<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998 Commission File Number 1-6787
HEALTH-CHEM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-2682801
(State of Incorporation) (I.R.S. Employer Identification No.)
1212 Avenue of the Americas, 24th Floor, New York, NY 10036
(Address of principal executive offices)
Registrant's Telephone Number: 212-398-0700
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and has been subject to such filing requirements for the past 90 days.
As of July 31, 1998, 7,982,424 shares of Common Stock, $.01 Par Value, were
outstanding.
Page 1<PAGE>
<PAGE>
<TABLE> HEALTH-CHEM CORPORATION Part I
CONSOLIDATED BALANCE SHEETS (Unaudited) Item 1
(In thousands) Page 2
June 30, December 31,
1998 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 213 $ 162
Accounts receivable, net 4,767 4,194
Inventories (Note 3) 8,018 7,537
Other current assets 1,321 1,044
Total Current Assets 14,319 12,937
PROPERTY, PLANT & EQUIPMENT
Land and buildings 5,721 5,721
Other property, plant & equipment 24,095 23,875
Total Property, Plant & Equipment 29,816 29,596
Less accumulated depreciation & amortization 18,676 17,704
Net Property, Plant & Equipment 11,140 11,892
NON-CURRENT ASSETS
Notes receivable 750 900
Cash surrender value of life insurance
policies 1,001 1,033
Excess of cost over fair value of assets
acquired 670 682
Deferred taxes-non-current 1,891 1,892
Other non-current assets 344 600
Total Non-Current Assets 4,656 5,107
TOTAL ASSETS $30,115 $29,936
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,304 $ 4,189
Accrued expenses and other current liabilities 10,153 2,884
Income taxes payable 185 166
Total Current Liabilities 14,642 7,239
LONG-TERM LIABILITIES
10.375% convertible subordinated debentures 0 8,000
Long-term debt 9,223 8,270
Other long-term liabilities 2,796 2,530
Minority interest 14 11
STOCKHOLDERS' EQUITY
Convertible special stock 7 7
Common stock 145 145
Additional paid-in capital 18,286 18,286
Less stockholder notes receivable <148> <148>
Accumulated deficit <7,167> <6,721>
Subtotal 11,123 11,569
Less treasury stock <7,683> <7,683>
Total Stockholders' Equity 3,440 3,886
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,115 $29,936
<FN>
See Notes to Consolidated Financial Statements.<PAGE>
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except per share amounts) Page 3
For the Six Months
Ended June 30,
<S> 1998 1997
REVENUE: <C> <C>
Net sales $19,511 $19,076
Cost of goods sold 14,034 14,578
Gross profit 5,477 4,498
OPERATING EXPENSES:
Selling, general and administrative expense 4,275 4,605
Legal expense 542 275
Research and development expense 542 1,247
Net interest expense 835 789
Total operating expenses 6,194 6,916
LOSS FROM OPERATIONS <717> <2,418>
Other income - net 270 258
LOSS FROM OPERATIONS BEFORE TAXES
AND MINORITY INTEREST <447> <2,160>
Income tax benefit 7 703
LOSS BEFORE MINORITY INTEREST <440> <1,457>
Minority Interest in earnings of subsidiary 3 1
LOSS BEFORE EXTRAORDINARY GAIN <443> <1,458>
Extraordinary loss from repurchase of debentures 3 1
LOSS $ <446> $<1,459>
Earnings per common share (basic & diluted)
(Note 4):
Loss before extraordinary gain $ <.06> $ <.18>
Extraordinary loss from repurchase of
debentures .00 .00
LOSS PER COMMON SHARE $ <.06> $ <.18>
Average number of common shares outstanding
(basic & diluted) (Note 4): 7,982 7,982
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
HEALTH-CHEM CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except per share amounts) Page 4
For the Three Months
Ended June 30,
<S> 1998 1997
REVENUE: <C> <C>
Net sales $ 9,204 $10,333
Cost of goods sold 6,678 7,707
Gross profit 2,526 2,626
OPERATING EXPENSES:
Selling, general and administrative expense 2,117 2,288
Legal expense 176 168
Research and development expense 289 503
Net interest expense 423 405
Total operating expenses 3,005 3,364
LOSS FROM OPERATIONS <479> <738>
Other income - net 181 157
LOSS FROM OPERATIONS BEFORE TAXES
AND MINORITY INTEREST <298> <581>
Income tax provision <benefit> 21 <173>
LOSS BEFORE MINORITY INTEREST <319> <408>
Minority Interest in earnings of subsidiary 3 2
LOSS BEFORE EXTRAORDINARY GAIN <322> <410>
Extraordinary loss from repurchase of debentures 3 2
LOSS $ <325> $ <412>
Earnings per common share (basic & diluted)
(Note 4):
Loss before extraordinary gain $ <.04> $ <.05>
Extraordinary loss from repurchase of
debentures .00 .00
LOSS PER COMMON SHARE $ <.04> $ <.05>
Average number of common shares outstanding
(basic & diluted) (Note 4): 7,982 7,982
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE> HEALTH-CHEM CORPORATION Part I
CONSOLIDATED CASH FLOW STATEMENTS (Unaudited) Item 1
(In thousands) Page 5
For the Six Months
Ended June 30,
<S> 1998 1997
Cash was <Used for> Provided by: <C> <C>
OPERATIONS:
Loss before extraordinary gain $ <440> $<1,458>
Adjustments to reconcile to net cash used for
operations:
Depreciation and amortization 1,068 811
Gain on disposal of property, plant and equipment 1 <14>
Provision for doubtful accounts receivable 36 10
Deferred income taxes 0 <703>
Minority interest 3 1
Changes in:
Accounts receivable <608> <556>
Inventories <481> 646
Other current assets <278> <127>
Other non-current assets 200 1
Accounts payable 115 <769>
Accrued expenses and other current liabilities 104 <12>
Interest and income taxes payable 9 <5>
Other long-term liabilities 260 272
Other, net <3> 0
Net cash used for operations <14> <1,903>
INVESTING:
Additions to property, plant and equipment <229> <279>
Proceeds on disposals of property, plant and
equipment 0 17
Investment in life insurance policies - net 32 250
Payments received on notes receivable 150 150
Net cash <used for> provided by investing <47> 138
FINANCING:
Long-term debt proceeds 1,425 8,616
Long-term debt payments <123> <5,551>
Repurchase of convertible subordinated debentures <1,190> <1,142>
Net cash provided by financing 112 1,923
Net Increase in Cash and Cash Equivalents 51 158
Cash and Cash Equivalents at beginning of period 162 134
Cash and Cash Equivalents at end of period $ 213 $ 292
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 909 $ 859
Income Taxes 4 5
Supplemental Disclosures of Noncash Investing
and Financing:
Acquisition of fixed assets through capital
lease obligations $ 24 $ 45
<FN>
See Notes to Consolidated Financial Statements
<PAGE>
<PAGE> HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 6
1. Principles of consolidation
The consolidated financial statements include the accounts of Health-
Chem Corporation ("Health-Chem") and all of its subsidiaries
(collectively the "Company").
The Consolidated Balance Sheet as of June 30, 1998, the Consolidated
Statements of Operations and the Consolidated Cash Flow Statements for
the interim periods ended June 30, 1998 and 1997 have been prepared by
the Company, without audit. In the opinion of the Company, all
necessary adjustments, consisting of normal recurring items, have been
made to present fairly the financial position, results of operations and
cash flows at June 30, 1998 and for all periods presented. Certain
amounts included in the consolidated financial statements relating to
prior periods have been reclassified to conform to the current
presentation.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's December 31, 1997 Annual Report on Form 10-K. The results of
operations for the periods ended June 30, 1998 and 1997 are not
necessarily indicative of the operating results for the full years.
2. Taxes on Income (In thousands) For the Six Months
Ended June 30,
1998 1997
The income tax <benefit> provision includes:
State and local income taxes $ <8> $ <35>
Federal income taxes 0 <668>
Total $ <8> $ <703>
Taxes on income are comprised of:
Currently payable <receivable> $ <8> $ 0
Deferred <benefit> 0 <703>
Total $ <8> $ <703>
Taxes are charged <credited> to:
Operations $ <7> $ <703>
Extraordinary gain on repurchase of
debentures <1> 0
Total $ <8> $ <703>
A reconciliation of taxes on income to the federal statutory rate is as
follows:
For the Six Months
Ended June 30,
1998 1997
Tax benefit at statutory rate $ <153> $ <735>
Increase <decrease> resulting from:
Intangibles and officers life insurance
premiums 4 53
State and local taxes, net of federal
tax benefit 4 <35>
Valuation allowance 127 0
Other 10 14
Tax benefit $ <8> $ <703>
3. Inventories (In thousands)
June 30, 1998 December 31, 1997
Raw materials $3,754 $3,590
Finished goods and work-in-process 4,264 3,947
Total $8,018 $7,537
<PAGE>
<PAGE> HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
4. Earnings Per Share
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per
share and applies to entities with publicly-held common stock or
potential common stock. SFAS 128 simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings Per
Share," by replacing the presentation of primary earnings per share with
a presentation of basic earnings per share. It also requires dual
presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structures.
Restatement of all prior-period earnings per share data is required upon
adoption. The impact of adopting SFAS 128 on the Company's earnings per
share data is not material. In accordance with SFAS 128, if there is a
loss from continuing operations, diluted earnings per share would be the
same as basic earnings per share.
Basic and diluted earnings per share are computed based upon the
weighted average number of common shares outstanding during each period
after adjustment for any dilutive effect of the Company's outstanding
10.375% convertible subordinated debentures and stock options. Interest
on the subordinated debentures, when dilutive, net of applicable taxes,
is added to net income for the purpose of computing earnings per share.
Convertible subordinated debentures and stock options are anti-dilutive
for all periods presented.
A reconciliation of the numerators and denominators of the basic and
diluted earnings per common share computations for loss from continuing
operations for the periods ended June 30, 1998 and 1997 is presented
below (in thousands, except per share amounts):
For the For the
Six Months Three Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Loss Applicable to Common
Stockholders:
Loss before extraordinary
item $ <443> $<1,458> $ <322> $ <410>
Loss applicable to
common stockholders $ <443> $<1,458> $ <322> $ <410>
Basic Loss Per Common Share:
Weighted average number of
common shares outstanding 7,982 7,982 7,982 7,982
Basic Loss per common share $ <0.06> $ <0.18> $ <0.04> $ <0.05>
Diluted Earnings <Loss> Per
Common Share:
Weighted average number of
common shares outstanding 7,982 7,982 7,982 7,982
Stock options 0 0 0 0
Convertible debentures 0 0 0 0
Weighted average number of
common shares outstanding
- diluted 7,982 7,982 7,982 7,982
Diluted loss per common
share $ <0.06> $ <0.18> $ <0.04> $ <0.05>
<PAGE> HEALTH-CHEM CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 8
Options to purchase 302,500 and 478,500 shares of common stock were
outstanding at June 30, 1998 and 1997, respectively. No options were
included in the computation of diluted earnings per common share for the
three months and six months ended June 30, 1998 and 1997 because the
Company reported a loss from continuing operations for those periods.
5. Litigation
In August 1995, Key Pharmaceuticals, Inc. a subsidiary of Schering-
Plough Corporation ("Key") commenced an action against Hercon
Laboratories in the United States District Court for the District of
Delaware alleging that Hercon Laboratories' 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, constituted infringement of Key's patent for its
Nitro-Dur(R) products. Key sought certain injunctive relief, monetary
damages if commercial manufacture, use or sale occurs, and a judgment
that the effective date for FDA approval of the above-referenced ANDAs
be no earlier than February 16, 2010, the expiration date of Key's
patent. Hercon Laboratories denied the material allegations of the
complaint, asserting, among other things, that the Key patent is invalid
and unenforceable and that Hercon Laboratories had not infringed and did
not infringe any claim of the patent. Hercon Laboratories
counterclaimed against Key for declaratory judgment of patent
noninfringement, invalidity and unenforceability. On September 30,
1997, the Delaware District Court ruled in favor of Key both on its
infringement claim and on Hercon Laboratories' claim that Key's patent
is invalid and unenforceable. On December 17, 1997, the Delaware
District Court issued an injunction, enjoining Hercon Laboratories,
except as provided for by statute, from making, using, offering for
sale, selling or importing any transdermal nitroglycerin patches that
have been found to infringe claim 14 of Key's patent, before the
expiration of Key's patent on February 16, 2010. Hercon Laboratories
has appealed to the United States Court of Appeals for the Federal
Circuit in Washington, D.C. from both the September 30, 1997 judgment
and the December 17, 1997 injunction. Oral argument on the consolidated
appeals was heard by the appellate court on August 5, 1998. The Company
is awaiting decision by the court. Management continues to believe that
Hercon Laboratories has strong grounds for prevailing on appeal.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
remarks regarding important factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. The following discussion
includes certain forward-looking statements. Such forward-looking statements
are subject to a number of factors, including material risks and
uncertainties, including those referred to herein and in the Company's Reports
on Form 10-K, which could cause actual results to differ materially from the
forward-looking statements.
Results of Operations
Net sales increased $.4 million, or 2%, for the six months ended June 30, 1998
as compared to the same period in 1997. The increase is due primarily to
increases in sales of transdermal nitroglycerin patches of $.9 million
partially offset by decreases in sales of synthetic fabrics of $.5 million.
Sales of transdermal nitroglycerin patches, manufactured and marketed by the
Company's Hercon Laboratories Corporation subsidiary ("Hercon Laboratories")
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 9
increased due primarily to an increase in domestic sales volumes. The
synthetic fabrics sales decrease is due primarily to lower sales of industrial
fabrics at the Company's Pacific Combining subsidiary. During the first half
of 1997, in anticipation of increased market pressures and delays in approvals
from the FDA for the sale of new nitroglycerin patches, the Company undertook
an organizational restructuring which reduced annual payroll-related expenses
by $1,600,000. While the Company hopes to receive approvals for its new
nitroglycerin patches in 1998, no assurances can be made that any new
nitroglycerin patches will be approved by the FDA. Moreover, the Company's
ability to exploit its new nitroglycerin products may be limited in the
absence of a favorable resolution to its litigation with Key (See Note 5 above
and discussion below). During the second quarter, the Company commenced
production of over-the-counter pharmaceutical and cosmetic products, with
initial shipments occurring in July. Current orders for these products are
expected to contribute in excess of $4.5 million in net sales during the
second half of 1998.
Net sales decreased $1.1 million, or 10% for the quarter ended June 30, 1998
as compared to the same period in 1996. The decrease is due primarily to
decreases in sales of synthetic fabrics and transdermal nitroglycerin patches
of $1.2 million and $.1 million, respectively. Sales decreases were partially
offset by environmental product sales increases of $.2 million. The synthetic
fabrics sales decrease is due primarily to lower sales of industrial and
health-care fabrics. The transdermal nitroglycerin patch sales decrease is
due primarily to lower domestic sales volumes. The environmental product
sales increase is due primarily to higher sales of disruptants and
insecticides.
Gross profit increased $1.0 million, or 22%, for the six months ended June 30,
1998 as compared to the same period in 1997. Gross profit as a percent of
sales for the six months ended June 30, 1998 and 1997 was 28% and 24%,
respectively. Gross profit for transdermal nitroglycerin patches,
environmental products and synthetic fabrics increased $.7 million, $.2
million and $.1 million, respectively, for the six months ended June 30, 1998
as compared to the same period in 1997. Plant overhead decreased $.2 million,
due primarily to a decrease in payroll-related expenses, for the six months
ended June 30, 1998 as compared to the same period in 1997 reflecting, in
part, the organizational restructuring and cost reduction program.
Transdermal nitroglycerin patch gross profit increased due primarily to
increased domestic sales volumes. Environmental product gross profit
increased due primarily to increased sales volumes of disruptants and
insecticides. Synthetic fabrics gross profit increased $.1 million despite
lower sales of $.5 million due primarily to cost reduction efforts and
reductions in lower margin business.
Gross profit decreased $.1 million, or 3% for the quarter ended June 30, 1998
as compared to the same period in 1997. The decrease is due primarily to
decreased gross profits for synthetic fabrics of $.3 million partially offset
by increased gross profits for environmental products of $.2 million. The
gross profit fluctuations are attributable to the factors noted above.
Selling, general and administrative expenses decreased $.3 million and $.2
million for the six months and quarter ended June 30, 1998, respectively, as
compared to the corresponding periods in 1997. The decrease for both periods
is due primarily to lower payroll-related costs.
Legal expenses increased $.3 million for the six months and was flat for the
quarter ended June 30, 1998, as compared to the same periods in 1997. The
increased legal expenses are due primarily to activity associated with the
defense of the action brought by Key against Hercon Laboratories (see Note 5
of the Notes to Consolidated Financial Statements) and to an award of fees and
expenses in connection with the dismissal of a class and derivative action.
<PAGE> HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 10
Research and development expenses decreased $.7 million and $.2 million for
the six months and quarter ended June 30, 1998, respectively, as compared to
the same periods in 1997. Payroll related expenses decreased $.5 million and
$.2 million for the six months and quarter end June 30, 1998, respectively, as
compared to the same periods in 1997 reflecting the organizational
restructuring changes. Outside clinical testing, laboratory supplies and
clinical materials expenses decreased a combined $.2 million for the six
months ended June 30, 1998 as compared to the same period in 1997. The
Company expects total research and development expenses in 1998 to be lower
than 1997 levels.
Net interest expenses increased $46,000 and $18,000 for the six months and
quarter ended June 30, 1998 as compared to the same periods in 1997 due
primarily to higher average outstanding balances and interest rates on
borrowings.
Other income decreased $12,000 and $24,000 for the six months and quarter
ended June 30, 1998, respectively, as compared to the same periods in 1997 due
primarily to 1997 non-recurring proceeds related to an insurance recovery and
to a Hercon Laboratories distribution agreement.
Loss from operations before taxes and minority interest for the six months and
quarter ended June 30, 1998 decreased $1.7 million and $.3 million,
respectively, as compared to the same periods in 1997 due primarily to the
factors discussed above. Income tax provision or benefit varies with the
amount of income or loss from operations before income taxes (See Note 2).
The results of operations for the periods ended June 30, 1998 and 1997 are not
necessarily indicative of the operating results for the full years.
Liquidity and Capital Resources
The following measures of liquidity are derived from the Company's
Consolidated Financial Statements:
June 30, December 31,
1998 1997
Working Capital (current assets less current
liabilities, in thousands) $ <323> $5,698
Current Ratio (current assets/current liabilities) 1.0 1.8
Quick Ratio (cash & receivables/current liabilities) .3 .6
Working capital decreased $6.0 million from December 31, 1997 to June 30, 1998
due to an increase of $7.4 million in current liabilities, partially offset by
an increase of $1.4 in current assets. Accrued expenses and other current
liabilities, accounts receivable and inventories increased $7.3 million, $.6
million and $.5 million, respectively. The increase in accrued expenses and
other current liabilities reflects an $8 million reclassification of the
Company's convertible subordinated debentures to current portion of long-term
debt.
Cash used for operations for the six months ended June 30, 1998 and 1997 was
$14,000 and $1.9 million, respectively. This decrease is due primarily to
decreasing losses from operations of $1.5 million in 1997 to $440,000 in 1998
and increasing deferred income tax assets of $.7 million in 1997 as compared
to no increase in deferred income tax assets in 1998, partial offset by
reduction in inventory in 1997 of $.6 million as compared to increasing
inventory of $.5 milliion in 1998. Investing activities for the six months
ended June 30, 1998 consumed cash of $47,000 as compared to providing cash for
investing activities of $138,000 for the same period in 1997. This decrease
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 11
in cash generation is due primarily to a reduction in investment in life
insurance policies. Financing activities for the six months ended June 30,
1998 and 1997 provided cash for operations of $.1 million and $1.9 million,
respectively.
On January 9, 1997, the Company replaced a $6,000,000 line of credit and a
$1,750,000 term loan from The First National Bank of Maryland ("First
National") with secured financing from 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. At June
30, 1998, 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 June 30, 1998 the Company had borrowed $6.1 million on its revolving line
of credit from IBJS and $3.8 million in term loans. In April 1998, the
Company borrowed the remaining $1.2 million allowable by IBJS in term loans to
purchase the Company's convertible subordinated debentures to meet the April
1998 sinking fund requirements. In May 1998, the Company commenced required
monthly payments on the term loan of $56,000. Monthly payments will continue
until the termination of the loan on January 9, 2002. The $8,000,000
revolving credit line borrowing base is limited to the sum of 85% of eligible
accounts receivable and 50% of eligible inventory. The eligible amount is
evaluated monthly. For the six months ended June 30, 1998, the maximum
eligible amount of the $8,000,000 revolving credit line ranged from $6,566,000
to $7,570,000, or from 82% to 95%.
The Company expects to meet the $.5 million debenture interest payment on its
convertible subordinated debentures due in October 1998 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, 1998
was satisfied by application of $.3 million debentures previously repurchased
or redeemed, of which $.1 million were purchased in 1996, and by calling for
redemption of the remaining $1.2 million. The Company has not paid cash
dividends and does not anticipate paying such dividends on its common stock in
<PAGE>
HEALTH-CHEM CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 12
the foreseeable future. The terms of the indenture relating to the debentures
restrict the Company's ability to pay cash dividends and/or repurchase its
capital stock pursuant to a formula based upon the consolidated net income of
the Company and other factors. Under the formula, at June 30, 1998, no amount
was available for the payment of dividends and/or the repurchase of capital
stock. The Company is also restricted from declaring, paying or making any
dividend or distribution on any shares of its capital stock by the Loan
Agreement with IBJS. The Company is in the process of developing a program to
enable it to refinance the $8 million convertible debenture obligation due
April 15, 1999. While management believes that it will be successful in its
efforts to refinance the debentures by April 15, 1999, there can be no
assurance that the Company will be able to do so.
The Company's 90% owned Transderm Laboratories Corporation subsidiary
("Transderm") has outstanding stock options of 11,450,000 at June 30, 1998.
The Company's ownership in Transderm would be reduced to approximately 70% in
the event that all outstanding options to purchase common stock of Transderm
were exercised. There would be no impact on minority interest due to the
deficit equity position of Transderm. The exercise of all such options would
not affect the method by which the Company is consolidated from a financial
reporting standpoint. Such exercises would preclude the Company from
utilizing any tax attributes available to Transderm. Management believes that
there would be no material adverse effect on the financial condition of the
Company from the loss of any such tax attributes that may be available to
Transderm.
The Company's debt to equity ratio was 8:1 at June 30, 1998 and at December
31, 1997.
Management believes anticipated expenditures in 1998 such as capital
expenditures, research and development costs and other operating expenses will
be financed, in part, by the utilization of the Company's credit facility from
IBJS. 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 June 30, 1998 the Company
had expended $229,000 for capital expenditures for property, plant and
equipment in 1998.
<PAGE>
<PAGE> Part II
Item 1
Page 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in any pending legal proceedings in the
quarter ended June 30, 1998 that were not previously reported.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 12, 1998. The
following members were elected to the Company's Board of Directors to hold
office for the ensuing year:
Nominee In Favor Withheld
Martin Benis 6,841,501 443,913
Steven Bernstein 6,849,558 435,856
Matthew Goldstein 6,848,298 437,116
Paul R. Moeller 6,845,698 439,716
Eugene Roshwalb 6,848,121 437,293
Bruce M. Schloss 6,846,998 438,416
Marvin M. Speiser 6,736,987 548,429
Robert D. Speiser 6,741,440 543,974
Milton Y. Zussman 6,826,574 458,840
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none.
(b) During the quarter ended June 30, 1998 the Company did not file any
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH-CHEM CORPORATION
August 13, 1998 /s/ Marvin M. Speiser
By: Marvin M. Speiser
Chairman of the Board and President
(Principal Executive Officer)
/s/ Paul R. Moeller
By: Paul R. Moeller
Vice President - Finance
(Principal Financial Officer)
(Principal Accounting Officer)
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