<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1996 Commission File Number 0-27642
TRANSDERM LABORATORIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3518345
(State of Incorporation) (I.R.S. Employer Identification No.)
1212 Avenue of the Americas, 24th Floor, New York, NY 10036
(Address of principal executive offices)
Registrant's Telephone Number: 212-398-0700
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and has been subject to such filing requirements for the past 90 days.
As of October 31, 1996, 40,000,000 shares of Common Stock, $.001 Par Value,
were outstanding.
Page 1<PAGE>
<PAGE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED BALANCE SHEETS Item 1
(In thousands) Page 2
<CAPTION>
September 30, December 31,
<S> 1996 1995
ASSETS (Unaudited)
CURRENT ASSETS <C> <C>
Cash $ 8 $ 8
Accounts receivable 1,167 650
Inventories (Note 3) 1,124 934
Deferred income taxes - current 106 72
Other current assets 24 0
Total Current Assets 2,429 1,664
PROPERTY, PLANT & EQUIPMENT
Land and building 2,854 2,854
Other property, plant & equipment 7,840 7,530
Total Property, Plant & Equipment 10,694 10,384
Less accumulated depreciation & amortization 5,366 4,855
Net Property, Plant & Equipment 5,328 5,529
NON-CURRENT ASSETS
Deferred income taxes 745 989
Payable to Health-Chem as net operating loss and
tax credit carryforwards are used <432> <803>
Long-term receivable - Health-Chem 795 1,939
Other non-current assets 0 1
Total Non-Current Assets 1,108 2,126
TOTAL ASSETS $ 8,865 $ 9,319
LIABILITIES AND STOCKHOLDERS' EQUITY <DEFICIENCY>
CURRENT LIABILITIES
Accounts payable $ 1,257 $ 250
Accrued expenses and other current liabilities 196 552
Current portion of redeemable preferred stock 1,000 500
Preferred dividends payable 0 233
Income taxes payable 16 91
Total Current Liabilities 2,469 1,626
LONG-TERM LIABILITIES
Subordinated promissory note 7,000 7,000
Other long-term debt 0 200
Deferred income taxes 489 537
REDEEMABLE PREFERRED STOCK 8,500 9,500
STOCKHOLDERS' EQUITY <DEFICIENCY>
Common stock 40 40
Retained deficit <9,633> <9,584>
Total Stockholders' Equity <Deficiency> <9,593> <9,544>
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY <DEFICIENCY> $ 8,865 $ 9,319
<FN>
See Notes to Consolidated Financial Statements.<PAGE>
<PAGE>
</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except share data) Page 3
<CAPTION>
For The Nine Months
Ended September 30,
1996 1995
<S>
REVENUE: <C> <C>
Net sales $10,022 $ 9,468
Cost of goods sold 4,198 3,830
Gross profit 5,824 5,638
OPERATING EXPENSES:
Selling, general and administrative expense 1,696 1,447
Legal expense 1,514 129
Research and development expense 1,667 1,903
Net interest expense 330 416
Total operating expenses 5,207 3,895
INCOME FROM OPERATIONS 617 1,743
Other income 42 100
INCOME FROM OPERATIONS BEFORE TAXES 659 1,843
Income tax provision (Note 2) 201 697
NET INCOME 458 1,146
PREFERRED DIVIDENDS 507 58
NET <LOSS> INCOME AVAILABLE TO COMMON STOCKHOLDERS $ <49> $ 1,088
Earnings per Common Share (primary & fully
diluted) (Note 4):
NET <LOSS> INCOME PER COMMON SHARE $ 0.00 $ 0.03
Average number of common shares outstanding (Note 4)
Primary 47,254,285 40,000,000
Fully Diluted 47,365,893 40,000,000
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except share data) Page 4
<CAPTION>
For The Three Months
Ended September 30,
1996 1995
<S>
REVENUE: <C> <C>
Net sales $ 2,990 $ 3,700
Cost of goods sold 1,325 1,446
Gross profit 1,665 2,254
OPERATING EXPENSES:
Selling, general and administrative expense 554 643
Legal expense 753 22
Research and development expense 523 741
Net interest expense 69 142
Total operating expenses 1,899 1,548
<LOSS> INCOME FROM OPERATIONS BEFORE TAXES <234> 706
Income tax <benefit> provision <105> 270
NET <LOSS> INCOME <129> 436
PREFERRED DIVIDENDS 166 58
NET <LOSS> INCOME AVAILABLE TO COMMON STOCKHOLDERS $ <295> $ 378
Earnings per Common Share (primary & fully
diluted) (Note 4):
NET <LOSS> INCOME PER COMMON SHARE $ <0.01> $ 0.01
Average number of common shares outstanding (Note 4)
Primary 46,855,346 40,000,000
Fully Diluted 46,855,346 40,000,000
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED CASH FLOW STATEMENTS Item 1
(Unaudited) Page 5
(In thousands)
<CAPTION>
For The Nine Months
Ended September 30,
1996 1995
<S>
Cash was Provided by <Used for>: <C> <C>
OPERATIONS:
Net income $ 458 $ 1,146
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 511 527
Deferred income taxes 162 591
Changes in:
Accounts receivable <517> 81
Inventories <190> <107>
Other current assets <24> 0
Other non-current assets 1 0
Accounts payable 1,007 <157>
Accrued expenses and other current liabilities <356> <102>
Income taxes payable <75> <29>
Net cash provided by operations 977 1,950
INVESTING:
Additions to property, plant and equipment <310> <476>
Net cash used for investing <310> <476>
FINANCING:
Borrowings from <payments to> affiliates, net 773 <1,392>
Other long-term debt payments <200> 0
Redemption of preferred stock <500> 0
Preferred dividends paid <740> 0
Decrease in Health-Chem equity in land and building 0 <73>
Net cash used for financing <667> <1,465>
Net Increase in Cash 0 9
Cash at beginning of period 8 3
Cash at end of period $ 8 $ 12
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 482 $ 423
Income taxes 114 156
Supplemental Schedule of Noncash Investing and Financing:
Issuance of redeemable preferred stock in exchange
for land and building and the stock of Hercon
Laboratories Corporation 0 10,000
Issuance of 40,000,000 shares of Transderm
Laboratories Corporation common stock, $.001 par
value, in exchange for the previously issued $.01
par value common shares 0 40
Increase in Health-Chem payable for the right to use
net operating loss and tax credit carryforwards 0 963
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 6
1. Basis of Presentation
The consolidated financial statements include the accounts of Transderm
Laboratories Corporation and its subsidiary, Hercon Laboratories
Corporation ("Hercon"). Transderm Laboratories Corporation and Hercon
Laboratories Corporation are sometimes hereinafter referred to
collectively as the "Company". The Company is an indirect 90% owned
subsidiary of Health-Chem Corporation ("Health-Chem").
The Consolidated Balance Sheet as of September 30, 1996, the Consolidated
Statements of Operations and the Consolidated Cash Flow Statements for the
interim periods ended September 30, 1996 and 1995 have been prepared by
the Company, without audit. In the opinion of the Company, all necessary
adjustments, consisting of normal recurring items, have been made to
present fairly the financial position, results of operations and cash
flows at September 30, 1996 and for all periods presented. Certain
amounts included in the consolidated financial statements relating to
prior periods have been reclassified to conform to the current
presentation.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's December 31, 1995 Annual Report on Form 10-K. The results of
operations for the periods ended September 30, 1996 and 1995 are not
necessarily indicative of the operating results for the full years.
2. Taxes on Income (In thousands) For the Nine Months
Ended September 30,
1996 1995
Taxes on income include provision <benefit> for:
Federal income taxes $ 212 $ 591
State and local income taxes <11> 106
Total $ 201 $ 697
Taxes on income are comprised of:
Current $ 39 $ 106
Deferred 162 591
Total $ 201 $ 697
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
A reconciliation of taxes on income to the federal statutory rate is as
follows:
For the Nine Months
Ended September 30,
1996 1995
Tax provision at statutory rate $ 225 $ 627
Increase <decrease> resulting from:
State and local taxes, net of federal tax benefit 1 70
Reversal of valuation allowance <25> 0
Tax provision $ 201 $ 697
3. Inventories (In thousands)
September 30, 1996 December 31, 1995
Raw materials $ 1,026 $ 749
Finished goods and work in process 98 185
Total inventories $ 1,124 $ 934
4. Earnings Per Share
Primary and fully diluted earnings per share are computed based upon the
weighted average number of common shares outstanding after adjustment for
any dilutive effect of the Company's stock options.
5. Legal Proceedings
Reference is made to Item 8, Financial Statements, Note 5 of the Notes to
Consolidated Financial Statements in Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995 for a description of an
action in the United States District Court for the District of Delaware
entitled Key Pharmaceuticals Inc. v. Hercon Laboratories Corporation. A
trial in this action was completed on October 10, 1996. The Court has
ordered that all post-trial briefs in this matter shall be filed by
December 6, 1996 at which time oral argument will be scheduled.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 8
Results of Operations
The following discussion includes certain forward-looking statements. Such
forward-looking statements are subject to a number of factors, including
material risks and uncertainties, including those referred to herein and in
the Company's Reports on Form 10-K and Form 10-Q, which could cause actual
results to differ materially from the forward-looking statements.
Net sales increased $554,000 for the nine months ended September 30, 1996 as
compared to the same period in 1995. The increase is due primarily to greater
demand from distributors for transdermal nitroglycerin patches ($234,000) and
to higher selling prices ($320,000).
Net sales decreased $710,000 for the quarter ended September 30, 1996 as
compared to the same period in 1995. The decrease in net sales consists of an
$839,000 decrease in volume, partially offset by $129,000 in higher selling
prices. The net sales decrease was due to lower sales to one of the Company's
domestic distributors, which in August 1996 obtained approval from the United
States Food and Drug Administration for the manufacture and sale of its own
nitroglycerin patches. This distributor accounted for approximately 51% of
the Company's sales for the year ended December 31, 1995. In addition to the
expected loss of sales to this distributor, it is anticipated that this
distributor's nitroglycerin patches will compete with the Company's
nitroglycerin patches. Sales to all of the Company's other distributors of
nitroglycerin patches increased during the period, as compared to both the
same period in 1995 and the second quarter of 1996.
Gross profit increased $186,000, or 3%, for the nine months ended September
30, 1996 as compared to the same period in 1995. Gross profit as a percentage
of net sales decreased from 60% for 1995 to 58% for 1996. Gross profit
increased primarily due to increased domestic sales volumes of transdermal
nitroglycerin patches. Lower margins reflect increased domestic sales volumes
of lower margin products, as well as increased operating costs.
Gross profit decreased $589,000, or 26%, for the quarter ended September 30,
1996 as compared to the same period in 1995. Gross profit as a percentage of
net sales decreased from 61% for 1995 to 56% for 1996. Gross profit decreased
primarily due to decreased domestic sales volumes of transdermal nitroglycerin
patches. Lower margins reflect the change in relationship of lower margin
export sales to higher margin domestic sales, as well as increased operating
costs.
Selling, general and administrative expenses, excluding legal expenses,
increased $249,000 for the nine months ended September 30, 1996 as compared to
the same period in 1995. This increase is due primarily to a higher
allocation of expenses from affiliates of $122,000 and from higher data
processing and consulting costs. Selling, general and administrative expenses
incurred by Health-Chem which cannot be directly attributed to a specific
subsidiary are allocated to the Company based upon its net sales as a
percentage of Health-Chem's net sales. The Company's allocation of Health-
Chem's total expenses was 26% for both the nine months ended September 30,
1996 and 1995. For the quarter ended September 30, 1996, selling, general and
administrative expenses, excluding legal expenses, decreased $89,000. This
decrease is due primarily to a lower allocation of expenses from affiliates of
$74,000 and from decreased royalty costs.
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 9
Legal expenses for the nine months and quarter ended September 30, 1996
increased $1,385,000 and $731,000, respectively, as compared to the same
periods in 1995. In August 1995, Key Pharmaceuticals, Inc. commenced an
action against Hercon relating to some of Hercon's improved transdermal
nitroglycerin products. The increased legal expenses are primarily due to the
costs related to the defense of this action, including preparation for trial,
which was commenced at the end of September 1996.
Research and development expenses for the nine months and quarter ended
September 30, 1996 decreased $236,000 and $218,000, respectively, as compared
to the same periods in 1995. These decreases are due primarily to lower
outside testing and clinical materials expenses. These expenses are expected
to remain below 1995 levels through the fourth quarter of 1996 and are
expected to increase in the first quarter of 1997 as the Company commences new
phases of clinical studies.
Net interest expense for the nine months and quarter ended September 30, 1996
decreased $86,000 and $73,000, respectively, as compared to the same periods
in 1995 due primarily to capitalized interest related to new equipment under
construction of $65,000 and to a reduction in the outstanding balance of a
note payable to Circa Pharmaceuticals, Inc. which was paid in full in June
1996.
Other income for the nine months ended September 30, 1996 decreased $58,000 as
compared to the same period in 1995. This decrease is due to nonrecurring
proceeds of $100,000 received from entering into a distribution agreement in
1995, partially offset by $42,000 of 1996 development work income.
Income from operations before taxes decreased $1,184,000 and $940,000 for the
nine months and quarter ended September 30, 1996, respectively, as compared to
the same periods in 1995 due primarily to the factors discussed above. Income
tax provision varies with the amount and nature of the components of income
from operations before taxes. The decrease in the effective tax rate from 38%
for the nine months ended September 30, 1995 to 31% for the nine months ended
September 30, 1996 is due primarily to a reversal of a portion of the
valuation allowance amounting to $25,000, with such reversal directly reducing
the income tax provision (See Note 2).
Preferred dividends of $507,000 and $166,000 for the nine months and quarter
ended September 30, 1996, respectively, reflect dividends associated with the
Company's Redeemable Preferred Stock, $10.00 par value, issued on August 31,
1995. On March 31, 1996, the Company, as required, redeemed 50,000 shares of
the 1,000,000 shares of preferred stock that were issued. Annual dividend
payments required are $.70 per share.
The results of operations for the periods ended September 30, 1996 and 1995
are not necessarily indicative of the operating results for the full years.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
Liquidity and Capital Resources
The following measures of liquidity are drawn from the Company's consolidated
financial statements.
September 30, December 31,
1996 1995
Working capital (in thousands) $<40> $ 38
(Current assets less current liabilities)
Current ratio 1.0 1.0
(Current assets/current liabilities)
Quick ratio 0.5 0.4
(Cash and receivables/current liabilities)
Working capital decreased $78,000 from December 31, 1995 to September 30, 1996
due to an $843,000 increase in current liabilities, partially offset by a
$765,000 increase in current assets. Accounts receivable, inventory, deferred
taxes and other current assets increased $517,000, $190,000, $34,000 and
$24,000, respectively. The increase in accounts receivable is due primarily
to the majority of sales for the quarter ending September 30, 1996 occurring
in the latter part of the quarter. Inventory growth reflects the timing of
raw material purchases. The increase in current liabilities is due to
increases in accounts payable and the current portion of redeemable preferred
stock of $1,007,000 and $500,000, respectively, partially offset by decreases
in accrued expenses, preferred dividends payable and state taxes payable of
$356,000, $233,000 and $75,000, respectively.
Cash provided by operations for the nine months ended September 30, 1996 was
$977,000.
The Company has not paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.
The Company has financed its capital requirements primarily from cash flow
generated from operations and borrowings from its affiliates.
Capital expenditures in 1996 for property, plant and equipment are expected to
be approximately $400,000. These capital expenditures will primarily consist
of equipment needed to assemble and package the Company's second generation
nitroglycerin products.
Health-Chem is a borrower along with its affiliates, including the Company,
under the terms of a $6,000,000 line of credit with The First National Bank of
Maryland. Pacific Combining Corporation ("Pacific"), a subsidiary of Health-
Chem, is a borrower under the terms of a $1,750,000 term loan with The First
National Bank of Maryland. Borrowings under the line of credit and term loan
are collateralized by a pledge of substantially all of the assets of Health-
Chem, Pacific, the Company, and Health-Chem's other operating subsidiaries
with the exception of real estate. The line of credit and term loan, which
expire on October 15, 1997 and November 15, 2000, respectively, are subject to
various financial covenants. At September 30, 1996, Health-Chem and its
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
affiliates were in compliance with the covenants, as amended, except for the
fixed charge coverage covenant. First National has granted the Company a
waiver for this covenant. The Company is currently in negotiations with First
National to amend and extend the loan agreement to July 1998. The Company
currently anticipates a successful completion of these negotiations prior to
the end of November 1996.
The Company is required to make semi-annual interest payments each March and
September on its $7,000,000, 9% Subordinated Promissory Note, with the
principal amount of $7,000,000 payable on March 31, 1999. In March 1996, the
Company, as required, commenced the semi-annual interest payments. The
Company made the additional required 1996 semi-annual interest payment in
September.
The Company is required to make semi-annual preferred dividend payments each
March and September at the annual rate of $.70 per share on the then-
outstanding shares of its redeemable preferred stock, $10.00 par value. In
March 1996, the Company, as required, commenced the semi-annual dividend
payments and redeemed, for $500,000, 50,000 shares. The Company made the
additional required 1996 semi-annual dividend payment in September.
Additional required redemption payments are $1,000,000 annually in 1997
through 2004 and $1,500,000 in 2005.
Pursuant to a Corporate Services Agreement between the Company and Health-
Chem, Health-Chem provides or otherwise makes available to the Company certain
general corporate services provided by Health-Chem's corporate staff,
including, but not limited to, accounting, tax, corporate communications,
legal, data processing, purchasing, human resources, financial and other
administrative staff functions, and arranges for administration of insurance
and employee benefit programs. The Company reimburses Health-Chem for the
actual out-of-pocket cost to Health-Chem or, for those services not directly
attributable to the Company, reimburses them based upon a method (allocation
based upon the Company's net sales as a percentage of Health-Chem's
consolidated net sales) which is considered by the Company to be reasonable.
The Company reimbursed Health-Chem approximately $821,000 and $699,000 for the
nine months ended September 30, 1996 and 1995, respectively. The Agreement
has an initial term expiring on December 31, 1997 and will automatically renew
for successive one-year terms. The Company will be required to provide 30
days' notice prior to cancellation of the Agreement.
Pursuant to a tax sharing agreement between the Company and Health-Chem, the
Company is required to pay Health-Chem as it uses its net operating loss and
tax credit carryforwards to offset future taxable income. At September 30,
1996, the maximum amount of such payments which may be made in the future was
$432,000.
The semi-annual interest payment on the subordinated promissory note is
$315,000 and the semi-annual dividend on the preferred stock currently
outstanding is $332,500. In addition to the cumulative dividends and interest
payments, the Company is obligated to redeem the preferred stock and repay the
promissory note as described above. The Company anticipates that internally
generated funds may not be sufficient to provide the Company with cash to meet
all of these retirement and redemption obligations and thus the Company may
need to raise additional capital from third parties.
<PAGE>
<PAGE>
Part II
Item 1
Page 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3, Legal Proceedings, in Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995 for a description of
an action in the United States District Court for the District of Delaware
entitled Key Pharmaceuticals Inc. v. Hercon Laboratories Corporation. A trial
in this action was completed on October 10, 1996. The Court has ordered that
all post-trial briefs in this matter shall be filed by December 6, 1996 at
which time oral argument will be scheduled.
Item 6. Exhibits and Reports on Form 8-K
(a) None.
(b) During the three months ended September 30, 1996, the Company did not file
any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSDERM LABORATORIES CORPORATION
November 4, 1996 /s/ Robert D. Speiser
By: Robert D. Speiser
President
(Principal Executive Officer)
/s/ Ronald J. Burghauser
By: Ronald J. Burghauser
Controller
(Principal Financial Officer)
(Principal Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 1167
<ALLOWANCES> 0
<INVENTORY> 1124
<CURRENT-ASSETS> 2429
<PP&E> 10694
<DEPRECIATION> 5366
<TOTAL-ASSETS> 8865
<CURRENT-LIABILITIES> 2469
<BONDS> 7000
<COMMON> 40
8500
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8865
<SALES> 10022
<TOTAL-REVENUES> 10022
<CGS> 4198
<TOTAL-COSTS> 4198
<OTHER-EXPENSES> 5207
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 330
<INCOME-PRETAX> 659
<INCOME-TAX> 201
<INCOME-CONTINUING> 458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49)
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
