<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, 1998 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, 1998, 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,
1998 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 158 $ 162
Accounts receivable, net 5,169 4,194
Inventories (Note 3) 7,930 7,537
Other current assets 1,291 1,044
Total Current Assets 14,548 12,937
PROPERTY, PLANT & EQUIPMENT
Land and buildings 5,721 5,721
Other property, plant & equipment 24,405 23,875
Total Property, Plant & Equipment 30,126 29,596
Less accumulated depreciation & amortization 19,151 17,704
Net Property, Plant & Equipment 10,975 11,892
NON-CURRENT ASSETS
Notes receivable 675 900
Cash surrender value of life insurance
policies 1,038 1,033
Excess of cost over fair value of assets
acquired 0 682
Deferred taxes-non-current 1,891 1,892
Other non-current assets 319 600
Total Non-Current Assets 3,923 5,107
TOTAL ASSETS $29,446 $29,936
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,049 $ 4,189
Accrued expenses and other current liabilities 1,637 1,389
Current portion of 10.375% convertible
subordinated debentures 8,000 1,190
Bank debt 10,347 305
Income taxes payable 193 166
Total Current Liabilities 25,226 7,239
LONG-TERM LIABILITIES
10.375% convertible subordinated debentures 0 8,000
Long-term debt 0 8,270
Other long-term liabilities 2,919 2,530
Minority interest 14 11
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 <9,320> <6,721>
Subtotal 8,970 11,569
Less treasury stock <7,683> <7,683>
Total Stockholders' Equity 1,287 3,886
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,446 $29,936
<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
<S> Ended September 30,
1998 1997
REVENUE: <C> <C>
Net sales $28,119 $28,861
Cost of goods sold 21,330 22,167
Gross profit 6,789 6,694
OPERATING EXPENSES:
Selling, general and administrative expense 6,485 6,800
Legal expense 569 375
Goodwill amortization 18 18
Write-off of goodwill 664 0
Research and development expense 824 2,102
Net interest expense 1,253 1,210
Total operating expenses 9,813 10,505
LOSS FROM OPERATIONS <3,024> <3,811>
Other income - net 432 323
LOSS FROM OPERATIONS BEFORE TAXES
AND MINORITY INTEREST <2,592> <3,488>
Income tax provision <benefit> 1 <1,064>
LOSS BEFORE MINORITY INTEREST <2,593> <2,424>
Minority Interest in earnings of subsidiary 3 1
LOSS BEFORE EXTRAORDINARY LOSS <2,596> <2,425>
Extraordinary loss from repurchase of debentures 3 1
LOSS $<2,599> $<2,426>
Earnings per common share (basic & diluted)
(Note 4):
Loss before extraordinary gain $ <.33> $ <.30>
Extraordinary loss from repurchase of
debentures .00 .00
LOSS PER COMMON SHARE $ <.33> $ <.30>
Average number of common shares outstanding
(basic & 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> 1998 1997
REVENUE: <C> <C>
Net sales $ 8,609 $ 9,785
Cost of goods sold 7,296 7,589
Gross profit 1,313 2,196
OPERATING EXPENSES:
Selling, general and administrative expense 2,222 2,207
Legal expense 27 100
Goodwill amortization 6 6
Write-off of goodwill 664 0
Research and development expense 283 855
Net interest expense 417 421
Total operating expenses 3,619 3,589
LOSS FROM OPERATIONS <2,306> <1,393>
Other income - net 161 65
LOSS FROM OPERATIONS BEFORE TAXES <2,145> <1,328>
Income tax provision <benefit> 8 <361>
LOSS $<2,153> $ <967>
Earnings per common share (basic & diluted)
(Note 4):
LOSS PER COMMON SHARE $ <.27> $ <.12>
Average number of common shares outstanding
(basic & 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> 1998 1997
Cash was <Used for> Provided by: <C> <C>
OPERATIONS:
Loss before extraordinary loss $<2,596> $<2,425>
Adjustments to reconcile to net cash used for
operations:
Depreciation and amortization 1,596 1,480
Write-off of goodwill 664 0
Gain on disposal of property, plant and equipment <7> 1
Provision for doubtful accounts receivable 81 35
Deferred income taxes 0 <1,066>
Minority interest 3 1
Changes in:
Accounts receivable <1,055> <575>
Inventories <393> 39
Other current assets <247> <153>
Other non-current assets 201 <139>
Accounts payable 859 <105>
Accrued expenses and other current liabilities 45 120
Interest and income taxes payable 225 236
Other long-term liabilities 390 408
Other, net 0 <1>
Net cash used for operations <234> <2,144>
INVESTING:
Additions to property, plant and equipment <561> <297>
Proceeds on disposals of property, plant and
equipment 8 132
Investment in life insurance policies - net <5> 264
Payments received on notes receivable 225 225
Net cash <used for> provided by investing <333> 324
FINANCING:
Long-term debt proceeds 2,049 8,508
Long-term debt payments <296> <5,551>
Repurchase of convertible subordinated debentures <1,190> <1,142>
Net cash provided by financing 563 1,815
Net Decrease in Cash and Cash Equivalents <4> <5>
Cash and Cash Equivalents at beginning of period 162 134
Cash and Cash Equivalents at end of period $ 158 $ 129
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,146 $ 1,061
Income Taxes 4 6
Supplemental Disclosures of Noncash Investing
and Financing:
Acquisition of fixed assets through capital
lease obligations $ 24 $ 45
<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, 1998, the
Consolidated Statements of Operations and the Consolidated Cash Flow
Statements for the interim periods ended September 30, 1998 and 1997
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, 1998 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, 1997 Annual Report on Form 10-K. The results of
operations for the periods ended September 30, 1998 and 1997 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,
1998 1997
The income tax <benefit> provision includes:
State and local income taxes $ 0 $ <24>
Federal income taxes 0 <1,089>
Total $ 0 $<1,065>
Taxes on income are comprised of:
Currently payable <receivable> $ 0 $ 1
Deferred <benefit> 0 <1,066>
Total $ 0 $<1,065>
Taxes are charged <credited> to:
Operations $ 1 $<1,065>
Extraordinary gain on repurchase of
debentures <1> 0
Total $ 0 $<1,065>
A reconciliation of taxes on income to the federal statutory rate is as
follows:
For the Nine Months
Ended September 30,
1998 1997
Tax benefit at statutory rate $ <882> $<1,186>
Increase <decrease> resulting from:
Intangibles and officers life insurance
premiums 6 77
State and local taxes, net of federal
tax benefit <166> 22
Valuation allowance 1,027 2
Other 15 20
Tax benefit $ 0 $<1,065>
3. Inventories (In thousands)
September 30, 1998 December 31, 1997
Raw materials $3,903 $3,590
Finished goods and work-in-process 4,027 3,947
Total $7,930 $7,537<PAGE>
<PAGE> HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
4. Earnings Per Share
On December 31, 1997, the Company adopted 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.
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 material. In accordance with SFAS 128, if there is a
loss from continuing operations, diluted earnings per share would be the
same as basic earnings per share.
Basic and diluted earnings per share are computed based upon the
weighted average number of common shares outstanding during each period
after adjustment for any dilutive effect of the Company's outstanding
10.375% convertible subordinated debentures and stock options. Interest
on the subordinated debentures, when dilutive, net of applicable taxes,
is added to net income for the purpose of computing earnings per share.
Convertible subordinated debentures and stock options are anti-dilutive
for all periods presented.
A reconciliation of the numerators and denominators of the basic and
diluted earnings per common share computations for loss from continuing
operations for the periods ended September 30, 1998 and 1997 is
presented below (in thousands, except per share amounts):
For the For the
Nine Months Three Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Loss Applicable to Common
Stockholders:
Loss before extraordinary
item $<2,596> $<2,425> $<2,153> $ <967>
Loss applicable to
common stockholders $<2,596> $<2,425> $<2,153> $ <967>
Basic Loss Per Common Share:
Weighted average number of
common shares outstanding 7,982 7,982 7,982 7,982
Basic Loss per common share $ <.33> $ <.30> $ <.27> $ <.12>
Diluted Earnings <Loss> Per
Common Share:
Weighted average number of
common shares outstanding 7,982 7,982 7,982 7,982
Stock options 0 0 0 0
Convertible debentures 0 0 0 0
Weighted average number of
common shares outstanding
- diluted 7,982 7,982 7,982 7,982
Diluted loss per common
share $ <.33> $ <.30> $ <.27> $ <.12>
<PAGE> HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 8
Options to purchase 295,000 and 466,500 shares of common stock were
outstanding at September 30, 1998 and 1997, respectively. No options
were included in the computation of diluted earnings per common share
for the three months and six months ended September 30, 1998 and 1997
because the Company reported a loss from continuing operations for those
periods.
5. Litigation
In August 1995, Key Pharmaceuticals, Inc. a subsidiary of Schering-
Plough Corporation ("Key") commenced an action against Hercon
Laboratories in the United States District Court for the District of
Delaware alleging that Hercon Laboratories Corporation's ("Hercon
Laboratories") submission to the United States Food and Drug
Administration ("FDA") of three Abbreviated New Drug Applications
("ANDAs") relating to some of Hercon Laboratories' transdermal
nitroglycerin products, and for which Hercon Laboratories is awaiting
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 Laboratories denied the material allegations of the complaint,
asserting, among other things, that the Key patent is invalid and
unenforceable and that Hercon Laboratories had not infringed and did not
infringe any claim of the patent. Hercon Laboratories counterclaimed
against Key for declaratory judgment of patent noninfringement,
invalidity and unenforceability. On September 30, 1997, the Delaware
District Court ruled in favor of Key both on its infringement claim and
on Hercon Laboratories' claim that Key's patent is invalid and
unenforceable. On December 17, 1997, the Delaware District Court issued
an injunction, enjoining Hercon Laboratories, except as provided for by
statute, from making, using, offering for sale, selling or importing any
transdermal nitroglycerin patches that have been found to infringe claim
14 of Key's patent, before the expiration of Key's patent on February
16, 2010. Hercon Laboratories has appealed to the United States Court
of Appeals for the Federal Circuit in Washington, D.C. from both the
September 30, 1997 judgment and the December 17, 1997 injunction. Oral
argument on the consolidated appeals was heard by the appellate court on
August 5, 1998. The Company is awaiting decision by the court.
Management continues to believe that Hercon Laboratories has strong
grounds for prevailing on appeal.
Item 2. Management's Discussion and Analysis of Financial Condition and
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, which could cause actual results to differ materially from the
forward-looking statements.
Results of Operations
Net sales decreased $.7 million, or 3%, for the nine months ended September
30, 1998 as compared to the same period in 1997. The decrease is due
primarily to decreases in sales of synthetic fabrics and environmental
products of $2 million and $.2 million, respectively, partially offset by
increases in sales from Hercon Laboratories of $1.5 million. The synthetic
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 9
fabrics sales decrease is due primarily to a $2.3 million decrease in sales of
industrial fabrics at the Company's Pacific Combining Corporation subsidiary
("Pacific"). Sales increases at Hercon Laboratories are due primarily to
increased sales of transdermal nitroglycerin patches and over-the-counter
pharmaceutical and cosmetic products of $.3 million and $1.2 million,
respectively. Sales of environmental products decreased $.2 million due
primarily to lower sales of disruptant products, partially offset by increased
sales of insecticide products. 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 reduced annual payroll-related expenses. For the nine
months and quarter ended September 30, 1998, total payroll-related expenses
were reduced by $1.1 million and $.1 million, respectively, principally due to
the organizational restructuring. On October 30, 1998, the Company received
FDA market approval for its improved nitroglycerin patches. The Company's
newly-approved patches have been rated by the FDA as an accepted generic
alternative to Novartis Pharmaceutical Corporation's Transderm Nitro(R)
products. The Company's ability to commercially exploit its newly-improved
nitroglycerin products is currently being adversely affected by the absence of
a favorable resolution to its litigation with Key (See Note 5 above and
discussion below). Current orders for the over-the-counter pharmaceutical and
cosmetic products are expected to contribute in excess of $1.5 million in net
sales during the fourth quarter of 1998, with additional orders anticipated
for delivery in 1999.
Net sales decreased $1.2 million, or 12% for the quarter ended September 30,
1998 as compared to the same period in 1997. The decrease is due primarily to
decreases in sales of synthetic fabrics, transdermal nitroglycerin patches and
environmental products of $1.5 million, $.6 million and $.3 million,
respectively. Sales decreases were partially offset by initial sales of over-
the-counter pharmaceutical and cosmetic products of $1.2 million. The
synthetic fabrics sales decrease is due primarily to lower sales of industrial
fabrics. The transdermal nitroglycerin patch sales decrease is due primarily
to lower domestic sales volumes. The environmental product sales decrease is
due primarily to lower sales of disruptants and insecticides.
Gross profit increased $.1 million, or 1%, for the nine months ended September
30, 1998 as compared to the same period in 1997. The increase is due
primarily to increases in gross profit for Hercon Laboratories' products of
$.6 million, partially offset by deceases in gross profits for synthetic
fabrics of $.5 million. Gross profit as a percent of sales for the nine
months ended September 30, 1998 and 1997 was 24% and 23%, respectively. The
synthetic fabrics gross profit decrease consists of a $.9 million gross profit
decrease for Pacific, partially offset by a $.4 million increase for the
Company's Herculite Products, Inc. subsidiary ("Herculite"). Hercon
Laboratories' gross profit increases relate to the initial sales of over-the-
counter pharmaceutical and cosmetic products and increased sales volumes for
foreign transdermal nitroglycerin patches. Payroll-related expenses decreased
$.2 million for the nine months ended September 30, 1998 as compared to the
same period in 1997 reflecting, in part, the organizational restructuring and
cost reduction program.
Gross profit decreased $.9 million, or 40% for the quarter ended September 30,
1998 as compared to the same period in 1997. The decrease is due primarily to
decreased gross profits for synthetic fabrics at Pacific, domestic transdermal
nitroglycerin patches and environmental products. Gross profit for synthetic
fabrics at Pacific decreased $.6 million due primarily to lower sales volumes
of industrial fabrics. Hercon Laboratories' gross profit decreased $.2
million due primarily to lower sales volumes of higher margin products.
Hercon Laboratories' gross profit as a percentage of net sales decreased to 9%
in 1998 from 35% in 1997. Environmental products gross profit decreased $.1
million due primarily to lower sales volumes of disruptant and insecticide
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 10
products. Plant overhead increased $.2 million for the quarter ended
September 30, 1998 as compared to the same period in 1997 due primarily to
increased sales of lower margin products for Hercon Laboratories. Payroll-
related expenses remained essentially the same for the quarter ended September
30, 1998 as compared to the same period in 1997 despite an increase in
payroll-related expenses of $.1 million for Hercon Laboratories.
Selling, general and administrative expenses decreased $.3 million for the
nine months ended September 30, 1998 as compared to the corresponding periods
in 1997. This decrease is due primarily to lower general and administrative
expenses of $.5 million partially offset by higher selling and marketing
expenses of $.2 million.
Selling, general and administrative expenses were flat for the quarter ended
September 30, 1998 as compared to the same period in 1997. An increase in
selling and marketing expenses was largely offset by lower general and
administrative expenses.
Legal expenses increased $.2 million for the nine months and decreased $.1
million for the quarter ended September 30, 1998, as compared to the same
periods in 1997. The increased legal expenses are due primarily to activity
associated with the defense of the action brought by Key against Hercon
Laboratories (see Note 5 of the Notes to Consolidated Financial Statements)
and to an award of fees and expenses in connection with the dismissal of a
class and derivative action. The decrease for the quarter is due in part to
insurance reimbursements for previously paid litigation expenses.
Research and development expenses decreased $1.3 million and $.6 million for
the nine months and quarter ended September 30, 1998, respectively, as
compared to the same periods in 1997. Payroll-related expenses decreased $.5
million and $.1 million for the nine months and quarter ended September 30,
1998, respectively, as compared to the same periods in 1997 reflecting the
organizational restructuring. Outside clinical testing and clinical materials
expenses decreased a combined $.7 million for the nine months ended September
30, 1998 as compared to the same period in 1997. The Company expects total
research and development expenses in 1998 to be lower than 1997 levels.
Net interest expenses were essentially the same for the nine months and for
the quarter ended September 30, 1998 as compared to the same periods in 1997.
Continuing reductions in revenues and escalating losses at Pacific, during the
quarter ended September 30, 1998, have caused the Company to consider a
restructuring or sale or other disposition of this business. Management
believes that a decision as to which alternative to pursue will be made later
in the fourth quarter of fiscal 1998. Accounting Principals Board Opinion No.
17, "Intangible Assets" (APB 17), specifies that a Company should periodically
review the remaining expected period of benefits with regard to its
amortization of goodwill. The Company has evaluated Pacific's goodwill of $.7
million as of September 30, 1998. After considering the financial position
and results of operations of Pacific for the current and preceding years as
well as future prospects, the Company, in accordance with APB 17, has decided
that the goodwill at Pacific will not have a future benefit and has elected to
write it off as of September 30, 1998.
Other income increased $.1 million for the nine months and quarter ended
September 30, 1998 as compared to the same periods in 1997. These increases
are due primarily to recording $.2 million and $.1 million for the nine months
and third quarter ended September 30, 1998, respectively, related to
development work income at Hercon Laboratories, partially offset by 1997 non-
recurring proceeds of $.1 million related to a Hercon Laboratories
distribution agreement.
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 11
Loss from operations before taxes and minority interest for the nine months
ended September 30, 1998 decreased $.9 million and for the quarter ended
increased $.8 million as compared to the same periods in 1997 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 Company recorded a valuation allowance of $1,027,000 to offset tax
benefits from current year losses in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"). (See discussion below).
The results of operations for the periods ended September 30, 1998 and 1997
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:
September 30, December 31,
1998 1997
Working Capital (current assets less current
liabilities, in thousands) $<10,678> $5,698
Current Ratio (current assets/current liabilities) .6 1.8
Quick Ratio (cash & receivables/current liabilities) .2 .6
Working capital decreased $16.4 million from December 31, 1997 to September
30, 1998 due to an increase of $18 million in current liabilities, partially
offset by an increase of $1.6 in current assets. Accounts payable, accrued
expenses and other current liabilities, current portion of 10.375% convertible
subordinated debentures, and bank debt increased $.9 million, $.3 million,
$6.8 million and $10 million, respectively. The increase in 10.375%
convertible subordinated debentures reflects a reclassification to current
liabilities of the portion due within one year. The outstanding bank debt
with IBJ Schroder Business Credit Corporation (formerly IBJ Schroder Bank &
Trust Company) ("IBJS") was reclassified to current liabilities in September
1998 because the Company was not in compliance with certain financial
covenants of its loan agreement with IBJS. (See discussion below). Accounts
receivable, inventories and other current assets increased $1 million, $.4
million and $.2 million, respectively.
At December 31, 1997, the Company reversed a liability for federal income
taxes payable in the amount of $443,000. This liability was originally
established to provide for potential audit adjustments. The Company re-
evaluated the liability at year end and determined that because the tax years
in question were no longer open, the liability was not necessary and should be
reversed to income.
At December 31, 1997, the Company had moved into a three year cumulative loss
status. In accordance with SFAS 109, this required the Company to assess the
likelihood that all or a portion of its deferred tax asset would not be
realized, in which case the asset would have to be reduced by a valuation
allowance. To determine the amount of the valuation allowance, all positive
and negative information regarding financial position and results of
operations of the Company for the current, preceding and future years was
considered. In addition, the Company considered tax-planning strategies in
determining the amount of valuation allowance required. Under SFAS 109, a tax
planning strategy is a prudent and feasible action that is allowable under the
tax law and is expected to result in realization of deferred tax benefits.
Such action is one that management normally would not implement unless the
Company were about to lose tax benefits. At December 31, 1997, the Company
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 12
determined that it would be feasible to enter into a sale-leaseback
transaction before the deferred tax assets expire. This tax planning
strategy, in conjunction with other deferred tax liabilities, enabled the
Company to continue to recognize deferred tax assets of approximately
$1,892,000. In accordance with SFAS 109, the Company was required to increase
its valuation allowance by $1,019,000 to $9,488,000.
At December 31, 1997, the Company had approximately $18 million of net
operating loss carryforwards for federal income tax purposes which expire in
various years from 2000 through 2012 and tax credit carryforwards that expire
in various years from 1998 through 2008. The Company also had net operating
loss carryforwards in various states in which the Company and its subsidiaries
operate which are available to absorb allocated portions of future taxable
income for state tax purposes. The state operating loss carryforwards expire
from 1998 through 2012. The Company believes that it is more likely than not
that the $1,892,000 deferred tax asset will be realizable, however, the amount
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
At September 30, 1998, the Company recorded an increase of $1,027,000 to its
valuation allowance to offset increases to the deferred tax asset primarily in
the form of net operating losses from the current year. The deferred tax
asset net of a valuation allowance remains at $1,892,000.
Cash used for operations for the nine months ended September 30, 1998 and 1997
was $234,000 and $2.1 million, respectively. This decrease is due primarily
to no change in deferred income tax assets in 1998 as compared to increasing
deferred income tax assets of $1.1 million in 1997. The reduction in cash
used for operations was partially offset by increasing inventory of $.4
million in 1998 as compared to a reduction in inventory in 1997 of $39,000.
Investing activities for the nine months ended September 1998 consumed cash of
$.3 million as compared to providing cash for investing activities of $.3
million for the same period in 1997. This decrease in cash generation is due
primarily to a reduction in investment in life insurance policies and an
increase in additions to property, plant and equipment. Financing activities
for the nine months ended September 30, 1998 and 1997 provided cash for
operations of $.6 million and $1.8 million, respectively.
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 secured financing from IBJS. Pursuant to a Revolving Credit
Term Loan and Security Agreement ("Loan Agreement") dated as of January 9,
1997, the Company was 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. The term loans were
intended to be 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. Term loan advances were limited to $4,000,000
until the resolution of the litigation between Hercon Laboratories and Key in
such a way as to be immaterial on the future operations of the Company.
Borrowings under the IBJS facility are collateralized by a pledge of
substantially all of the assets of the Company. The Loan Agreement, which
expires on January 9, 2002, was subject to various covenants which, among
other things, required 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. On January 21,
1998, the Company entered into a First Amendment ("First Amendment") to the
Loan Agreement with IBJS. The First Amendment, among other things, amended
the terms for drawing upon the term loan and amended certain financial
covenants. Pursuant to the First Amendment, the maximum term loan amount was
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 13
reduced to $3,998,000 from $7,000,000 providing an aggregate of up to
$11,998,000 in senior secured financing. In addition, an overadvance facility
of $400,000 was provided through July 31, 1998. The interest rates on the
revolving credit line and term loans increased to IBJS's prime plus .50% and
IBJS's prime plus .875%, respectively. These rates are subject to a .25%
decrease upon IBJS's satisfactory review of the financial statements for the
year ended December 31, 1998. The Company pays a facility fee of 3/8 of 1% on
the amount of the unused available financing facility. As of July 31, 1998,
the Company entered into a Second Amendment to the Loan Agreement with IBJS,
among other things, to increase the Company's overadvance facility to $600,000
through December 31, 1998.
At September 30, 1998, 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. This resulted in a
reclassification of amounts outstanding under the line of credit and term loan
to current liabilities. The Company is currently in negotiations with IBJS to
amend the facility. An unfavorable resolution with IBJS would have a material
adverse effect on the financial condition and operations of the Company.
At September 30, 1998 the Company had borrowed $6.7 million on its revolving
line of credit from IBJS and $3.7 million in term loans. In April 1998, the
Company borrowed the remaining $1.2 million allowable by IBJS in term loans to
purchase the Company's convertible subordinated debentures to meet the April
1998 sinking fund requirements. In May 1998, the Company commenced required
monthly payments on the term loan of $56,000. Monthly payments will continue
until the termination of the loan on January 9, 2002. The $8,000,000
revolving credit line borrowing base is limited to the sum of 85% of eligible
accounts receivable, 50% of eligible inventory and an overadvance facility of
$600,000 which effectively increases the eligible amount by $600,000. The
eligible amount is evaluated monthly. For the nine months ended September 30,
1998, the maximum eligible amount of the $8,000,000 revolving credit line
ranged from $6,566,000 to $7,570,000, or from 82% to 95% exclusive of the
$600,000 overadvance facility.
In October 1998, the Company paid $.5 million in interest on its convertible
subordinated debentures. The Company expects to meet 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, 1998 was
satisfied by application of $.3 million debentures previously repurchased or
redeemed, of which $.1 million were purchased in 1996, and by calling for
redemption of the remaining $1.2 million. The Company has not paid cash
dividends and does not anticipate paying such dividends on its common stock in
the foreseeable future. The terms of the indenture relating to the debentures
restrict the Company's ability to pay cash dividends and/or repurchase its
capital stock pursuant to a formula based upon the consolidated net income of
the Company and other factors. Under the formula, at September 30, 1998, no
amount was available for the payment of dividends and/or the repurchase of
capital stock. The Company is also restricted from declaring, paying or
making any dividend or distribution on any shares of its capital stock by the
Loan Agreement with IBJS. The Company has retained a financial advisory firm
to assist in the development of a program to enable the Company to restructure
its financial obligations, including refinancing the $8 million convertible
debenture obligation due April 15, 1999. While management believes that it
will be successful in effecting such a restructuring, including the
refinancing of the debentures by April 15, 1999, there can be no assurance
that the Company will be able to do so. A failure to successfully effect a
restructuring, including refinancing of the $8 million convertible debenture
obligation, would have a material adverse effect on the financial condition
and operations of the Company.
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 14
The Company's 90% owned Transderm Laboratories Corporation subsidiary
("Transderm") has outstanding stock options of 11,450,000 at September 30,
1998. The Company's ownership in Transderm would be reduced to approximately
70% in the event that all outstanding options to purchase common stock of
Transderm were exercised. There would be no impact on minority interest due
to the deficit equity position of Transderm. The exercise of all such options
would not affect the method by which the Company is consolidated from a
financial reporting standpoint. Such exercises would preclude the Company
from utilizing any tax attributes available to Transderm. Management believes
that there would be no material adverse effect on the financial condition of
the Company from the loss of any such tax attributes that may be available to
Transderm.
The Company's debt to equity ratio was 22:1 at September 30, 1998 and 7:1 at
December 31, 1997. The Company's debit to equity ratio increased at September
30, 1998 reflecting a $2.6 net loss for the nine months ended.
Management believes anticipated expenditures in 1998 such as capital
expenditures, research and development costs and other operating expenses will
be financed, in part, by the utilization of the Company's credit facility.
The Company anticipates capital expenditures for property, plant and equipment
in 1998 not to exceed $1.3 million. These capital expenditures will primarily
consist of manufacturing equipment. At September 30, 1998, the Company had
expended $561,000 for capital expenditures for property, plant and equipment
in 1998.
Update on the Impact of Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has assessed the Year 2000 issue and has determined that it will
be required to modify or replace significant portions of its software so that
its computer systems will properly utilize dates beyond December 31, 1999.
The conversion process is considered to have five phases: (1) installation of
upgrade to computer operating system; (2) installation of test environment;
(3) testing and modifying manufacturing and financial package programs; (4)
upgrading manufacturing and financial programs to live system; and (5)
upgrading customized reports and programs. The total cost of converting the
software to be Year 2000 compatible is estimated at $100,000. The cost
incurred to date is approximately $18,000. The total project cost will be
expensed as incurred throughout 1999 and is not expected to have a material
effect on the results of operations of the Company.
Through September 30, 1998, the Company has completed phases one and two of
the Year 2000 project. In January, the upgrade for the computer operating
system was installed. In August, consultants from the software manufacturer
installed the test environment. Management information system personnel have
commenced phase three by prioritizing programs that have a material effect on
daily production, inventory control and invoicing. The Company has targeted
completion of the Year 2000 project for June 1999. The Company presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue can be resolved. If such modifications and
conversions are not made, or are not completed on a timely basis, the Year
2000 issue could have a material adverse effect on the operations of the
Company. Although the Company is uncertain about the duration of a worst case
scenario, the Company's most reasonable likely worst case scenario would be to
lose temporarily the ability to process transactions, send invoices, or engage
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 15
in similar normal business activities. The Company is developing a
contingency plan which will include but it not limited to maintaining records
on a manual system until a portion or all of the computer system recovers.
The Company believes a worst case scenario is unlikely but if it did occur it
could have a material adverse effect on the operations of the Company.
The Company is assessing the effect of the Year 2000 issue on its non-
information technology systems, however the Company believes that it will not
have a material impact on the operations of the Company. The Company is
addressing Year 2000 issues relating to third parties with which it has a
material relationship by sending questionnaires to vendors, suppliers and
customers who would have a material impact on the Company's operations if
their operations were disrupted. The Company's operations could be adversely
affected if such vendors, suppliers and customers do not prepare for the
impact of the Year 2000. Companies responding to the Company's questionnaires
have indicated an awareness of and preliminary preparation for dealing with
the impact of the Year 2000 on their operations.
As part of management's plan of applying manufacturing methods and cost
reduction techniques proven at Herculite to Pacific in efforts to improve
gross profit results, the Company planned to upgrade certain information
technology at Pacific. The Company has delayed portions of this
implementation project to avoid duplication of costs and efforts relating to
software upgrades. The effects of this delay will not have a material impact
on the implementation schedule of the Year 2000 conversion process described
above nor on the financial condition and results of operations of the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(a) Reference is made to Note 5 of the Notes to Consolidated Financial
Statement for information concerning the litigation between Key
Pharmaceuticals, Inc. and Hercon Laboratories Corporation.
(b) In October 1995, Gershon Yormack, a stockholder of the Company,
initiated an action against the Company, its directors and Transderm in the
Delaware Chancery Court (New Castle County) in which he sought injunctive and
declaratory relief with respect to certain options to purchase Transderm
common stock granted to each of Marvin M. Speiser, the Company's Chairman of
the Board and President, and Robert D. Speiser, the Company's Executive Vice
President. Pursuant to Employment Agreements entered into in April 1995, in
November 1995 the Company caused Transderm to issue an option to purchase
shares of Transderm's common stock at an exercise price of $.10 per share to
each of Marvin M. Speiser and Robert D. Speiser (the "Options"). The
plaintiff alleged that this price for Transderm common stock offered by the
Company to stockholders under a registered subscription rights offering (via
a prospectus dated September 18, 1995) was substantially less than the fair
market value of such Transderm common stock.
In October 1998, plaintiff and defendants reached a settlement, subject to
court approval, of this derivative action. The major terms of the settlement
are that: (i) the exercise price of the Options shall be increased to an
average of $0.15 per share; (ii) Transderm and Robert D. and Marvin M. Speiser
will agree that no additional options to purchase Transderm stock will be
issued to the Speisers during the term of the Options; (iii) the Speisers will
not exercise the Options before April 4, 2000, unless there is a transaction
in which Transderm is acquired, in which case the number of Options
exercisable will be limited to 20% of the total Options for each year that has
passed subsequent to their authorization; (iv) the action will be dismissed,
with prejudice, thereby releasing defendants from liability for all claims
which were or could have been asserted in the action; and (v) plaintiff's
counsel will apply to the Court for attorneys' fees and expenses in the amount
of $70,000, to be paid by the Company.
<PAGE> Part II
Item 1
Page 16
A hearing is scheduled to be held before the Court of Chancery on November 18,
1998 to determine whether the Court should approve the proposed settlement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Second Amendment to Revolving Credit, Term Loan and Security Agreement
dated as of July 31, 1998 by and between the Company, Herculite, Hercon
Environmental Corporation, Pacific, Hercon Laboratories and Transderm
and IBJ Schroder Business Credit Corporation (as successor in interest
to IBJ Schroder Bank & Trust Company). Filed herewith on page 17.
(b) During the quarter ended September 30, 1998 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 12, 1998 /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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 158
<SECURITIES> 0
<RECEIVABLES> 5451
<ALLOWANCES> 282
<INVENTORY> 7930
<CURRENT-ASSETS> 1291
<PP&E> 30126
<DEPRECIATION> 19151
<TOTAL-ASSETS> 29446
<CURRENT-LIABILITIES> 25226
<BONDS> 0
<COMMON> 145
0
0
<OTHER-SE> 1287
<TOTAL-LIABILITY-AND-EQUITY> 29446
<SALES> 28119
<TOTAL-REVENUES> 28119
<CGS> 21330
<TOTAL-COSTS> 21330
<OTHER-EXPENSES> 8560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1253
<INCOME-PRETAX> (2592)
<INCOME-TAX> 1
<INCOME-CONTINUING> (2593)
<DISCONTINUED> 0
<EXTRAORDINARY> (3)
<CHANGES> 0
<NET-INCOME> (2599)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
<PAGE>
SECOND AMENDMENT
TO
REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT ("Amendment") is entered into as of
July 31, 1998, by and among HEALTH-CHEM CORPORATION, a
corporation organized under the laws of the State of Delaware
("Holdings"), HERCULITE PRODUCTS, INC., a corporation organized
under the laws of the State of New York ("HPI"), TRANSDERM
LABORATORIES CORPORATION, a corporation organized under the laws
of the State of Delaware ("TLC"), HERCON ENVIRONMENTAL
CORPORATION, a corporation organized under the laws of the State
of Delaware ("HEC"), PACIFIC COMBINING CORPORATION, a corporation
organized under the laws of the State of California ("PCC") and
HERCON LABORATORIES CORPORATION, a corporation organized under
the laws of the State of Delaware ("HLC") (Holdings, HPI, TLC,
HEC, PCC and HLC, each a "Borrower" and collectively
"Borrowers"), and IBJ SCHRODER BUSINESS CREDIT CORPORATION (as
successor in interest to IBJ Schroder Bank & Trust Company), as
agent (in such capacity, the "Agent") for itself and the
financial institutions which are now or which hereafter become a
party (collectively, the "Lenders" and individually a "Lender")
to the Loan Agreement (as hereafter defined).
BACKGROUND
Borrowers, Agent and Lender are parties to a Revolving
Credit, Term Loan and Security Agreement dated as of January 9,
1997 (as amended, supplemented or otherwise modified from time to
time, the "Loan Agreement") pursuant to which Agent and Lenders
provided Borrowers with certain financial accommodations.
Borrower has requested that Agent and Lenders amend the Loan
Agreement to, among other things, continue to provide Borrower
with an overadvance facility which shall terminate no later than
December 31, 1998 and Agent and Lenders are willing to do so on
the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or
grant of credit heretofore or hereafter made to or for the
account of Borrowers by Agent and Lenders, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise
defined herein shall have the meanings given to them in the Loan
Agreement.
<PAGE>
2. Amendment to Loan Agreement. Subject to satisfaction
of the conditions precedent set forth in Section 3 below, the
Loan Agreement is hereby amended by amending the defined term
"Special Advance Amount" in its entirety to provide as follows:
"Special Advance Amount" shall mean an amount equal to
(i) $400,000 during the period January 21, 1998 through July 31,
1998, (ii) $600,000 during the period August 1, 1998 through
December 31, 1998 and (iii) $0 at all other times.
3. Conditions of Effectiveness. This Amendment shall
become effective when Agent shall have received (i) three (3)
copies of this Amendment executed by Borrowers and consented and
agreed to by each Guarantor and (ii) payment of an amendment fee
of $10,000 (which amount shall be charged to Borrower's Account).
4. Representations and Warranties. Each Borrower hereby
represents and warrants as follows:
(a) This Amendment and the Loan Agreement, as amended
hereby, constitute legal, valid and binding obligations of
such Borrower and are enforceable against such Borrower in
accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, each
Borrower hereby reaffirms all covenants, representations and
warranties made in the Loan Agreement to the extent the same
are not amended hereby and agree that all such covenants,
representations and warranties shall be deemed to have been
remade as of the effective date of this Amendment.
(c) No Event of Default or Default has occurred and is
continuing or would exist after giving effect to this
Amendment.
(d) No Borrower has any defense, counterclaim or
offset with respect to the Loan Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each
reference in the Loan Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import shall mean and be a
reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan
Agreement, and all other documents, instruments and agreements
executed and/or delivered in connection therewith, shall remain
in full force and effect, and are hereby ratified and confirmed.
<PAGE>
(c) The execution, delivery and effectiveness of this
Amendment shall not, operate as a waiver of any right, power or
remedy of Agent or any Lender, nor constitute a waiver of any
provision of the Loan Agreement, or any other documents,
instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their
respective successors and assigns and shall be governed by and
construed in accordance with the laws of the State of New York.
7. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose.
8. Counterparts; Telecopies Signature. This Amendment may
be executed in any number of and by different parties hereto, on
separate counterparts, all of which when so executed shall be
deemed an original, but all such counterparts shall constitute
one and the same agreement. Any signature delivered by a party
by facsimile transmission shall be deemed to be an original
signature hereto.
IN WITNESS WHEREOF, this Amendment has been duly executed as
of the day and year first written above.
HEALTH-CHEM CORPORATION
HERCULITE PRODUCTS, INC.
PACIFIC COMBINING CORPORATION
HERCON LABORATORIES CORPORATION
By: /s/ Marvin M. Speiser
Name: Marvin M. Speiser
Title: Chairman of the Board of
each of the foregoing
corporations
TRANSDERM LABORATORIES CORPORATION
By: /s/ Ronald J. Burghauser
Name: Ronald J. Burghauser
Title: Vice President Finance
HERCON ENVIRONMENTAL CORPORATION
By: /s/ Paul R. Moeller
Name: Paul R. Moeller
Title: President
<PAGE>
IBJ SCHRODER BUSINESS CREDIT
CORPORATION, as Agent and Lender
By: /s/ John J. Butera
Name: John J. Butera
Title: Vice President
<PAGE>
<PAGE>
CONSENT AND REAFFIRMATION BY GUARANTORS
Each of the undersigned consents to the execution of the
Second Amendment and acknowledges and agrees that each Guaranty
by each of the undersigned with respect to the Obligations is,
and will remain, in full force and effect in accordance with its
terms and that the undersigned has no defense, counterclaim or
offset with respect to the Guaranty.
August 20, 1998
MEDALLION GROUP, INC.
HEALTH-CHEM INDUSTRIES, INC.
H.S. PROTECTIVE FABRICS CORPORATION
H.S. DEVELOPMENT, INC.
YORK AEROSOL DELIVERY SYSTEM
CORPORATION
SPRINGS DEVELOPMENT CORPORATION
RESEARCH DEVELOPMENT CORPORATION
HEALTH-MED CORPORATION
CAPCO DELAWARE, INC.
ABERDEEN RESEARCH CORPORATION
By: /s/ Marvin M. Speiser
Name: Marvin M. Speiser
Title: President or Chairman of
the Board of each of the
foregoing corporations
