who
accounted for approximately 12% of the Company's sales for the nine months
ended September 30, 1996. The most recent sales to this distributor were
during the fourth quarter of 1996. In August 1996, this former distributor
obtained approval from the United States Food and Drug Administration for the
manufacture and sale of its own nitroglycerin patches and now competes with
the Company's nitroglycerin patches. Sales to the Company's current domestic
distributors of nitroglycerin patches also decreased during the nine months
ended September 30, 1997, as compared to the same period in 1996. The
synthetic fabrics sales decrease is due primarily to lower sales of industrial
and health-care fabrics. During the first half of 1997, in anticipation of
increased market pressures and delays in approvals from the FDA for the sale
of new nitroglycerin patches, the Company undertook an organizational
restructuring which is expected to reduce annual payroll-related expenses by
approximately $1,600,000. While the Company hopes to receive approvals for
its new nitroglycerin patches in 1998, no assurances can be made that any new
nitroglycerin patches will be approved by the FDA. Moreover, the Company's
ability to exploit its new nitroglycerin products may be limited in the
absence of a favorable resolution to its litigation with Key (See Note 5 above
and discussion below).
Net sales decreased $1.6 million, or 14% for the quarter ended September 30,
1997 as compared to the same period in 1996. The decrease is due primarily to
decreases in sales of transdermal nitroglycerin patches of $2.0 million offset
by increased sales of synthetic fabrics and environmental products of $.3
million and $.1 million, respectively. The transdermal nitroglycerin patch
sales decrease is attributable to the factors noted above. The synthetic
fabrics sales increase of $.3 million is due primarily to increased sales at
the Company's Pacific Combining subsidiary ("Pacific").
Gross profit decreased $4.6 million, or 40% for the nine months ended
September 30, 1997 as compared to the same period in 1996. The decrease is
due primarily to decreased gross profits for transdermal nitroglycerin patches
and synthetic fabrics of $4.3 million and $.3 million, respectively. Gross
profit as a percentage of net sales for the nine months ended September 30,
1997 and 1996 was 24% and 30%, respectively. Gross profit for transdermal
nitroglycerin patches decreased $4.3 million due primarily to decreased
domestic sales volumes. Gross profit for transdermal nitroglycerin patches as
a percentage of net sales for the nine months ended September 30, 1997 and
1996 was 43% and 58%, respectively. Lower transdermal nitroglycerin patch
margins also reflect the allocation of fixed costs over decreased revenue.
<PAGE>
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 9
Gross profit for synthetic fabrics decreased $.3 million reflecting a $.4
million decrease for Pacific offset by a $.1 million increase for the
Company's Herculite Products subsidiary ("Herculite"). Plant overhead
decreased $1.0 million, including a $.5 million decrease for payroll-related
expenses, for the nine months ended September 30, 1997 as compared to the same
period in 1996 reflecting, in part, the organizational restructuring and cost
reduction program.
Gross profit decreased $1.2 million, or 34% for the quarter ended September
30, 1997 as compared to the same period in 1996. The decrease is due
primarily to decreased gross profits for transdermal nitroglycerin patches of
$1.2 million. Plant overhead decreased $.5 million, including a $.2 million
decrease for payroll-related expenses, for the quarter ended September 30,
1997 as compared to the same period in 1996.
Selling, general and administrative expenses decreased $.2 million for the
nine months ended September 30, 1997 as compared to the corresponding period
in 1996. The decrease is due primarily to lower payroll-related costs.
Selling, general and administrative expenses were about the same for the
quarter ended September 30, 1997 as compared to the same period in 1996.
Legal expenses decreased $1.7 million and $.9 million for the nine months and
quarter ended September 30, 1997 respectively, as compared to the same period
in 1996. The decreased legal expenses are due primarily to reduced activity
associated with the defense of the action brought by Key against Hercon
Laboratories, for which a two-week trial was completed in October 1996 (See
Note 5 above).
Research and development expenses were approximately the same for the nine
months ended September 30, 1997 as compared to the same period in 1996.
Payroll related expenses decreased $.3 million reflecting the organizational
restructuring changes; however, this decrease was more than offset by higher
outside clinical testing expenses. Research and development expenses
increased $.2 million for the quarter ended September 30, 1997 as compared to
the same period in 1996. These increases are due primarily to higher outside
clinical testing expenses. The Company expects total research and development
expenses related to pharmaceutical products in 1997 to be lower than 1996
levels.
Net interest expenses increased $.3 million and $.2 million for the nine
months and quarter ended September 30, 1997 respectively, as compared to the
same periods in 1996. These increases are due primarily to higher average
outstanding balances on borrowings.
Other income decreased $.1 million for both the nine months and quarter ended
September 30, 1997 respectively, as compared to the same periods in 1996.
These decreases are due primarily to nonrecurring proceeds received in the
third quarter of 1996 related to a settlement of a lawsuit.
Loss from operations before taxes and minority interest for the nine months
and quarter ended September 30, 1997 increased $3.1 million and $.9 million,
respectively, as compared to the same period in 1996 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 (See Note 2).
The results of operations for the periods ended September 30, 1997 and 1996
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 10
Liquidity and Capital Resources
The following measures of liquidity are derived from the Company's
Consolidated Financial Statements:
September 30, December 31,
1997 1996
Working Capital (current assets less current
liabilities, in thousands) <$2,130> $6,927
Current Ratio (current assets/current liabilities) .9 1.9
Quick Ratio (cash & receivables/current liabilities) .3 .7
Working capital decreased $9.1 million from December 31, 1996 to September 30,
1997 due to an increase of $9.7 million in current liabilities partially
offset by an increase of $.6 million in current assets. Accounts receivable
and other current assets increased $540,000 and $153,000 respectively, while
inventory and deferred taxes decreased $38,000 and $42,000, respectively. The
increase in accounts receivable reflects increased levels of sales for the
month of September 1997 as compared to lower sales levels for the month of
December 1996. The increase in current liabilities is due primarily to
increases of $9.0 million in short-term debt and $722,000 in accrued expenses
and other current liabilities partially offset by a $105,000 decrease in
accounts payable. The increase in short-term debt is due to a
reclassification of the Company's outstanding debt with IBJ Schroder Bank &
Trust Company ("IBJS") (see below). The accounts payable decrease reflects a
decrease in legal fees related to the defense of Hercon Laboratories in its
litigation with Key (see Note 5 above) and a decrease in raw material
purchases related to lower sales levels of transdermal nitroglycerin patches.
Accrued expenses and other current liabilities increased $722,000 due
primarily to a reclassification of a portion of the Company's subordinated
debentures from long-term debt to current liabilities and an increase in
accrued interest.
Cash used for operations for the nine months ended September 30, 1997 was $2.1
million as compared to cash provided by operations of $3.0 million for the
same period in 1996. This decrease is due primarily to lower sales volumes
and decreased gross profits for 1997 as compared to 1996. Investing
activities for the nine months ended September 30, 1997 provided cash of $.3
million as compared to cash used for investing of $2.1 million for the same
period in 1996. This increase is due primarily to lower additions to
property, plant and equipment for 1997 which reflects the completion of
spending on the new laminating line for Pacific. Financing activities for the
nine months ended September 30, 1997 provided $1.8 million of cash required to
fund operations, thus increasing long-term debt as compared to the same period
in 1996 when $1.0 million of cash generated by operations was used to reduce
long-term debt.
The Company expects to meet $.5 million of debenture interest payments on its
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, 1997
was satisfied by application of $.5 million debentures previously repurchased
and by the Company's redemption of an additional $1.0 million of debentures.
In market transactions throughout the nine months of 1997, the Company
purchased $145,000 principal amount of its subordinated debentures for
$142,000. Debentures may be repurchased and retired throughout the year or if
debentures are not available for purchase, the Company has an option to call
for redemption the amount required to meet 1998 sinking fund requirements.
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 11
The Company has not paid cash dividends and does not anticipate paying such
dividends on its common stock in the foreseeable future.
On January 9, 1997, the Company replaced a $6,000,000 line of credit and a
$1,750,000 term loan from The First National Bank of Maryland ("First
National") with an aggregate of up to $15,000,000 in senior secured financing
from IBJS. Pursuant to a Revolving Credit Term Loan and Security Agreement
("Loan Agreement") dated as of January 9, 1997, the Company will be provided
with up to $7,000,000 in term loans and up to $8,000,000 in revolving credit.
Proceeds from borrowings under the Loan Agreement were used by the Company to
repay outstanding indebtedness under the aggregate $7,750,000 facility with
First National and are also used to repurchase, repay and/or redeem up to
$7,000,000 of the Company's 10 3/8% Convertible Subordinated debentures due
April 15, 1999, as market conditions warrant, and for general working capital
purposes. Advances on the term loan are limited to $4,000,000 until such time
as the litigation between Hercon Laboratories and Key is resolved in such a
way as to be immaterial on the future operations of the Company.
At September 30, 1997 the Company had borrowed $6.3 million on its revolving
line of credit from IBJS and $2.7 million on the term loan. A $1.1 million
increase in the term loan, made in the second quarter, was used to purchase
the Company's convertible subordinated debentures to meet the April 1997
sinking fund requirements. The revolving credit line bears interest at the
Bank's prime rate and the term loan bears interest at the Bank's prime rate
plus .375%. Borrowings under the IBJS facility are collateralized by a pledge
of substantially all of the assets of the Company. The Company will pay a
facility fee of 3/8 of 1% on the amount of the unused available financing
facility. The borrowing agreement, which expires on January 9, 2002, contains
various covenants which, among other things, require the Company to maintain
specified ratios of net worth, current ratio, fixed charge coverage, minimum
level of earnings before taxes, depreciation and amortization and limits
capital expenditures. The Company was not in compliance with the net worth,
current ratio, fixed charge coverage and the minimum level of earnings before
taxes, depreciation and amortization covenants at September 30, 1997. This
resulted in a reclassification of amounts outstanding under the line of credit
and term loan to short-term debt. IBJS has granted the Company a waiver for
these covenants. The Company is currently in negotiations with IBJS to amend
the facility and anticipates a successful completion of these negotiations
prior to the end of December 1997.
The $8,000,000 revolving credit line borrowing base is limited to the sum of
85% of eligible accounts receivable and 50% of eligible inventory. The
eligible amount is evaluated monthly. For the nine months ended September 30,
1997, the maximum eligible amount of the $8,000,000 revolving credit line, has
ranged from $6,460,000 to $7,385,000, or from 81% to 92%.
The Company's debt to equity ratio was 6:1 at September 30, 1997 and 4:1 at
December 31, 1996. The increase is due primarily to current year losses.
Management believes anticipated expenditures in 1997 such as capital
expenditures, research and development costs and other operating expenses will
be financed by the utilization of the Company's credit facility from IBJS.
The term loan portion of up to $7,000,000 of the overall $15,000,000 credit
facility from IBJS will be used for the repurchasing of debentures. The
Company anticipates capital expenditures for property, plant and equipment in
1997 to decrease from the $2.2 million expended in 1996 to approximately $.5
million. These capital expenditures will primarily consist of manufacturing
equipment. At September 30, 1997 the Company had expended $297,000 for
capital expenditures for property, plant and equipment in 1997.
<PAGE>
<PAGE>
Part II
Item 1
Page 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 5 of the Notes to Consolidated Financial Statements
for an update on the litigation between Key Pharmaceuticals, Inc. and Hercon
Laboratories Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none.
(b) During the three months ended September 30, 1997 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 the signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH-CHEM CORPORATION
November 13, 1997 /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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 129
<SECURITIES> 0
<RECEIVABLES> 6112
<ALLOWANCES> 235
<INVENTORY> 7305
<CURRENT-ASSETS> 1950
<PP&E> 29637
<DEPRECIATION> 17261
<TOTAL-ASSETS> 32505
<CURRENT-LIABILITIES> 17391
<BONDS> 8000
<COMMON> 145
0
0
<OTHER-SE> 4718
<TOTAL-LIABILITY-AND-EQUITY> 32505
<SALES> 29033
<TOTAL-REVENUES> 29033
<CGS> 22167
<TOTAL-COSTS> 22167
<OTHER-EXPENSES> 9467
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1210
<INCOME-PRETAX> (3488)
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