<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 Number)
1212 Avenue of the Americas, 24th Floor, New York, NY 10036
(Address of principal executive offices)
Registrant's Telephone Number: 212-398-0700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each Class Name of Exchange on Which Registered
Common Stock, $.01 Par Value American Stock Exchange, Inc.
10.375% Convertible Subordinated American Stock Exchange, Inc.
Debentures due April 15, 1999
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
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 February 28, 1998, 7,982,424 shares of the registrant's Common Stock
were outstanding. The aggregate market value of the Common Stock (based on
the closing price on such date) held by non-affiliates was approximately $3.0
million.
DOCUMENTS INCORPORATED BY REFERENCE
The information responsive to Part III of this Annual Report on Form 10-K is
incorporated herein by reference to the registrant's Proxy Statement in
connection with the registrant's Annual Meeting of Stockholders to be held on
May 12, 1998.
The Exhibit Index appears on page 43.
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____________________________________________________________________________
FORM 10-K PART I
____________________________________________________________________________
ITEM 1. BUSINESS
Health-Chem Corporation is a Delaware corporation and conducts its business
primarily through its wholly-owned subsidiaries, Herculite Products, Inc.
("Herculite") and Pacific Combining Corp. ("Pacific"), and through its
subsidiaries Transderm Laboratories Corporation ("Transderm") and Hercon
Environmental Corporation ("Hercon Environmental"), of which it owns 90% and
98.5%, respectively. Unless the context otherwise requires, the term
"Company" includes Health-Chem Corporation and all its subsidiaries. The
Company's executive offices are located in New York, New York.
The Company develops, manufactures and distributes products relying on or
derived from laminated or coated films. The products fall into several
categories - reinforced synthetic fabrics for industrial and health care use,
controlled release dispensers for pharmaceuticals and controlled release
dispensers for environmental chemicals.
Herculite and Pacific, which maintain facilities in Pennsylvania and
California, manufacture and market multilayered synthetic fabrics which are
sold domestically and internationally to health-care, industrial, military,
automotive, marine and institutional markets. The manufacturing process of
these products involves laminating and or coating layer(s) of vinyl, urethane
or polyolefins to a synthetic textile. The result is a strong and durable
fabric.
Fabrics for industrial use include heavy-duty, and high visibility fabrics,
and a variety of custom engineered fabrics. Some of the applications for
these fabrics include tension structures, commercial tents and awnings,
livestock curtains for poultry, cattle and hogs, commercial wall covering,
banners, inflatable bladders for air mattresses, tennis court wind screens,
fabrics for use in motor homes, swimming pool and spa covers, gymnasium pads,
mats and trampolines, long-term storage covers for military and commercial
equipment and fabrics for use in nuclear power plants.
Herculite's Staph-Chek(R) products employ molecular migration technology to
make them self-deodorizing and anti-bacterial. A wide variety of thicknesses
and colors are sold to manufacturers of institutional mattresses, pillows,
laundry carts, shower and cubicle curtains and many related products.
Herculite's 'Lectrolite(R) fabric is engineered electrically conductive. By
dissipating static electricity it helps reduce the hazard of explosion in
flammable, gaseous atmospheres. It is sold to manufacturers of pads for
various types of hospital equipment and operating room tables, and to
manufacturers in the computer industry to reduce static problems. Herculite's
latest health care innovation is a family of engineered Staph-Check(R) fabrics
for low air loss and pressure relief applications. Herculite and Pacific are
also actively engaged in development of product improvements and innovations
to capture existing and new market opportunities for fabric reinforced
composites. Pacific has recently installed new coating and lamination
equipment to manufacture specialty fabrics for a variety of markets including
some not currently served by the Company. These include the automotive and
certain sporting goods markets.
The Company's fabric products are sold to more than 1,600 customers by a sales
force consisting of several sales and marketing executives, 23 domestic
manufacturers representatives, and sales agents in Europe and other parts of
the world. The Company also distributes its fabric products through a network
of 59 domestic and foreign distributors.
The Company also employs molecular migration technology to manufacture very
different controlled release products.
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Hercon Environmental manufactures and distributes controlled release
dispensers and pheromone products for insect control and household use.
Insecticide or insect pheromone products are contained in insoluble, vinyl
dispensers to kill, trap or monitor insects as part of safer, more
ecologically sound pest management programs. These products are sold to
industry, farmers, the United States Department of Agriculture, and a variety
of state agencies. Sales are effected primarily by a three person sales team.
In an effort to decrease the seasonality and cyclical nature of Hercon
Environmental's business, the Company plans to develop markets in the southern
hemisphere. Additional new products are being developed through joint
programs with governmental and private enterprises.
Transderm owns 98.5% of Hercon Laboratories Corporation ("Hercon
Laboratories"), which develops and manufactures controlled release products
for the pharmaceutical industry, at Transderm's Pennsylvania facility, to
deliver a variety of drugs topically or transdermally. Many medications can
be administered to or through a patient's skin at precise rates from small,
adhesive patches. Some of the advantages of controlled release dispensers
are steady dose rates and reduced dosage frequency. They also can be used for
oral, buccal and subdermal delivery of medication.
Since 1986, Hercon Laboratories has manufactured a transdermal nitroglycerin
patch which was the first such product introduced for the generic market in
the U.S. This product is used for transdermal relief of vascular and
cardiovascular symptoms related to angina pectoris. The Company sells the
transdermal nitroglycerin patch to pharmaceutical companies who distribute it
in the United States and in Europe. The Company is currently awaiting FDA
approval of applications to market its improved transdermal nitroglycerin
products which are thinner, smaller, more comfortable transparent patches.
Some of these applications are the subject of a lawsuit instituted by Key
Pharmaceuticals, Inc. (see Item 3. Legal Proceedings). In addition to its
nitroglycerin transdermal products, the Company is also developing transdermal
products for hormone replacement therapies. There can be no assurance that
FDA filings for any additional products will be effected or that FDA approval
for any additional products will be obtained.
The Company has additional products in early development and is conducting a
number of feasibility studies on drugs to be developed independently or for
client companies.
RESEARCH AND DEVELOPMENT
The Company's pharmaceutical research and development laboratory facilities
are maintained at Transderm's York, Pennsylvania facilities. Independent
laboratories are often engaged for special projects. Research and development
for the Company's synthetic fabric operations are conducted at the Company's
York and Los Angeles, California facilities. The York facilities also serve
the Company's environmental product operations. The Company currently
utilizes the skills of approximately 9 full-time employees with varying
technical backgrounds, including pharmaceutics and pharmaceutical sciences, to
conduct its research and development efforts. See the Consolidated Statements
of Operations for the amount of research and development costs incurred during
1997, 1996 and 1995.
SUPPLIERS; RAW MATERIALS
Most of the products and materials used by the Company are purchased from a
variety of suppliers and are readily available on the open market. Several
materials used in the manufacture of the Company's products are available from
single sources only. The Company has not experienced difficulty acquiring
such materials which generally have been available to the Company and the
industries in which the Company operates on commercially reasonable terms.
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COMPETITION
Each of the businesses in which the Company is engaged is highly competitive.
Many of its competitors are large national and international manufacturers and
distributors, with considerably more financial, marketing and other resources
than the Company. The Company believes that its principal competitive
strength lies in its research, engineering and manufacturing capabilities.
PATENTS AND PROPRIETARY RIGHTS
The Company has obtained various U.S. and foreign patents and trademarks
(which expire from time to time) for certain of its products and processes.
While it is the Company's view that these patents and trademarks are a
valuable asset, the Company does not consider any single patent or trademark
to be of material importance to its business as a whole. The Company
continues to seek patent and trademark protection for its proprietary
technologies and products as it believes is appropriate in the U.S. and
abroad.
ENVIRONMENTAL MATTERS
The Company does not believe that compliance by it with federal, state or
local laws and regulations which have been enacted or adopted regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment has or will have any material effect upon the
capital expenditures, earnings or competitive position of the Company. There
can be no assurance, however, (i) that changes in federal, state or local laws
or regulations, changes in regulatory policy or the discovery of unknown
problems or conditions will not in the future require substantial
expenditures, or (ii) as to the extent of the Company's liabilities, if any,
for past failures, if any, to comply with laws, regulations and permits
applicable to its operations.
BACKLOG; SEASONALITY
The Company's backlog orders usually do not exceed 60 days. Neither the
backlog nor the Company's operations are subject to substantial seasonal
variations, although its manufacturing operations typically are shut down for
a one-week vacation period during the third quarter, which is reflected in
results of operations for the period.
CUSTOMERS; GOVERNMENT CONTRACTS
There was no single customer nor, to the Company's knowledge, any group of
affiliated customers to which sales during the fiscal year ended December 31,
1997 were in the aggregate equal to 10% or more of the Company's consolidated
net sales. Government contracts are not material to the Company's
consolidated net sales.
EMPLOYEES
The Company employs approximately 206 employees, of whom 83 are covered by
collective bargaining agreements. Union employees of the Company are covered
by three collective bargaining agreements, two with a local unit of the Retail
Wholesale and Department Store Union, AFL-CIO ("R.W.D.S.U.") and one with the
Stove, Furnace and Allied Appliance Workers International Union of North
America ("S.F.A.A.W."). The R.W.D.S.U. agreements are for a three year period
ending December 10, 1998 and a five year period ending December 18, 2002. The
S.F.A.A.W. agreement is for a five year period ending March 2, 1999. All
contracts are subject to annual renewal thereafter. The Company believes its
relations with employees are good.
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ITEM 2. PROPERTIES
The following table lists the principal facilities owned or leased by the
Company as of December 31, 1997. In the opinion of management, the
facilities are adequate for their purposes.
Lease
Approx. Expiration
Location Sq. Ft. Date Use
New York, NY 7,000 3/99 Executive offices
York, PA 61,000 (owned) Pharmaceutical production,
warehouse, research
facility & office
York, PA 278,000 (1) (owned) Production, warehouse,
& office
Los Angeles, CA 30,000 2/99 Production, office and
warehouse; synthetic
fabrics
Los Angeles, CA 25,000 6/98 Warehouse; synthetic
fabrics
Los Angeles, CA 10,300 2/99 Warehouse; synthetic
fabrics
(1) Non-affiliated tenants lease approximately 114,000 square feet
under a lease expiring in August 1998. The monthly lease payment
is approximately $31,000 which includes payment for a prorated
share of utilities.
ITEM 3. LEGAL PROCEEDINGS
(a) 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' 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,
for which Hercon Laboratories is awaiting FDA approval, constitutes
infringement of Key's patent for its Nitro-Dur(R) products. Key seeks 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 not 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 has not infringed and does not
infringe any claim of the patent. Hercon Laboratories has 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 on its infringement claim and 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 to the United States District
Court for the Federal Circuit in Washington, DC. On December 17, 1997, the
Delaware District Court issued an injunction, enjoining Hercon, 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 has appealed to the United States Court of Appeals
<PAGE>
for the Federal Circuit in Washington, D.C. from both the September 30, 1997
judgment and the December 17, 1997 injunction. The appeals were consolidated
on January 23, 1998 and are now in the briefing stage. Management believes
that Hercon has strong grounds for appeal.
(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 plaintiff alleges that
this exercise price, which is the same per share price as the subscription
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 June 1997, the defendants filed an answer denying all
material allegations and seeking dismissal of the complaint. Management
believes that the claims are without merit and is defending the action
vigorously. The action is in the discovery stage.
(c) In May 1996, Herman Rovner and Bruce Nicholl, two stockholders of the
Company, commenced a class and derivative action against the Company, its
directors, and a former director in the Delaware Chancery Court (New Castle
County). The complaint alleged that the defendants breached their fiduciary
duties insofar as the transactions under a Stock Purchase Agreement entered
into between the Company and Marvin M. Speiser in March 1996 would 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. In
July 1996, after a hearing, the Vice Chancellor denied the plaintiffs' motion
for a preliminary injunction on the basis that the plaintiffs failed to show
irreparable harm or the likelihood of establishing that the 1991 Chancery
Court order was violated. Later in July 1996, the Delaware Supreme Court
denied the plaintiff's interlocutory appeal of the Vice Chancellor's decision.
In August 1996, in accordance with the Stock Purchase Agreement, as amended,
the Company commenced a registered subscription rights offering (the "Rights
Offering") of up to 1,320,000 shares of Common Stock to its record holders
other than Marvin M. Speiser. A total of 952,520 shares of the Company's
Common Stock were subscribed for in the Rights Offering prior to its
expiration in September 1996. Under the Stock Purchase Agreement, Mr. Speiser
provided shares of Common Stock for purchase by the Company in an amount equal
to the number of shares issued to subscribers in the Rights Offering. The
shares provided by Mr. Speiser had been subject to repurchase by the Company
from Mr. Speiser pursuant to option agreements entered into in 1991 and 1994
(the "Options"). After expiration of the Rights Offering, 317,406 shares of
Common Stock remain subject to the Options.
In July 1997, motions to dismiss the action were brought independently on
behalf of the plaintiffs and the defendants, respectively. Common to both
motions was the ground that the claims are moot. Plaintiffs' motion included
a petition for an award of attorneys' fees and expenses. The defendants have
vigorously opposed any award of attorneys' fees on several grounds, including
the absence of any "benefit" conferred upon the Company by the bringing of the
action. The Chancery Court heard oral argument on the issue of attorneys'
fees on February 18, 1998. The Company is awaiting a decision from the Court.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
FORM 10-K PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange, Inc.
under the symbol HCH.
The following information indicates the range of sale prices at which the
Company's Common Stock traded on the American Stock Exchange, Inc. during the
past two years:
1997 1996
QUARTER High Low High Low
1st 1 3/16 3/4 1 7/8 1 3/8
2nd 15/16 11/16 2 1/2 1 5/8
3rd 15/16 3/4 1 3/4 1 3/16
4th 1 1/2 1 3/8 7/8
There were approximately 1,472 holders of record of the Company's Common Stock
as of February 28, 1998.
The Company has not paid cash dividends on its Common Stock during the five
years ended December 31, 1997. See Note 4 to the Consolidated Financial
Statements concerning restrictions on the payment of dividends.
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ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data)
Year Ended December 31,
1997 1996 1995 1994 1993
Net sales $37,720 $47,565 $46,544 $46,930 $44,869
<Loss> income before
extraordinary gain $<3,275> $<1,327> $ <297> $ 1,415 $ 2,557
Extraordinary gain from
repurchase of subordinated
debentures 17 5 7 5 75
NET <LOSS> INCOME $<3,258> $<1,322> $ <290> $ 1,420 $ 2,632
Earnings per common share (basic & diluted):
<Loss> income before
extraordinary gain $ <.41> $ <.17> $ <.04> $ .18 $ .33
Extraordinary gain from
repurchase of subordinated
debentures .00 .00 .00 .00 .01
NET <LOSS> INCOME PER SHARE $ <.41> $ <.17> $ <.04> $ .18 $ .34
Dividends per share $ 0 $ 0 $ 0 $ 0 $ 0
Total assets $29,936 $32,413 $33,653 $32,177 $29,162
Long-term debt (including
current portion) $17,765 $16,483 $17,616 $15,358 $14,625
See Item 8 herein for more detailed financial information.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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-Q, which could cause actual results to differ materially from the
forward-looking statements.
Year ended December 31, 1997 versus December 31, 1996
Net sales decreased $9.8 million, or 21% for the twelve months ended December
31, 1997 as compared to the same period for 1996. The decrease is due
primarily to decreases in sales of transdermal nitroglycerin patches and
synthetic fabrics of $6.8 million and $2.9 million, respectively. Sales of
transdermal nitroglycerin patches, manufactured and marketed by Hercon
Laboratories decreased due primarily to the absence of sales to a former
domestic distributor and current competitor of the Company who accounted for
approximately 10% of the Company's sales for the year ended December 31, 1996.
Sales to both of the Company's current domestic distributors of nitroglycerin
patches also decreased during 1997 as compared to 1996. During the first half
of 1997, in anticipation of increased market pressures and delays in approvals
from the United States Food and Drug Administration ("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 8 of
the Notes to Consolidated Financial Statements and discussion below.) The
synthetic fabrics sales decrease is due primarily to lower sales of industrial
fabrics, eliminating unprofitable business including certain government
contracts and lower demand from certain customers.
Gross profit decreased $4.7 million, or 35%, for the twelve months ended
December 31, 1997 as compared to the same period in 1996. Gross profit as a
percent of sales was 24% for the twelve months ended December 31, 1997 and 29%
for the same period in 1996. Gross profit for transdermal nitroglycerin
patches and synthetic fabrics decreased $4.7 million and $149,000
respectively, while environmental products gross profit increased $113,000 as
compared to the same period in 1996. Plant overhead decreased $1.2 million,
including a $.6 million decrease for payroll-related expenses, for the twelve
months ended December 31, 1997 as compared to the same period in 1996
reflecting, in part, the organizational restructuring and cost reduction
program. Transdermal nitroglycerin patch gross profit decreased due primarily
to decreased domestic sales volumes of higher margin products. Transdermal
nitroglycerin patch plant overhead decreased $630,000, including a $450,000
decrease for payroll-related expenses, for the year ended December 31, 1997 as
compared to the same period in 1996 reflecting, in part, the organizational
restructuring. The synthetic fabrics gross profit decrease is due primarily
to lower gross profit of $489,000 at Pacific Combining partially offset by
higher gross profit of $340,000 at Herculite. Herculite's gross profit
<PAGE>
increased $340,000 despite lower sales volumes of $1.5 million due primarily
to utilizing the computerized inventory management system to improve the
manufacturing process and implement cost reduction efforts and by identifying
and eliminating unprofitable business including certain government contracts.
In 1998, management will continue to apply manufacturing methods and cost
reduction techniques proven at Herculite, to Pacific in efforts to improve
gross profit results. Plant overhead for synthetic fabrics decreased
$548,000, including a $205,000 decrease for payroll-related expenses, for the
twelve months ended December 31, 1997 as compared to the same period in 1996
reflecting, in part, the organizational restructuring and cost reduction
program. Environmental products gross profit increased $113,000 due primarily
to decreased plant overhead expenses along with improved product mix.
Selling, general and administrative expenses decreased $.4 million for the
twelve months ended December 31, 1997 as compared to the corresponding period
in 1996. The decrease is due primarily to lower payroll-related expenses of
$.2 million and $.1 million for consulting service expenses related to the
Company's applications with the FDA to market improved transdermal
nitroglycerin products.
Legal expenses decreased $2.2 million for the twelve months ended December 31,
1997 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 (See Note 8 of the Notes to
Consolidated Financial Statements).
Research and development expense decreased $.2 million for the twelve months
ended December 31, 1997 as compared to the same period in 1996. Payroll-
related expenses decreased $.5 million reflecting the organizational
restructuring while outside testing and clinical material expenses increased
$.6 million. All other increases and decreases were not individually
significant. The Company expects total research and development expenses
related to pharmaceutical products in 1998 to be lower than 1997 levels.
Net interest expense increased $.4 million for the twelve months ended
December 31, 1997 as compared to the same period in 1996 due primarily to
higher average outstanding balances on borrowings.
Other income - net decreased $46,000 for the twelve months ended December 31,
1997 as compared to the same period in 1996. The decrease is due primarily to
nonrecurring proceeds received in the third quarter of 1996 related to the
settlement of a lawsuit.
Loss from operations before taxes and minority interest increased $2.3 million
for the twelve month period ended December 31, 1997 as compared to the
corresponding period in 1996 due primarily to the loss of sales and gross
profits for transdermal nitroglycerin patches partially offset by a decrease
in legal expenses related to the Key litigation.
The Company reported a $1.2 million tax benefit on a $4.5 million loss from
operations for the twelve months ended December 31, 1997 as compared to a $.9
million tax benefit on a $2.2 million loss from operations in 1996. Income
tax provision or benefit varies with the amount and nature of the components
of income or loss from operations before income taxes. In 1997, the Company
recorded a valuation allowance of $371,000 against current year tax assets.
In 1996, a tax benefit was increased by 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. Note 12 to the accompanying
consolidated financial statements presents a reconciliation of taxes on income
for 1997 and 1996.
Minority interest represents a 1.5% interest of a former Hercon Laboratories
president in the equity of Hercon Environmental.
<PAGE>
Year ended December 31, 1996 versus December 31, 1995
Net sales increased $1.0 million, or 2% for the twelve months ended December
31, 1996 as compared to the same period for 1995. The increase was due
primarily to increases in sales of synthetic fabrics and environmental
products of $.8 million and $.5 million, respectively, partially offset by a
$.3 million decrease in sales of the Company's transdermal nitroglycerin
patches. The synthetic fabrics sales increase was due principally to higher
industrial fabrics sales which includes increased governmental and
agricultural sales. Environmental products sales increased due primarily to
several new insect mating disruptant products introduced in early 1996. Sales
of transdermal nitroglycerin patches manufactured and marketed by Hercon
Laboratories decreased due primarily to lower sales to a former domestic
distributor of the Company, which obtained approval from the FDA for the
manufacture and sale of its own nitroglycerin patches in August 1996. This
former distributor, which currently competes with the Company in the
nitroglycerin patch market, accounted for approximately 10% and 14% of the
Company's sales for the years ended December 31, 1996 and December 31, 1995,
respectively. Sales to all of the Company's other domestic distributors of
nitroglycerin patches increased for the twelve months ended December 31, 1996
as compared to the same period in 1995.
Gross profit increased $.4 million, or 3%, for the twelve months ended
December 31, 1996 as compared to the same period in 1995. Gross profit as a
percent of sales was 29% for both of the twelve month periods ended December
31, 1996 and 1995. Gross profit for synthetic fabrics increased $.8 million
while transdermal nitroglycerin patch gross profit decreased $.4 million as
compared to the same period in 1995. The synthetic fabrics gross profit
increase was primarily a result of greater sales volumes, improved
manufacturing variances and lower raw material costs. Reducing manufacturing
variances and lowering raw material costs were the primary focus of cost
reduction efforts in 1996. Transdermal nitroglycerin patch gross profit
decreased due primarily to decreased domestic and foreign sales volumes of
higher margin products. Gross profit as a percent of sales for transdermal
nitroglycerin patches was 58% for the twelve months ended December 31, 1996 as
compared to 60% for the same period in 1995 reflecting decreased domestic
sales volumes offset partially by domestic price increases and reduced
operating costs.
Selling, general and administrative expenses increased $.7 million for the
twelve months ended December 31, 1996 as compared to the corresponding period
in 1995. The increase was due primarily to higher 1996 payroll-related
expenses of $.3 million, including $.1 million related to pension accruals,
and $.2 million for consulting costs primarily related to the Company's
efforts of obtaining approval from the FDA for its new nitroglycerin patches.
These and other increases were partially offset by decreased sales commissions
and royalty expense.
Legal expenses increased $2.4 million for the twelve months ended December 31,
1996 as compared to the same period in 1995. In August 1995, Key commenced an
action against Hercon Laboratories relating to some of Hercon Laboratories'
improved transdermal nitroglycerin products. The increased legal expenses
were primarily due to the costs related to the defense of this action,
including preparing for and conducting a two-week trial which was completed on
October 10, 1996 (See Note 8 of the Notes to Consolidated Financial
Statements).
Research and development expense decreased $.7 million for the twelve months
ended December 31, 1996. Lower outside testing and clinical material expenses
related to pharmaceutical products research, along with lower product
development costs related to synthetic fabrics research contributed to the
decrease.
Net interest expense decreased $.1 million for the twelve months ended
December 31, 1996 as compared to the same periods in 1995 due primarily to
capitalized interest related to new equipment under construction.
<PAGE>
Other income - net decreased $33,000 for the twelve months ended December 31,
1996 as compared to the same period in 1995. The decrease was due primarily
to 1995 non-recurring income-producing items.
Loss from operations before taxes and minority interest increased $1.9 million
for the twelve month period ended December 31, 1996 as compared to the
corresponding period in 1995 due primarily to the increase in legal expenses
related to the litigation described above.
The Company reported a $.9 million tax benefit on a $2.2 million loss from
operations for the twelve months ended December 31, 1996 as compared to less
than a $.1 million tax benefit on a $.3 million loss from operations in 1995.
In 1996, a tax benefit was increased by 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. In 1995, the federal tax benefit
resulting from this loss was partially offset by the provision for state taxes
which was generated from income associated with the sale of transdermal
nitroglycerin patches.
Liquidity and Capital Resources
The following measures of liquidity are drawn from the Company's Consolidated
Financial Statements:
December 31,
1997 1996
Working capital (current assets less
current liabilities, in thousands) $5,698 $6,927
Current ratio (current assets/
current liabilities) 1.8 1.9
Quick ratio (cash and receivables/
current liabilities) .6 .7
Working capital decreased $1.2 million from December 31, 1996 to December 31,
1997 due to a $1.7 million decrease in current assets partially offset by a
$.5 million decrease in current liabilities. Accounts receivable and accounts
payable decreased $1.1 million and $.8 million, respectively, while accrued
expenses and other current liabilities increased $.8 million. The accounts
receivable decrease reflects lower sales volumes for transdermal nitroglycerin
patches and synthetic fabrics. The accounts payable decrease reflects lower
expenses related to cost reduction efforts and a reduction in amounts payable
to raw material vendors. Accrued expenses and other current liabilities
increased $.8 million due primarily to a $.6 million increase in the current
portion of long-term debt (See Note 4 of the Notes to Consolidated Financial
Statements.) Deferred taxes-current and income taxes payable-federal were
reclassified to deferred taxes-non-current.
Cash used for operations for the twelve months ended December 31, 1997 was
$1.8 million as compared to cash provided by operations of $2.4 million for
the same period in 1996. The decrease is due primarily to increasing
inventories of $.2 million and decreasing accounts payable of $.8 million in
1997 as compared to decreasing inventories of $1.7 million and increasing
accounts payable of $1.3 million in 1996. Investing activities for the twelve
months ended December 31, 1997 provided cash of $.5 million as compared to the
same period in 1996 which used cash of $1.4 million. This increase is due
primarily to lower additions to property, plant and equipment for 1997 which
reflects the completion of the new production line for Pacific in early 1997.
Financing activities for the twelve months ended December 31, 1997 provided
$1.3 million of cash as compared to the same period in 1996 which consumed
$1.1 million of cash. In 1997, financing activities provided cash for
operations, compared to 1996 when cash from operations was used by financing
activities to reduce outstanding debt.
<PAGE>
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 secured financing from IBJ Schroder Business Credit
Corporation (formerly IBJ Schroder Bank & Trust Company) ("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 ("Amendment") to the Loan
Agreement with IBJS. The Amendment, among other things, amends the terms for
drawing upon the term loan and amends certain financial covenants effective
with the December 31, 1997 covenants. At December 31, 1997, the Company was
in compliance with the covenants, as amended. Pursuant to the Amendment, the
maximum term loan amount was reduced to $3,998,000 from $7,000,000 providing
an aggregate of up to $11,998,000 in senior secured financing. 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.
At December 31, 1997 the Company had borrowed $5.8 million on its revolving
line of credit from IBJS and $2.7 million in term loans. A $1.1 million term
loan increase in the second quarter of 1997 was used to purchase the Company's
convertible subordinated debentures to meet the April 1997 sinking fund
requirements. 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 twelve months
ended December 31, 1997, the maximum eligible amount of the $8,000,000
revolving credit line, has ranged from $6,215,000 to $7,385,000, or from 78%
to 92%.
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 twelve months of 1997, the Company
purchased $.2 million principal amount of its subordinated debentures for $.2
million. 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 elected to satisfy the 1998 sinking fund requirement by
application of $.3 million of debentures previously repurchased or redeemed,
of which $.1 million were purchased in 1996, and by calling for redemption of
<PAGE>
the remaining $1.2 million. The Company intends to fund this redemption of
$1.2 million in April 1998 through a term loan pursuant to the Loan Agreement,
subject to IBJS's satisfactory review of the financial statements for the
month ended March 31, 1998, including compliance with all financial covenants.
The Company expects to be in compliance with all financial covenants at March
31, 1998.
The Company's debt to equity ratio increased to 7:1 at December 31, 1997 and
was 4:1 at December 31, 1996. The Company's debt to equity ratio increased at
December 31, 1997 reflecting a $3.3 million net loss for the twelve months
ended.
Management believes anticipated expenditures in 1998 such as capital
expenditures, research and development costs and other operating expenses will
be financed by cash generated from operations and the utilization of the
Company's credit facility from IBJS. The term loan portion of up to
$3,998,000 of the overall $11,998,000 credit facility from IBJS will be used
for the repurchasing of debentures. 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 December 31, 1997 the Company had expended $321,000 for capital
expenditures for property, plan and equipment in 1997.
Inflation
The Company believes that inflation has not had a material effect upon its
results of operations and liquidity and capital resources for any of the
periods presented.
Impact of the 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.
Based on a recent assessment, the Company 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 Company
presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be resolved. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company will utilize both internal and external resources to reprogram or
replace, and test the software for Year 2000 modifications. The Company plans
to complete the Year 2000 project no later than June 30, 1999. The total cost
of the Year 2000 project is estimated at $100,000 and is being funded through
operating cash flows. The total project cost will be expensed as incurred
over the next two years and is not expected to have a material effect on the
results of operations. To date, the Company has not incurred any external
costs related to the assessment of, and preliminary efforts in connection
with, its Year 2000 project and the development of a remediation plan.
<PAGE>
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
Implementation of New Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No.
130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement
of financial position. SFAS 130 is effective for financial statements issued
for periods beginning after December 15, 1997. The Company does not expect
the implementation of SFAS 130 to have a material impact on the consolidated
financial statements of the Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to
be restated. The Company is still evaluating the impact of SFAS 131 on
segment disclosures.
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements.
PAGE
Report of Independent Accountants 17
Consolidated Balance Sheets - December 31, 1997 and 1996 18-19
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995 20
Consolidated Cash Flow Statements
Years Ended December 31, 1997, 1996 and 1995 21-22
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995 23
Notes to Consolidated Financial Statements 24-41
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Health-Chem Corporation:
We have audited the accompanying consolidated financial statements and the
financial statement schedules of Health-Chem Corporation and Subsidiary
Companies as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997, listed in Item 14(a) of this Form 10-K.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health-Chem
Corporation and Subsidiary Companies as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, Pennsylvania
March 25, 1998
<PAGE>
<PAGE>
<TABLE>
HEALTH-CHEM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<CAPTION>
ASSETS December 31,
<S> 1997 1996
CURRENT ASSETS <C> <C>
Cash and cash equivalents $ 162 $ 134
Accounts receivable, net of allowances for
doubtful accounts of $353 and $306 4,194 5,337
Inventories (Note 2) 7,537 7,343
Deferred taxes-current 0 554
Other current assets 1,044 1,285
Total Current Assets 12,937 14,653
PROPERTY, PLANT AND EQUIPMENT
Land 141 141
Buildings 5,580 5,572
Equipment and leasehold improvements 23,788 19,079
Construction-in-progress 87 4,709
Total Property, Plant and Equipment 29,596 29,501
Less accumulated depreciation and amortization 17,704 15,934
Net Property, Plant and Equipment 11,892 13,567
NON-CURRENT ASSETS
Notes receivable 900 1,200
Cash surrender value of life insurance policies,
net of loans of $1,313 and $1,084 1,033 1,402
Excess of cost over fair value of assets acquired 682 706
Deferred taxes-non-current 1,892 675
Other non-current assets 600 210
Total Non-Current Assets 5,107 4,193
TOTAL ASSETS $29,936 $32,413
<FN>
Consolidated Balance Sheets are continued on the next page.
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION
CONSOLIDATED BALANCE SHEETS, CONTINUED
(In thousands, except share amounts)
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
1997 1996
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 4,189 $ 5,026
Accrued expenses and other current
liabilities (Note 3) 2,884 2,132
Income taxes payable (Note 12) 166 568
Total Current Liabilities 7,239 7,726
LONG-TERM LIABILITIES
10.375% convertible subordinated debentures
(Notes 4 and 16) 8,000 9,500
Long-term debt (Note 4) 8,270 6,082
Other long-term liabilities 2,530 1,949
Minority interest (Note 17) 11 12
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (Notes 9, 10 and 11)
Preferred stock, par value $.01 per share;
1,000,000 shares authorized, none issued 0 0
Convertible special stock, par value $.01
per share; 750,000 shares authorized;
738,667 shares issued, all of which are
held in treasury 7 7
Common stock, par value $.01 per share;
50,000,000 shares authorized; 14,473,056
shares issued; 7,982,424 shares outstanding
in 1997 and 1996 145 145
Additional paid-in capital 18,286 18,286
Less stockholder notes receivable (Note 16) <148> <148>
Accumulated deficit <6,721> <3,463>
Subtotal 11,569 14,827
Less treasury stock <7,683> <7,683>
Total Stockholders' Equity 3,886 7,144
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,936 $32,413
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Year Ended December 31,
<S> 1997 1996 1995
REVENUE: <C> <C> <C>
Net sales $37,720 $47,565 $46,544
Cost of goods sold 28,804 33,922 33,264
Gross profit 8,916 13,643 13,280
OPERATING EXPENSES:
Selling, general and administrative
expense 9,110 9,550 8,848
Legal expense 557 2,732 363
Research and development expense 2,576 2,808 3,555
Net interest expense (Note 13) 1,613 1,263 1,351
Total operating expenses 13,856 16,353 14,117
LOSS FROM OPERATIONS: <4,940> <2,710> <837>
Other income - net 434 479 512
LOSS FROM OPERATIONS BEFORE TAXES AND
MINORITY INTEREST: <4,506> <2,231> <325>
Income tax benefit (Note 12) <1,230> <899> <45>
LOSS BEFORE MINORITY INTEREST: <3,276> <1,332> <280>
Minority Interest in loss <earnings>
of subsidiary (Note 17) 1 5 <17>
LOSS BEFORE EXTRAORDINARY GAIN: <3,275> <1,327> <297>
Extraordinary gain from repurchase of
subordinated debentures (Note 14) 17 5 7
NET LOSS $<3,258> $<1,322> $ <290>
Earnings per common share (basic & diluted)
(Note 1h):
Loss before extraordinary gain $ <.41> $ <.17> $ <.04>
Extraordinary gain from repurchase of
debentures .00 .00 .00
NET LOSS PER SHARE $ <.41> $ <.17> $ <.04>
Average number of common shares
outstanding (Note 1h)
Basic 7,982 7,982 7,982
Diluted 7,982 7,982 7,982
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION
CONSOLIDATED CASH FLOW STATEMENTS
(In thousands)
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash was Provided by <Used for>:
OPERATIONS:
Loss before extraordinary gain $<3,284> $<1,327> $ <297>
Adjustments to reconcile to net cash <used for>
provided by operations:
Depreciation and amortization 2,012 1,953 1,786
Gain on disposal of property, plant and
equipment <21> 0 0
Provision for doubtful accounts receivable 51 181 154
Deferred income taxes <1,105> <840> <278>
Minority interest <1> <5> 17
Changes in:
Accounts receivable 1,091 <897> 449
Inventories <193> 1,727 470
Other current assets <96> 270 <265>
Other non-current assets <138> <86> <11>
Accounts payable <837> 1,337 <526>
Accrued expenses and other current liabilities <98> <217> <619>
Interest and income taxes payable 274 <189> <85>
Long term liabilities 545 531 399
Other, net <1> <5> 8
Net cash <used for> provided by operations <1,801> 2,433 1,202
Extraordinary item:
Gain from repurchase of subordinated debentures 17 5 7
Gain from repurchase of debentures providing
no cash <17> <5> <7>
Net cash provided by extraordinary item 0 0 0
Net cash <used for> provided by operations <1,801> 2,433 1,202
<FN>
Consolidated Cash Flow Statements are continued on the next page.
See Notes to Consolidated Financial Statements.
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION
CONSOLIDATED CASH FLOW STATEMENTS, CONTINUED
(In thousands)
<CAPTION>
Year Ended December 31,
<S> 1997 1996 1995
INVESTING: <C> <C> <C>
Additions to property, plant and equipment <321> <2,166> <3,627>
Proceeds on disposals of property, plant and
equipment 178 21 11
Investment in life insurance policies - net 369 708 <302>
Payments received on notes receivable 300 0 71
Net cash provided by <used for> investing 526 <1,437> <3,847>
FINANCING:
Long-term debt proceeds 8,045 22,875 15,323
Long-term debt payments <5,561> <22,666> <11,369>
Repurchase of convertible subordinated
debentures <1,181> <1,330> <1,679>
Stock options exercised 0 0 5
Net cash provided by <used for> financing 1,303 <1,121> 2,280
Net Increase <Decrease> in Cash and Cash
Equivalents 28 <125> <365>
Cash and Cash Equivalents at beginning of period 134 259 624
Cash and Cash Equivalents at end of period $ 162 $ 134 $ 259
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,755 $ 1,357 $ 1,607
Income taxes 6 170 284
Supplemental Disclosures of Noncash Investing
and Financing:
Acquisition of fixed assets through capital
lease obligations $ 68 $ 0 $ 0
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(In Thousands)
Stock- Retained
Conver- Addi- holder Earnings
tible tional Notes <Accumu-
Special Common Paid-In Receiv- lated Treasury
Stock Stock Capital able Deficit> Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 7 $ 145 $18,281 $ <188> $<1,851> $<7,683> $ 8,711
Reduction of stockholder
notes 40 40
Exercise of stock options 5 5
Net loss 1995 <290> <290>
Balance, December 31, 1995 $ 7 $ 145 $18,286 $ <148> $<2,141> $<7,683> $ 8,466
Net loss 1996 <1,322> <1,322>
Balance, December 31, 1996 $ 7 $ 145 $18,286 $ <148> $<3,463> $<7,683> $ 7,144
Net loss 1997 <3,258> <3,258>
Balance, December 31, 1997 $ 7 $ 145 $18,286 $ <148> $<6,721> $<7,683> $ 3,886
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
HEALTH-CHEM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996, 1995
1. Accounting Policies
a. 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.
b. Cash equivalents
Money market funds and investment instruments with original maturities of
ninety days or less are considered cash equivalents.
c. Inventories
Inventories are stated at lower of cost (first-in, first-out basis) or market.
<PAGE>
d. Depreciation and amortization
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line method by charges to
operations over the estimated useful lives of depreciable assets or, where
applicable, the terms of the respective leases, whichever is shorter. The
cost and related accumulated depreciation of disposed assets are removed from
the applicable accounts and any gain or loss is included in income in the
period of disposal. Depreciation expense on property, plant and equipment was
$1,907,000, $1,848,000 and $1,712,000 for 1997, 1996 and 1995, respectively.
The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (SFAS 121). SFAS 121 requires that long-lived assets,
including related goodwill, be reviewed for impairment and written down to
fair value whenever events or changes in circumstances indicated that the
carrying value may not be recoverable. The Company evaluates long-lived
assets for impairment by individual business unit. The cumulative effect
resulting from the adoption of SFAS 121 was immaterial.
e. Amortization of excess of cost over fair value of assets acquired
The excess of cost over fair value of assets acquired is being amortized over
40 years on a straight-line basis. The accumulated amortization at December
31, 1997 and 1996 was $223,000 and $199,000 respectively. The Company's
policy is to record an impairment loss against the net unamortized cost in
excess of net assets of businesses acquired in the period when it is
determined that the carrying amount of the asset may not be recoverable. An
evaluation is made at each balance sheet date (quarterly) and it is based on
such factors as the occurrence of a significant change in the environment in
which the business operates or if the expected future net cash flows
(undiscounted and without interest) would become less than the carrying amount
of the asset.
f. Research and development
Research and development costs are charged to operations as incurred.
g. Income taxes
Deferred tax assets and liabilities are provided for differences between the
financial statement and tax bases of assets and liabilities that will result
in future taxable or deductible amounts. The deferred tax assets and
liabilities are measured using the enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable income.
Income tax expense is computed as the tax payable or refundable for the period
plus or minus the change during the period in deferred tax assets and
liabilities. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. (See Note 12).
h. Per share information
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
<PAGE>
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 year after adjustment
for any dilutive effect of the Company's outstanding 10.375% convertible
subordinated debentures and stock options and excluding the weighted average
number of redeemable common shares outstanding (See Note 9). 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 each of the
years ended December 31, 1997, 1996 and 1995.
A reconciliation of the basic and diluted earnings per common share
computations for income for continuing operations for the years ended December
31, 1997, 1996 and 1995 is presented below (in thousands, except per share
amounts):
</TABLE>
<TABLE>
1997 1996 1995
Income Shares Per- Income Shares Per Income Shares Per
(Numer- (Denom- Share (Numer- (Denom- Share (Numer- (Denom- Share
ator inator) Amt. ator inator) Amt. ator) inator) Amt.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss before
extraordinary
item $<3,275> $<1,327> $<297>
Basic Earnings
Per Common Share
Net <loss>
income
applicable
to common
stockholders <3,275> 7,982 $<.41> <1,327> 7,982 $<0.17> <297> 7,982 $<0.04>
Effect of
Dilutive
Securities
Stock options 0 0 0 0 0 0
Convertible
debentures 0 0 0 0 0 0
Diluted Earnings
Per Common Share
Net <loss>
income applicable
to common
stockholders
and assumed
conversions $<3,275> 7,982 $<.41>$<1,327> 7,982 $<0.17> $<297> 7,982 $<0.04>
</TABLE>
i. Fair Value of Financial Instruments
In 1995, the Company adopted Statement of Financial Accounting Standards #107,
"Disclosures about Fair Value of Financial Instruments," which requires
disclosure of fair value information about financial instruments, whether or
not recognized in the balance sheet. The carrying amount reported in the
consolidated balance sheets at December 31, 1997 for cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities
approximate fair value due to the short-term nature of these instruments. The
carrying amount of the Company's notes receivable and long-term debt
approximate fair value because the underlying instruments reprice frequently.
The fair value of the Company's convertible subordinated debentures is based
on quoted market prices and at December 31, 1997 was approximately $7 million.
<PAGE>
j. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
k. Implementation of New Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of a statement of financial
position. SFAS 130 is effective for financial statements issued for periods
beginning after December 15, 1997. The Company does not expect the
implementation of SFAS 130 to have a material impact on the consolidated
financial statements of the Company.
l. Reclassifications
Certain amounts included in the Consolidated Financial Statements and Notes
thereto relating to prior periods have been reclassified to conform to the
current presentation.
2. Inventories (In thousands)
December 31,
1997 1996
Raw materials $3,590 $3,979
Finished goods and work in process 3,947 3,364
Total $7,537 $7,343
3. Accrued Expenses and Other Current Liabilities (In thousands)
December 31,
1997 1996
Allowance for litigation contingencies $ 201 $ 201
Current portion of long-term debt 1,495 901
Accrued interest on debt 37 57
Accrued legal and audit fees 197 112
Accrued payroll and related liabilities 551 400
Financed insurance premiums 119 192
Other 284 269
Total accrued expenses and other current liabilities $2,884 $2,132
<PAGE>
4. Long-Term Debt
The Company's long-term debt balances are as follows (in thousands):
December 31,
1997 1996
10.375% convertible subordinated debentures,
due April 15, 1991 through April 15, 1999 $ 9,500 $11,000
Less debentures purchased to meet
sinking fund requirements 310 599
Subtotal 10.375% convertible subordinated debentures 9,190 10,401
Less current portion 1,190 901
Total 10.375% convertible subordinated debentures $ 8,000 $ 9,500
Long-term line of credit payable $ 5,834 $ 4,582
Long-term bank debt term loan 2,741 1,500
Subtotal other long-term debt 8,575 6,082
Less current portion 305 0
Total other long-term debt $ 8,270 $ 6,082
From January 1996 throughout January 1997 the Company had a $6.0 million long-
term line of credit and a $1,750,000 term loan from The First National Bank of
Maryland ("First National") which had been scheduled to expire October 15,
1997 and November 15, 2000, respectively. Borrowings under the line of credit
and term loan were collateralized by a pledge of substantially all of the
assets of the Company and its subsidiaries with the exception of real estate.
They were subject to various financial covenants which, among other things,
required 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 December 31, 1996, the Company was not in
compliance with certain covenants. The borrowing base was limited to the sum
of 80% of eligible accounts receivable and 35% of eligible inventory. At the
Company's option, borrowings under the line would bear interest at the
lender's prime rate or the London Inter-Bank Offer Rate, as amended. The
weighted average interest rate was 7.4% at December 31, 1996. In addition,
the Company paid a facility fee of 1/4 of 1% on the amount of the unused
credit facility. Borrowings under the term loan would bear interest at the
lender's prime rate plus .375%, unless Pacific elected otherwise in accordance
with the loan documents. The interest rate was 8.1% at December 31, 1996.
The term loan required quarterly principal payments of $62,500 in 1996 which
would have increased to $87,500 in 1997 and $95,833 from 1998 through November
2000 had the loan not been replaced in January of 1997.
On January 9, 1997, the Company replaced the line of credit and term loan from
First National with secured financing from IBJ Schroder Business Credit
Corporation (formerly IBJ Schroder Bank & Trust Company) ("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.
<PAGE>
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 ("Amendment") to the Loan
Agreement with IBJS. The Amendment, among other things, amends the terms for
drawing upon the term loan and amends certain financial covenants effective
with the December 31, 1997 covenants. At December 31, 1997, the Company was
in compliance with the covenants, as amended. Pursuant to the Amendment, the
maximum term loan amount was reduced to $3,998,000 from $7,000,000 providing
an aggregate of up to $11,998,000 in senior secured financing. 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.
At December 31, 1997 the Company had borrowed $5.8 million on its revolving
line of credit from IBJS and $2.7 million in term loans. A $1.1 million term
loan increase in the second quarter of 1997 was used to purchase the Company's
convertible subordinated debentures to meet the April 1997 sinking fund
requirements. 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 twelve months
ended December 31, 1997, the maximum eligible amount of the $8,000,000
revolving credit line, has ranged from $6,215,000 to $7,385,000, or from 78%
to 92%.
Interest on the debentures is payable semi-annually. The debentures are
subject to redemption through a sinking fund whereby the Company is required
to redeem at face value $1,500,000 of the debentures each April 15, from 1991
through 1998. The balance is due on April 15, 1999. The debentures are
convertible into shares of the Company's common stock at $19.52 per share and
are redeemable in whole or in part at par. During 1997, 1996 and 1995, the
Company repurchased debentures with a face amount of $1.1 million in market
transactions and called for redemption $3.1 million to meet sinking fund
requirements. The Company satisfied the 1997 sinking fund requirement by
application of $.5 million of debentures previously repurchased and by the
Company's redemption of an additional $1.0 million of debentures. In market
transactions throughout the twelve months of 1997, the Company purchased $.2
million principal amount of its subordinated debentures for $.2 million. The
Company has elected to satisfy the 1998 sinking fund requirement by
application of $.3 million of 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 intends to fund this redemption of
$1.2 million in April 1998 through a term loan pursuant to the Loan Agreement,
subject to IBJS's satisfactory review of the financial statements for the
month ended March 31, 1998, including compliance with all financial covenants.
The Company expects to be in compliance with all financial covenants at March
31, 1998.
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 December 31, 1997, no amount was available for
the payment of dividends and/or the repurchase of capital stock.
<PAGE>
Annual maturities of long-term debt for each of the five years following
December 31, 1997 are as follows:
Convertible Line of
Subordinated Credit Term
Year Debentures(1) Payable Loan (2)
1998 $ 1,190 $ 0 $ 305
1999 8,000 0 457
2000 0 0 457
2001 0 0 457
2002 0 5,834 1,065
Subtotal 9,190 5,834 2,741
Less:
Current portion 1,190 0 305
Total $ 8,000 $5,834 $2,436
Note: (1) Amounts shown are net of face value of repurchased
debentures and assume application of such debentures
to meet, in part, sinking fund requirements for 1998.
(2) The term loans require monthly payments commencing
with $38,080 in May 1998. The sum of all term loans
made during the borrowing period will be amortized on
the basis of a seventy-two (72) month amortization
schedule (with the monthly amortization amount being
adjusted upon each term loan being advanced).
5. Supplemental Pension Agreements
In April 1995, Health-Chem entered into five-year Employment Agreements with
each of Marvin M. Speiser and Robert D. Speiser which entitle them to receive
upon retirement on or after January 1, 2000, in the case of Marvin M. Speiser,
and on or after January 1, 2010, in the case of Robert D. Speiser, an annual
supplemental pension benefit equal to 60% of such executive's final base
salary, which for this purpose will be the highest nominal annual salary paid
to him during his employment. The supplemental pension will be payable for a
period of ten (10) years beginning on the retirement date, or if later,
January 1, following termination of employment. In the event of termination
of employment prior to the retirement date, the amount of the supplemental
pension payable on that date will be prorated based on the period of
employment from December 31, 1994 to the date of termination. No proration
will be applied, however, if the executive's employment is involuntarily
terminated. An actuarially reduced supplemental pension benefit may be paid
if the benefit is commenced upon termination of employment prior to the
retirement date. For the year ended December 31, 1997 and 1996 the related
pension accrual in the amount of $1,474,000 and $930,000 has been recorded in
other long-term liabilities on the Consolidated Balance Sheets.
Net pension cost included in the operating results for fiscal year ended
December 31, 1997, 1996 and 1995 consisted of the following components:
1997 1996 1995
Service costs $ 81 $ 76 $ 50
Interest costs 147 134 107
Net amortization 316 321 242
Net pension cost $544 $531 $399
<PAGE>
The supplemental pension agreements currently are not funded. The status of
these plans at December 31, 1997 and 1996 is as follows:
1997 1996
Accumulated benefit obligations $1,932 $1,758
Projected benefit obligation 2,243 2,120
Projected obligation of plan assets
in excess 2,243 2,120
Unrecognized prior service cost <769> <1,190>
Accrued pension cost $1,474 $ 930
The assumed discount rate used in determining the accumulated benefit
obligation was 7% for 1997 and 1996.
6. Employee Benefit Plan
All permanent, full-time non-union employees of the Company are eligible to
participate in Health-Chem's 401(k) Plan (the "Plan") following six months of
employment. The Plan allows eligible employees to defer up to 20% of their
income on a pre-tax basis through contributions to the Plan. The Company may
contribute for each participant a matching contribution equal to a percentage
of the elective contributions made by the participants. The decision to make
matching contributions and the amount of such contributions will be made each
year by the Company. These Company matching contributions were $59,000,
$64,000, and $59,000 in 1997, 1996 and 1995, respectively.
7. Commitments
The Company leases office space in New York City and three
production/warehouse facilities in Los Angeles. Minimum rental commitments
required under non-cancelable operating leases having a term of more than one
year as of December 31, 1997 were as follows (in thousands):
Year Amount
1998 $ 421
1999 80
Total $ 501
Rent expense was $541,000, $511,000 and $502,000 in 1997, 1996 and 1995,
respectively.
At December 31, 1997, commitments under employment arrangements aggregated
$1,816,000 through 2002. Certain employees were provided bonuses, based upon
defined earnings or the attainment of certain sales levels, which amounted to
$251,000 and $201,000 in 1997 and 1996, respectively. Based on these
criteria, no bonuses were earned in 1995.
8. Litigation
(a) 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' 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,
for which Hercon Laboratories is awaiting FDA approval, constitutes
infringement of Key's patent for its Nitro-Dur(R) products. Key seeks 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 not 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
<PAGE>
unenforceable and that Hercon Laboratories has not infringed and does not
infringe any claim of the patent. Hercon Laboratories has 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 on its infringement claim and 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 to the United States Court of
Appeals for the Federal Circuit in Washington, DC. On December 17, 1997, the
Delaware District Court issued an injunction, enjoining Hercon, 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 has appealed to the United States District Court
for the Federal Circuit in Washington, D.C. from both the September 30, 1997
judgment and the December 17, 1997 injunction. The appeals were consolidated
on January 23, 1998 and are now in the briefing stage. Management believes
that Hercon has strong grounds for appeal.
(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 plaintiff alleges that
this exercise price, which is the same per share price as the subscription
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 June 1997, the defendants filed an answer denying all
material allegations and seeking dismissal of the complaint. Management
believes that the claims are without merit and is defending the action
vigorously. The action is in the discovery stage.
(c) In May 1996, Herman Rovner and Bruce Nicholl, two stockholders of the
Company, commenced a class and derivative action against the Company, its
directors, and a former director in the Delaware Chancery Court (New Castle
County). The complaint alleged that the defendants breached their fiduciary
duties insofar as the transactions under a Stock Purchase Agreement entered
into between the Company and Marvin M. Speiser in March 1996 would 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. In
July 1996, after a hearing, the Vice Chancellor denied the plaintiffs' motion
for a preliminary injunction on the basis that the plaintiffs failed to show
irreparable harm or the likelihood of establishing that the 1991 Chancery
Court order was violated. Later in July 1996, the Delaware Supreme Court
denied the plaintiff's interlocutory appeal of the Vice Chancellor's decision.
For a description of the transactions effected pursuant to the Stock Purchase
Agreement, see Note 9 below. In July 1997, motions to dismiss the action were
brought independently on behalf of the plaintiffs and the defendants,
respectively. Common to both motions was the ground that the claims are moot.
Plaintiffs' motion included a petition for an award of attorneys' fees and
expenses. The defendants have vigorously opposed any award of attorneys' fees
on several grounds, including the absence of any "benefit" conferred upon the
Company by the bringing of the action. The Chancery Court heard oral argument
on the issue of attorneys' fees on February 18, 1998. The Company is awaiting
a decision from the Court.
<PAGE>
9. Redeemable Common Stock and Stock Purchase Agreement/Rights Offering
On July 15, 1994, the Company exercised its option to purchase 525,000 shares
of the Company's Common Stock, par value $.01 per share, at $2.00 per share,
from National Union Fire Insurance Company of Pittsburgh, PA. These shares
are included in treasury stock and had previously been classified as
Redeemable Common Stock.
In compliance with certain restrictive covenants under the indenture governing
the Company's 10.375% convertible subordinated debentures due April 15, 1999,
the Company paid for the 525,000 shares from the proceeds of the substantially
concurrent sale of 575,000 shares of the Company's treasury stock at $2.00 per
share, to Marvin M. Speiser pursuant to a stock purchase and option agreement
("1994 Option Agreement")
In September 1996, the Company issued 952,520 shares of its Common Stock, at
$1.10 per share, pursuant to a subscription rights offering of up to 1,320,000
shares registered under the Securities Act (the "Rights Offering"). The
Rights Offering was effected in accordance with the Stock Purchase Agreement
referenced in Note 8(c). Substantially all of the proceeds of this Rights
Offering were used to pay the exercise price (at $1.0816 per share) of an
equal number of shares acquired from Marvin M. Speiser upon the exercise of
the Company's repurchase rights under the 1994 Option Agreement and an option
agreement entered into in 1991. Of the total of 1,782,689 shares subject to
repurchase by the Company, 952,520 shares were purchased, 512,763 shares were
retained by Mr. Speiser free of the Company's repurchase rights, as the deemed
exercise of his pro rata subscription rights, and 317,406 remain subject to
the Company's repurchase rights under the option agreements.
10. Stockholders' Equity
a. A summary of the shares of common and treasury stock is as follows:
Treasury Stock
Common Convertible Common
Stock Special Stock Stock
Balance at 12/31/96 7,982,424 738,667 6,490,632
Balance at 12/31/97 7,982,424 738,667 6,490,632
b. Convertible special stock
The convertible special stock has the same rights as common stock except that
it is nonvoting. Each share is convertible into 1 1/3 shares of the Company's
common stock. The conversion rate is subject to change under certain
circumstances. No shares of convertible special stock are outstanding.
c. Reserved shares
Number of
Purpose of Reservation Shares
Conversion of convertible special stock 984,889
Stock option plans 902,500
Conversion of 10.375% convertible
subordinated debentures 470,799
Total reserved shares 2,358,188
<PAGE>
d. Stock rights plan
On February 28, 1989, the Company adopted a stock rights plan which was
amended November 7, 1990. Pursuant to such plan, the Board of Directors
declared a dividend of one right ("Right") for each share of common stock of
the Company outstanding on March 21, 1989. In the event that a person or
affiliated group, other than any present officer or director, acquires,
obtains the right to acquire, or tenders for 30% or more of the Company's
outstanding common stock (other than through certain permissibly structured
tender offers), then each holder of a Right, other than the 30% stockholder or
tender offeror, shall be entitled to receive upon exercise of each Right,
common shares of the Company which have a market value equal to two times the
exercise price of the Right, or capital stock of the acquiring company which
has a market value of two times the exercise price of the Right.
The Company may redeem the Rights for a nominal amount at any time prior to 10
days (subject to extension by the Board of Directors) after a person or group
acquires or tenders for 30% or more of the Company's common stock. Unless
redeemed earlier, all Rights expire on February 27, 1999.
11. Stock Options
Health-Chem Corporation
Options granted under various stock option plans are exercisable in
installments commencing one year from the date of grant and expire five to ten
years from the grant date.
In March 1995, the Company adopted the 1995 Performance Equity Plan ("1995
Plan") which was designed to attract and retain employees of the highest
caliber, to provide increased incentive for officers and key employees and to
continue to promote the well-being of the Company. Pursuant to the 1995 Plan,
up to an aggregate of 600,000 shares of the Company's Common Stock are
available for the granting of stock or stock related incentive awards.
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123). As permitted by SFAS
123, the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for its stock
option plans. Accordingly, no compensation cost has been recognized for
options granted under the plans. The Company did not award any option grants
during the years ended December 31, 1997, 1996 and 1995.
<PAGE>
A summary of the status of the Company's plans as of December 31, 1997, 1996
and 1995 and changes during the years ended on those dates is presented below:
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 557,500 $4.53 615,000 $4.53 697,600 $4.97
Granted 0 0 0
Exercised 0 0 <2,000> $2.50
Forfeited
Price @ $9.125-$11.125 <88,000> $10.25 0 <69,600> $9.14
Price @ $4.38-$5.25 <91,000> $5.25 <3,000> $5.25 0
Price @ $3.25-$3.75 <66,000> $3.48 <44,500> $3.48 <11,000> $3.52
Price @ $2.50 <10,000> $2.50 <10,000> $2.50 0
Total Forfeited <255,000> <57,500> <80,600>
Outstanding at end
of year 302,500 $3.16 557,500 $4.65 615,000 $4.53
Options exercisable
at year-end 238,900 397,600 343,800
The following table summarizes information about the Plan's stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
$ 2.50 98,000 4.3 years $ 2.50 98,000 $ 2.50
$ 3.25 113,500 6.3 years $ 3.25 68,100 $ 3.25
$ 3.75 91,000 5.3 years $ 3.75 72,800 $ 3.75
Total 302,500 238,900
Transderm Laboratories Corporation
Pursuant to the five-year Employment Agreements referred to in Note 5, on
November 13, 1995, the Company caused Transderm to enter into stock option
agreements with Robert D. Speiser and Marvin M. Speiser allowing each of them
to purchase 5,000,000 shares of Transderm's common stock at $.10 per share,
which was the per share subscription exercise price in Transderm's initial
public offering effected pursuant to the Plan of Reorganization and Asset
Exchange Agreement referred to in Note 1a. The options, which have been
exercisable in full since November 13, 1996, each represent ten percent (10%)
of the outstanding common stock of Transderm on a diluted basis.
<PAGE>
In April 1996, Transderm adopted the 1996 Performance Equity Plan ("Transderm
Plan") which was designed to attract and retain employees of the highest
caliber, to provide increased incentive for officers and key employees and to
continue to promote the well-being of Transderm. Pursuant to the Transderm
Plan, up to an aggregate of 2,000,000 shares of Transderm's Common Stock were
made available for the granting of stock or stock related incentive awards.
During 1996 the Company entered into stock option agreements with three
officers and key employees allowing them to purchase up to an aggregate of
1,400,000 shares under the Transderm Plan. The Company has reserved 1,400,000
shares of Common Stock pursuant to these stock option agreements.
In accordance with the Company's adoption of SFAS 123, no compensation cost
has been recognized for options granted under the Transderm Plan. Had
compensation cost for the Transderm Plan been determined based on the fair
value at the grant dates for awards under the Transderm Plan consistent with
the method of SFAS 123, the Company's net loss and net loss per share would
have been increased to the pro forma amounts indicated below. Transderm did
not award any option grants during the year ended December 31, 1997.
1997 1996 1995
Net loss As reported $<3,258,000> $<1,322,000> $<290,000>
Pro forma $<3,288,000> $<2,033,000> $<432,000>
Basic and diluted As reported $<0.41> $<0.17> $<0.04>
loss per share Pro forma $<0.41> $<0.25> $<0.05>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively; no dividend yield
for both years; expected volatility of 100% for both years; risk-free interest
rates of 6.11% and 5.86%; and expected lives of seven years for both the 1996
and 1995 option grants.
A summary of the status of the Transderm Plan as of December 31, 1997, 1996
and 1995 and changes during the years ended on those dates is presented below
(in thousands, except per share amounts):
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 11,400 $0.103 10,000 $0.10 0 $0
Granted 0 0 1,400 0.125 10,000 0.10
Exercised 0 0 0 0 0 0
Forfeited 0 0 0 0 0 0
Outstanding at end
of year 11,400 0.103 11,400 0.103 10,000 0.10
Options exercisable
at year-end 10,280 10,000
Weighted-average
fair value of
options granted
during the year $0 $0.106 $0.085
<PAGE>
The following table summarizes information about the Transderm Plan stock
options outstanding at December 31, 1997:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
$0.10- 11,400,000 8.0 years $0.103 10,280,000 $0.101
$0.125
12. Taxes on Income (In thousands)
Year Ended December 31,
1997 1996 1995
Taxes on income include provision <benefit> for:
Federal income taxes $<1,136> $ <767> $ <105>
State and local income taxes <85> <128> 63
Total $<1,221> $ <895> $ <42>
Taxes on income are comprised of:
Currently payable <receivable> $ <116> $ <55> $ 236
Deferred <benefit> <1,105> <840> <278>
Total $<1,221> $ <895> $ <42>
Charged <credited> to:
Income before extraordinary gain $<1,230> $ <898> $ <45>
Extraordinary gain on repurchase of debentures 9 3 3
Total $<1,221> $ <895> $ <42>
A reconciliation of taxes on income to the federal statutory rate is as
follows:
Year Ended December 31,
1997 1996 1995
Tax <benefit> at statutory rate $<1,523> $ <755> $ <107>
Increase <decrease> resulting from:
State and local taxes, net of federal
tax benefit <85> <36> 13
Recognition of tax loss and tax credit
carryforwards (not previously recognized) <84> <51> 0
Intangibles and officers' life insurance
premiums 79 15 20
Settlement of state tax assessments 0 <69> 0
Valuation allowance <reversal> 371 <25> 0
Other 21 26 32
Tax <benefit> $<1,221> $ <895> $ <42>
<PAGE>
At December 31, 1997 and 1996, the deferred tax assets and liabilities result
from the following temporary differences and carryforwards:
1997 1996
Deferred tax assets:
Net operating and other tax loss
carryforwards $10,047 $ 8,733
Tax credit carryforwards 631 693
Provision for litigation contingencies 101 99
Allowances for bad debts 282 303
Inventory reserves 126 158
Capitalization of overhead costs as
inventory in accordance with tax laws 169 150
Retirement benefits 690 435
Other 215 29
Total deferred tax assets 12,261 10,600
Deferred tax liabilities:
Accelerated depreciation <881> <902>
Other 0 0
Total deferred tax liabilities <881> <902>
Net deferred tax asset before valuation
allowance 11,380 9,698
Valuation Allowance <9,488> <8,469>
Total deferred tax assets and
liabilities net $ 1,892 $ 1,229
At December 31, 1997, the net deferred tax asset was comprised of a non-
current asset of $1,892,000. The net deferred tax asset at December 31, 1996
was comprised of a current asset of $554,000 and a non-current asset of
$675,000. For the year ended December 31, 1997 the valuation allowance
increased by $1,019,000 and total assets and liabilities net of the valuation
allowance increased $663,000 primarily as a result of generating a federal net
operating loss for the current year and changes in temporary differences.
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. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although
realization is not assured, management believes the deferred tax asset net of
a valuation allowance is an amount that is more likely than not to be
realized. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.
13. Interest Expense - Net (In thousands)
Year ended December 31,
1997 1996 1995
Interest expense $1,775 $1,700 $ 1,646
Interest income <162> <181> <175>
Capitalized interest 0 <256> <120>
Total interest expense - net $1,613 $1,263 $ 1,351
<PAGE>
14. Extraordinary Gain
The Company's Board of Directors has authorized the repurchase (subject to
certain bank credit facility restrictions) of up to $12 million in principal
amount of the Company's 10.375% convertible subordinated debentures to be used
to satisfy redemption requirements which began in April 1991. As of December
31, 1997, $7,697,000 principal amount of debentures had been repurchased in
market transactions and $3,113,000 were called for redemption. Extraordinary
gains on the repurchase of debentures during 1997, 1996 and 1995 have been
recognized as follows (in thousands):
1997 1996 1995
Extraordinary gain from repurchase of
subordinated debentures before taxes $ 26 $ 8 $ 10
Tax provision (See Note 12) <9> <3> <3>
Extraordinary gain from repurchase of
subordinated debentures $ 17 $ 5 $ 7
15. Segment Information and Foreign Sales
The Company's operations consist of a single dominant segment which
manufactures and distributes several products. These products are related
mainly by manufacturing processes requiring lamination of materials and
usually involve common technological features such as the slow timed release
of various substances. Most products are wholesaled through distributors or
to other manufacturers.
Foreign sales, consisting primarily of sales to European countries, were $2.1
million or 5.5% of sales in 1997. In each of 1997, 1996 and 1995, foreign
sales were less than 10% of total revenues.
In 1997, there was no single customer nor, to the Company's knowledge, any
group of affiliated customers to which sales during the fiscal year ended
December 31, 1997 were in the aggregate equal to 10% or more of the Company's
consolidated net sales. In 1996 and 1995 sales of transdermal nitroglycerin
patches to Mylan Laboratories, Inc. accounted for approximately 10% and 14% of
consolidated net sales, respectively.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to
be restated. The Company is still evaluating the impact of SFAS 131 on
segment disclosures.
<PAGE>
<PAGE>
16. Related Party Transactions
The consolidated financial statements include the following items applicable
to related parties (in thousands):
December 31,
Balance Sheets: 1997 1996
Receivable from director and executive officer $337 $311
10.375% convertible subordinated debentures
held by directors and executive officers 465 427
Stockholder notes receivable arising from
exercise of stock options 148 148
Year ended December 31,
Income Statements: 1997 1996 1995
Management fees - charged to selling,
general and administrative expense $ 0 $ 0 $ 20
Interest expense - net 22 14 36
17. Minority Interest
A former president of Hercon Laboratories maintains a 1.5% interest in Hercon
Laboratories and Hercon Environmental. Equity in Hercon Environmental has
generated a $11,000 minority interest.
18. Management Plans
The Company has incurred net losses of $3,258,000, $1,322,000 and $290,000 for
the years ended December 31, 1997, 1996 and 1995, respectively, and, as a
result has a retained deficit of $6,721,000 as of December 31, 1997.
Management developed a plan of action during 1997 which included cost
containment measures and the penetration of new markets. Cost containment
measures include an organizational restructuring whereby plant overhead,
research and development and selling, general and administrative expenses have
been reduced. The penetration of new markets includes sales of certain
products outside the United States and seeking contract manufacturing
opportunities and collaborative partnerships for the development of new
transdermal and topical products. Additionally, with respect to its synthetic
fabrics products, the Company has restructured the sales department, redefined
product lines, introduced new products to the market and focused its efforts
on traditionally high margin products. Management intends to continue to
refine and enhance this plan during 1998.
The Company is currently developing strategies which will enable it to retire
or refinance the remaining $8 million in debentures by April 15, 1999.
<PAGE>
<PAGE>
<TABLE>
19. Quarterly Financial Information (Unaudited) (In thousands except per
share data)
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qrtr. Qrtr. Qrtr. Qrtr. Qrtr. Qrtr. Qrtr. Qrtr.
1997 1997 1997 1997 1996 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 8,687 9,957 10,333 8,743 9,727 11,580 13,109 13,149
Gross profit $ 2,050 2,368 2,626 1,872 2,161 3,614 3,952 3,916
<Loss> income
before
extraordinary
gain $ <850> <967> <410> <1,048> <1,140> <266> <141> 220
Extraordinary
gain <loss> 18 0 <2> 1 1 0 0 4
NET <LOSS>
INCOME $ <832> <967> <412> <1,047> <1,139> <266> <141> 224
Earnings per common share (basic & diluted):
<Loss> income
before
extraordinary
gain $ <.10> <.12> <.05> <.13> <.14> <.03> <.02> .03
Extraordinary
gain <loss> .00 .00 .00 .00 .00 .00 .00 .00
NET <LOSS>
INCOME PER
SHARE $ <.10> <.12> <.05> <.13> <.14> <.03> <.02> .03
/TABLE
<PAGE>
<PAGE>
FORM 10-K PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information responsive to this item is incorporated by reference to the
Company's Proxy Statement in connection with the registrant's Annual Meeting
of Stockholders to be held on May 12, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information responsive to this item is incorporated by reference to the
Company's Proxy Statement in connection with the registrant's Annual Meeting
of Stockholders to be held on May 12, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information responsive to this item is incorporated by reference to the
Company's Proxy Statement in connection with the registrant's Annual Meeting
of Stockholders to be held on May 12, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information responsive to this item is incorporated by reference to the
Company's Proxy Statement in connection with the registrant's Annual Meeting
of Stockholders to be held on May 12, 1998.
<PAGE>
<PAGE>
FORM 10-K PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
(a) 1. FINANCIAL STATEMENTS
Report of Independent Accountants 17
Consolidated Balance Sheets-December 31, 1997 and 1996 18-19
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995 20
Consolidated Cash Flow Statements
Years Ended December 31, 1997, 1996 and 1995 21-22
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997, 1996 and 1995 23
Notes to Consolidated Financial Statements 24-41
(a) 2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts and Reserves 46
All other schedules are omitted because they are not required, are
inapplicable, or the information is included in the financial statements or
notes thereto.
(a) 3. EXHIBITS
2. Plan of Reorganization and Asset Exchange Agreement dated as of June
30, 1995, by and among the Company, Herculite Products, Inc.
("Herculite") and Transderm Laboratories Corporation ("Transderm").
Incorporated herein by reference to Exhibit 2 to Registration
Statement on Form S-1 (Reg. No. 33-95080) for Transderm, as filed with
the Commission on July 28, 1995.
3.1 Restated Certificate of Incorporation and amendments of the
Registrant. Incorporated herein by reference to Exhibit No. 3 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1985.
3.2 Certificate of Amendment of the Restated Certificate of Incorporation
of the Registrant dated May 8, 1987. Incorporated herein by reference
to Exhibit No. 3.2 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1987.
3.3 By-Laws of the Registrant. Incorporated herein by reference to
Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.
4.1 Indenture relating to the Company's 10 3/8% Convertible Subordinated
Debentures due 1999. Incorporated herein by reference to Exhibit No.
4.2 to the Company's Registration Statement on Form S-7 (Reg. No. 2-
71341) as filed with the Commission on April 15, 1981.
<PAGE>
4.2 Rights Agreement between the Company and Harris Trust Company of New
York as Rights Agent dated February 28, 1989. Incorporated herein by
reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1988.
4.3 Amendment dated as of November 7, 1990 to the Rights Agreement between
the Company and Harris Trust Company of New York as Rights Agent dated
February 28, 1989. Incorporated herein by reference to Exhibit 4.3
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1990.
10.1 The 1986 Stock Option Plan as approved by the Company's Stockholders
on April 26, 1986 and as amended by the Company's Board of Directors
on December 30, 1987. Incorporated herein by reference to Exhibit No.
10.7 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1987.
10.2 Second Amendment to the 1986 Stock Option Plan as approved by the
Company's Board of Directors on May 6, 1993. Incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
10.3 The 1995 Performance Equity Plan. Incorporated herein by reference
to Exhibit A to the Company's definitive Proxy Statement dated March
1, 1995 in connection with the Company's 1995 Annual Meeting of
Stockholders.
10.4 Stipulation and Agreement of Compromise and Settlement dated March 15,
1991 and amended on June 7, 1991 with respect to Delaware
Stockholders' Derivative Action. Incorporated herein by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991.
10.5 Lease Agreement between Herculite and WORCO dated August 17, 1994.
Incorporated herein by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.6 Amended and Restated Option Agreement, dated as of August 30, 1991,
by and between Marvin M. Speiser and the Company. Incorporated herein
by reference to Exhibit 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1991.
10.7 Stock Purchase and Option Agreement by and between Marvin M. Speiser
and the Company dated July 15, 1994. Incorporated herein by reference
to Exhibit 3 to the Company's Current Report on Form 8-K filed with
the Commission on July 25, 1994.
10.8(a) Stock Purchase Agreement dated as of March 29, 1996 by and between
Marvin M. Speiser and the Company. Incorporated herein by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-3 No.
333-02411 filed with the Commission on April 10, 1996.
10.8(b) First Amendment to Stock Purchase Agreement dated as of June 28, 1996
by and between Marvin M. Speiser and the Company. Incorporated herein
by reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended September 30, 1996.
10.8(c) Second Amendment to Stock Purchase Agreement dated as of September 17,
1996 by and between Marvin M. Speiser and the Company. Incorporated
herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 1996.
<PAGE>
10.9 Distribution Agreement between Hercon Laboratories and Bolar
Pharmaceutical Co., Inc. dated as of January 4, 1993. Incorporated
herein by reference to Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1992.
10.10 Employment Agreement between Marvin M. Speiser and the Company dated
April 4, 1995. Incorporated herein by reference to Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended March 31, 1995.
10.11 Employment Agreement between Robert D. Speiser and the Company dated
April 4, 1995. Incorporated herein by reference to Exhibit 10.2 to
the Company's Form 10-Q for the quarter ended March 31, 1995.
10.12 Stock Option Agreement between Transderm and Marvin M. Speiser dated
November 13, 1995. Incorporated herein by reference to Exhibit 10.3
to Transderm's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.13 Stock Option Agreement between Transderm and Robert D. Speiser dated
November 13, 1995. Incorporated herein by reference to Exhibit 10.4
to Transderm's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.14 Asset Acquisition Agreement dated April 28, 1995 between Hercon
Environmental and Hercon Laboratories. Incorporated herein by
reference to Exhibit 10.7 to Transderm's Registration Statement on
Form S-1 Reg. No. 33-95080 as filed with the Commission on July 28,
1995.
10.15 $7,000,000 principal amount Subordinated Promissory Note of Hercon
Laboratories. Incorporated herein by reference to Exhibit 10.8 to
Amendment No. 1.
10.16 Corporate Services Agreement dated as of August 31, 1995 between the
Company and Transderm. Incorporated herein by reference to Exhibit
10.9 to Amendment No. 1.
10.17 Tax Sharing Agreement dated as of August 31, 1995 between the
Company and Transderm. Incorporated herein by reference to Exhibit
10.10 to Amendment No. 1.
10.18(a) Revolving Credit, Term Loan and Security Agreement dated as of
January 9, 1997 by and between the Company, Herculite, Hercon
Environmental, Pacific, Hercon Laboratories and Transderm and IBJ
Schroder Bank & Trust Company. Incorporated herein by reference to
Exhibit 1 to the Company's Current Report on Form 8-K dated January
22, 1997.
10.18(b) First Amendment to Revolving Credit, Term Loan and Security
Agreement dated as of January 21, 1998 by and between the Company,
Herculite, Hercon Environmental, Pacific, Hercon Laboratories and
Transderm and IBJ Schroder Business Credit Corporation (as successor
in interest to IBJ Schroder & Trust Company). Filed herewith on page
48.
21 Subsidiaries of the Registrant. Filed herewith on page 59.
27 Financial Data Schedule. Filed herewith on page 60.
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 1997 the Company did not file any
reports on Form 8-K.<PAGE>
<PAGE>
<TABLE>
HEALTH-CHEM CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
Additions
Balance at Charged to Deductions Balance
Beginning Costs and from at End
of Year Expenses Allowances of Year
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts receivable $ 306 $ 159 $ 112 (A) $ 353
Allowance for litigation contingencies 201 0 0 201
Allowance for inventory valuation 393 0 75 (B) 318
Valuation allowance for notes receivable 36 0 0 36
Year ended December 31, 1996:
Allowance for doubtful accounts receivable $ 260 $ 181 $ 135 (A) $ 306
Allowance for litigation contingencies 201 0 0 201
Allowance for inventory valuation 487 0 94 (C) 393
Valuation allowance for notes receivable 36 0 0 36
Year ended December 31, 1995:
Allowance for doubtful accounts receivable $ 286 $ 154 $ 180 (A) $ 260
Allowance for litigation contingencies 201 0 0 201
Allowance for inventory valuation 591 594 698 (C) 487
Valuation allowance for notes receivable 36 0 0 36
<FN>
(A) Amount includes write-offs, net of recoveries.
(B) Valuation adjustments and credits to costs and expenses.
</TABLE>
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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
Date: March 26, 1998
/s/ Marvin M. Speiser /s/ Paul R. Moeller
By: Marvin M. Speiser By: Paul R. Moeller
Chairman of the Board and Vice President-Finance
President (Principal (Principal Financial Officer)
Executive Officer) (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following Directors on behalf of the
Registrant on the dates indicated:
/s/ Martin Benis /s/ Bruce M. Schloss
Martin Benis March 26, 1998 Bruce M. Schloss March 26, 1998
/s/ Steven Bernstein /s/ Marvin M. Speiser
Steven Bernstein March 26, 1998 Marvin M. Speiser March 26, 1998
/s/ Matthew Goldstein /s/ Robert D. Speiser
Matthew Goldstein March 26, 1998 Robert D. Speiser March 26, 1998
/s/ Paul R. Moeller /s/ Milton Y. Zussman
Paul R. Moeller March 26, 1998 Milton Y. Zussman March 26, 1998
/s/ Eugene Roshwalb
Eugene Roshwalb March 26, 1998
<PAGE>
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
HEALTH-CHEM CORPORATION
LIST OF SUBSIDIARY CORPORATIONS
State or Country
Name of Incorporation
Transderm Laboratories Corporation Delaware
Aberdeen Research Corporation Delaware
Capco Delaware, Inc. Delaware
HS Protective Fabrics Corporation Delaware
H.S. Development, Inc. Delaware
Health-Chem Industries, Inc. Delaware
Health Med Corporation Delaware
Hercon Environmental Corporation Delaware
Hercon Laboratories Corporation Delaware
Hercon Pharmaceutical Corporation Delaware
Herculite Products, Inc. New York
Medallion Group, Inc. Delaware
Pacific Combining Corporation California
Research Development Corporation Delaware
Springs Development Corporation Delaware
York Aerosol Corporation Delaware
York Aerosol Delivery Systems Corporation Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 162
<SECURITIES> 0
<RECEIVABLES> 4547
<ALLOWANCES> 353
<INVENTORY> 7537
<CURRENT-ASSETS> 1044
<PP&E> 29596
<DEPRECIATION> 17704
<TOTAL-ASSETS> 29936
<CURRENT-LIABILITIES> 7239
<BONDS> 8000
<COMMON> 145
0
0
<OTHER-SE> 3886
<TOTAL-LIABILITY-AND-EQUITY> 29936
<SALES> 37720
<TOTAL-REVENUES> 37720
<CGS> 28804
<TOTAL-COSTS> 28804
<OTHER-EXPENSES> 12243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1613
<INCOME-PRETAX> (4506)
<INCOME-TAX> (1230)
<INCOME-CONTINUING> (3275)
<DISCONTINUED> 0
<EXTRAORDINARY> 17
<CHANGES> 0
<NET-INCOME> (3258)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
<PAGE>
Exhibit 10.18(b)
FIRST AMENDMENT
TO
REVOLVING CREDIT, TERM LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT ("First Amendment") is entered into as of
January 21, 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 Lenders 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.
Borrowers have requested that Agent and Lenders amend the Loan
Agreement to, among other things, provide Borrowers with an overadvance
facility for the period commencing on the date hereof and terminating no
later than July 31, 1998, amend the terms for drawing upon the Term Loan
and to amend certain financial covenants 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.
2. Amendment to Loan Agreement. Subject to satisfaction of the
conditions precedent set forth in Section 5 below, the Loan Agreement is
hereby amended as follows:
<PAGE>
<PAGE>
(a) Section 1.2 of the Loan Agreement is hereby amended as
follows:
(i) by adding the following defined terms in their
appropriate alphabetical order:
"First Amendment" shall mean the First Amendment dated as of
January 21, 1998 among Agent, Lenders and Borrowers.
"Special Advance Amount" shall mean an amount equal to (i)
$400,000 during the period January 21, 1998 through July 31, 1998
and (ii) $0 at all other times.
(ii) by amending the following defined terms in their
entirety:
"Maximum Loan Amount" shall mean $11,998,000 less
repayments of the Term Loan.
"Maximum Term Loan Amount" shall mean $3,998,000, less
repayments of the Term Loan.
"Revolving Interest Rate" shall mean an interest rate
per annum equal to the sum of the Alternate Base Rate plus one-half
(.50%) of one percent.
"Term Loan Rate" shall mean an interest rate per annum
equal to the sum of the Alternate Base Rate plus seven-eighths
(.875%) of one percent.
(b) Section 2.1(a) of the Loan Agreement is hereby amended in its
entirety to provide as follows:
"2.1. (a) Revolving Advances. Subject to the terms and
conditions set forth in this Agreement, each Lender, severally and
not jointly, will make Revolving Advances to Borrowers in aggregate
amounts outstanding at any time equal to such Lender's Commitment
Percentage of the lesser of (x) the Maximum Revolving Advance
Amount or (y) an amount equal to the sum of:
(i) up to 85%, subject to the provisions of Section 2.1(b)
hereof ("Receivables Advance Rate"), of Eligible Receivables,
plus
(ii) up to the lesser of (A) 50%, subject to the provisions
of Section 2.1(b) hereof ("Inventory Advance Rate"), of the
value of the Eligible Inventory (the Receivables Advance Rate
and the Inventory Advance Rate shall be referred to
collectively, as the "Advance Rates") or (B) $4,000,000 in
the aggregate at any one time, plus
(iii) The Special Advance Amount, minus
<PAGE>
(iv) such reserves as Agent may reasonably deem proper and
necessary from time to time.
The amount derived from the sum of (x) Sections 2.1(a)(y)(i),
(ii) and (iii) minus (y) Section 2.1 (a)(y)(iv) at any time and
from time to time shall be referred to as the "Formula Amount".
The Revolving Advances shall be evidenced by the secured promissory
notes ("Revolving Credit Note") substantially in the form attached
hereto as Exhibit 2.1(a)."
(c) The penultimate sentence of Section 2.4 of the Loan Agreement
is hereby amended in its entirety to provide as follows:
"The Term Loans shall be, with respect to principal, payable in
monthly installments calculated in accordance with the immediately
preceding sentence commencing May 1, 1998 and on the first day of
each month thereafter, subject to acceleration upon the occurrence
of an Event of Default under this Agreement or termination of this
Agreement. In addition to the terms and conditions set forth above
and so long as no Default or Event of Default shall have occurred
and be continuing, Lender's agreement to advance Term Loans to
Borrowers after the date of the First Amendment is subject to
satisfaction of each of the following conditions: (i) the proceeds
of such Term Loan shall be used solely to repay the scheduled
installment on the Debentures due April 15, 1998, (ii) Agent shall
have received and reviewed to its satisfaction the annual financial
statements for the year ended December 31, 1997 prepared in
accordance with Section 9.7 hereof (including the compliance
certificate required thereunder); (iii) Agent shall have received
and reviewed to its satisfaction the monthly financial statements
for the month ended March 31, 1998 prepared in accordance with
Section 9.9 (including the compliance certificate required
thereunder); and (iv) Borrowers shall have complied with all
financial covenants set forth in Sections 6.5, 6.6, 6.7, 6.8 and
7.6 for the year ended December 31, 1997 and for the period ended
March 31, 1998 as demonstrated in the financial statements
delivered in accordance with clauses (ii) and (iii) above."
(d) Section 3.1 of the Loan Agreement is hereby amended by
inserting the following sentence at the end thereof:
"So long as no Default or Event of Default shall have occurred and
be continuing, the Revolving Interest Rate and the Term Loan Rate
shall each be decreased by one quarter (.25%) of one percent
effective as of the first day of the month following receipt and
review by Agent, to Agent's satisfaction, of Borrowers' annual
financial statements for the year ended 1998 delivered pursuant to
Section 9.7 hereof (including the compliance certificate required
thereunder) if such annual financial statements show, to Agent's
satisfaction, that Borrowers achieved their projections for the
1998 fiscal year."
<PAGE>
(e) Each of Sections 6.5, 6.6, 6.7, 6.8 and 7.6 of the Loan
Agreement are hereby amended in their entirety to provide as follows:
"6.5. Net Worth. Cause to be maintained for Borrowers on a
Consolidated Basis a Net Worth in an amount not less than the
amount set forth below at the end of each fiscal quarter set forth
below:
Quarter End Minimum Net Worth
12/31/97 $3,575,000
3/31/98 $3,000,000
6/30/98 $3,000,000
9/30/98 $3,250,000
12/31/98 $3,500,000
3/31/99 $3,600,000
6/30/99 $3,700,000
9/30/99 $3,800,000
12/31/99 $3,900,000
3/31/00 $4,000,000
6/30/00 $4,100,000
9/30/00 $4,200,000
12/31/00 $4,300,000
3/31/01 $4,400,000
6/30/01 $4,500,000
9/30/01 $4,600,000
12/31/01 $4,700,000"
"6.6. Current Ratio. Cause to be maintained a ratio of
Current Assets to Current Liabilities of not less than the ratios set
forth below on the last day of each quarter set forth below:
Quarter Ratio for Quarter
12/31/97 1.75
3/31/98 1.75
6/30/98 0.75"
and the last day of each
fiscal quarter thereafter
"6.7. Fixed Charge Coverage. Cause to be maintained a Fixed
Charge Coverage of not less than the amount set forth below for any
rolling four quarter period ending on the last day of each quarter
set forth below:
Four Quarters Ending Ratio
12/31/97 (0.85) to 1
3/31/98 (0.2) to 1
6/30/98 0.1 to 1
9/30/98 0.55 to 1
12/31/98 1.0 to 1
3/31/99 1.1 to 1
6/30/99 1.2 to 1
and each Rolling Four Fiscal
Quarter Period Ending
Thereafter"
<PAGE>
"6.8. Minimum EBITDA. Cause to be maintained EBITDA of not
less than the amount set forth below for any period and any rolling
four quarter period ending on the last day of each quarter set
forth below:
Period EBITDA
1/1/98 to 3/31/98 $225,000
Four Quarters Ending EBITDA
12/31/97 $(1,000,000)
3/31/98 (125,000)
6/30/98 365,000
9/30/98 1,885,000
12/31/98 3,375,000
3/31/99 3,875,000
6/30/99 4,375,000
9/30/99 4,875,000
12/31/99 5,375,000
3/31/00 5,875,000
6/30/00 6,375,000
9/30/00 6,875,000
12/31/00 7,375,000
3/31/01 7,875,000
6/30/01 and each Rolling 8,000,000
Four Fiscal Quarter Period
Ending Thereafter
"7.6. Capital Expenditures. Contract for, purchase or make any
expenditure or commitments for fixed or capital assets (including
capitalized leases) in an amount in excess of the amounts set forth
below for any period ending on the last day of each quarter and
each year set forth below:
Fiscal Period Amount
1/1/98 to 3/31/98 $100,000
1/1/98 to 6/30/98 400,000
1/1/98 to 9/30/98 800,000
Fiscal Year Amount
12/31/97 $ 500,000
12/31/98 $1,250,000
12/31/99 1,250,000
12/31/00 1,250,000
12/31/01 1,250,000"
<PAGE>
(f) Section 3.1 of the Loan Agreement is hereby amended by
amending the second sentence thereof in its entirety to read as follows:
"The financial statements of Holdings and TLC shall be
reported upon without qualification by an independent
certified public accounting firm selected by Borrowers and
satisfactory to Agent (the "Accountants"); provided that for
the year ended December 31, 1997, the financial statements
of TLC may be qualified by the Accountants only to the extent
such qualification relates to the value of TLC as a going-
concern."
3. Covenants
(a) Amendment Fee. To induce Lender to provide the financial
accommodations set forth in this First Amendment, Borrowers shall pay
Lender an amendment fee (the "Amendment Fee") equal to $100,000, which
fee shall be fully earned on the date of this First Amendment and which
shall be payable as follows: (a) $50,000 upon the execution of the First
Amendment (which amount shall be charged to Borrowers' Account) and (b)
$50,000 payable on the earlier of (i) January 2, 1999 or (ii) the date
upon which all Obligations are due and payable in accordance with the
Loan Agreement. The failure to timely pay the foregoing fee shall
constitute an Event of Default under the Loan Agreement.
(b) Repayment Plan. Borrowers shall provide Agent, no later than
December 31, 1998, with a written plan, in form and substance
satisfactory to Agent, regarding the repayment or restructuring of the
$8,000,000 balloon payment due April 15, 1999 with respect to the
Debentures. Borrower's failure to deliver such plan shall constitute an
Event of Default under the Loan Agreement.
(c) Proxy Statement. Holdings shall deliver to Agent, as and
when filed with the SEC but in no event later than March 31, 1998, its
final 1998 proxy statement. Borrower's failure to deliver such Proxy
Statement shall constitute an Event of Default under the Loan Agreement.
(d) Life Insurance Assignment Acknowledgements. Each Assignment
of Life Insurance delivered in accordance with Section 5 of this First
Amendment shall be countersigned by each applicable insurance company,
evidence of which shall be delivered to Agent no later than fourteen (14)
days after the date of this First Amendment. The failure to deliver such
countersignature shall constitute an Event of Default under the Loan
Agreement.
<PAGE>
4. Speiser Family Debentures; Subordination. To induce Agent
and Lenders to provide the financial accommodations described in this
First Amendment and to continue to provide financial accommodations to
Borrowers under the Loan Agreement, Marvin and Laura Speiser as joint
holders of Debentures, Marvin Speiser as an individual holder of
Debentures and Robert Speiser (collectively, the "Speiser Family
Holders") each hereby agrees that upon any redemption or other repayment
of his Debentures, he will promptly remit the proceeds thereof (the
"Redemption Proceeds") to Agent, on behalf of Borrowing Agent. Agent
shall apply the Redemption Proceeds as a prepayment of the Term Loan,
which proceeds shall be applied to the Term Loan in the inverse order of
the maturities thereof. The Redemption Proceeds remitted to Agent shall
be deemed a loan or equity investment by the Speiser Family to Borrowers.
To the extent the Redemption Proceeds are deemed a loan (the "Speiser
Loan"), such loan shall be expressly junior and subordinate in all
respects to the Obligations, shall bear interest at a rate no greater
than ten and three-eighths percent (10 3/8%), shall be unsecured and
shall not be payable, with respect to any installment of principal, until
after the repayment in full of the Obligations. Notwithstanding the
foregoing, Borrower may make and the Speiser Family Holders may retain,
regularly scheduled payments of interest on the Speiser Loan so long as
no Default or Event of Default is then outstanding or would exist after
giving effect to such payment. Upon the request of Agent, each Speiser
Family Holder agrees to enter into a subordination agreement in form and
substance satisfactory to Agent with respect to the Speiser Loan.
5. Conditions of Effectiveness. This First Amendment shall
become effective when Agent shall have received (i) three (3) copies of
this First Amendment executed by Borrowers and consented and agreed to
by each Guarantor and, with respect to Section 4 above, each Speiser
Family Holder, (ii) evidence that Borrowers have (A) borrowed at least
$200,000 against the cash surrender value of that certain Policy No.
Y119875 issued by Canada Life Insurance Company of New York upon the life
of Marvin Speiser (the "Canada Policy") and (B) applied to borrow at
least $200,000 against the cash surrender value of that certain Policy
No. 3166579-7 issued by The Manufacturers Life Insurance Company (USA)
upon the life of Marvin Speiser ("Manufacturers Policy"), provided that
Borrowers shall have delivered the proceeds of such loan to Lender no
later than thirty (30) days from the date of this First Amendment and the
failure to make such payment shall constitute an Event of Default, (iii)
a collateral assignment of life insurance (including a collateral
assignment of the cash surrender value thereof) in the form attached to
this First Amendment as Exhibit A ("Assignment of Life Insurance")
relating to the Canada Policy, the Manufacturers Policy and each other
policy identified on Exhibit B hereto (collectively, the "Policies"),
including a copy of each Policy and a certificate of insurance relating
to same; provided, however, Borrowers shall have the right not to renew
that certain Policy No. 4055-1218 issued by Transamerica Occidental Life
Insurance upon the life of Richard Maddalena at any time upon five (5)
days written notice to Agent and Agent shall release its security
interest upon such policy upon delivery of a written acknowledgement of
such nonrenewal signed by such insurance company, (iv) the first
installment of the Amendment Fee and (iv) Borrowers' projections for the
1998 fiscal year certified by an officer of Holdings.
<PAGE>
6. Representations and Warranties. Each Borrower hereby
represents and warrants as follows:
(a) This First Amendment and the Loan Agreement, as amended
hereby, constitute legal, valid and binding obligations of each Borrower
and are enforceable against each Borrower in accordance with their
respective terms.
(b) Upon the effectiveness of this First 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 First
Amendment.
(c) No Event of Default or Default has occurred and is continuing
or would exist after giving effect to this First Amendment.
(d) No Borrower has any defense, counterclaim or offset with
respect to the Loan Agreement.
7. 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.
(c) The execution, delivery and effectiveness of this First
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.
8. Governing Law. This First 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.
9. Headings. Section headings in this First Amendment are
included herein for convenience of reference only and shall not
constitute a part of this First Amendment for any other purpose.
<PAGE>
10. Counterparts; Telecopied Signatures. This First 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
<PAGE>
IN WITNESS WHEREOF, this First 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 Baord
of each of the foregoing
corporations
TRANSDERM LABORATORIES
CORPORATION
By: /s/ Robert D. Speiser
Name: Robert D. Speiser
Title: President
HERCON ENVIRONMENTAL CORPORATION
By: /s/ Paul R. Moeller
Name: Paul R. Moeller
Title: President
IBJ SCHRODER BUSINESS CREDIT
CORPORATION, as Agent and Lender
By: /s/ Christopher J. Norrito
Name: Christopher J. Norrito
Title: Vice President
<PAGE>
<PAGE>
AGREED TO AS TO SECTION 4:
/s/ Marvin Speiser
Marvin Speiser
/s/ Laura Speiser
Laura Speiser
/s/ Robert Speiser
Robert Speiser
