<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, 1997 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 July 31, 1997, 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 (Unaudited) Item 1
(In thousands) Page 2
June 30, December 31,
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 17 $ 21
Accounts receivable 743 1,232
Inventories (Note 3) 357 780
Deferred income taxes-current 38 99
Other current assets 0 3
Total Current Assets 1,155 2,135
PROPERTY, PLANT & EQUIPMENT
Land and building 2,854 2,854
Other property, plant & equipment 8,019 7,887
Total Property, Plant & Equipment 10,873 10,741
Less accumulated depreciation & amortization 5,818 5,527
Net Property, Plant & Equipment 5,055 5,214
NON-CURRENT ASSETS
Deferred income taxes 0 907
Payable to Health-Chem as net operating loss
and tax credit carryforwards are used 0 <393>
Other non-current assets 1 0
Total Non-Current Assets 1 514
TOTAL ASSETS $ 6,211 $ 7,863
LIABILITIES AND STOCKHOLDERS' EQUITY <DEFICIENCY>
CURRENT LIABILITIES
Accounts payable $ 99 $ 913
Accrued expenses and other current liabilities 393 362
Current portion of redeemable preferred stock 1,000 1,000
Preferred dividends payable 149 166
Income taxes payable 3 3
Total Current Liabilities 1,644 2,444
LONG-TERM LIABILITIES
Subordinated promissory note 7,000 7,000
Long-term payable <receivable> - Health-Chem 1,632 <427>
Other long-term debt 28 0
Deferred income taxes 80 480
REDEEMABLE PREFERRED STOCK 7,500 8,500
STOCKHOLDERS' EQUITY <DEFICIENCY>
Common stock 40 40
Retained deficit <11,713> <10,174>
Total Stockholders' Equity <Deficiency> <11,673> <10,134>
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
<DEFICIENCY> $ 6,211 $ 7,863
<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
For the Six Months
Ended June 30,
<S> 1997 1996
REVENUE: <C> <C>
Net sales $ 2,554 $ 7,032
Cost of goods sold 1,513 2,873
Gross profit 1,041 4,159
OPERATING EXPENSES:
Selling, general and administrative expense 716 1,142
Legal expense 114 761
Research and development expense 996 1,144
Net interest expense 359 261
Total operating expenses 2,185 3,308
<LOSS> INCOME FROM OPERATIONS <1,144> 851
Other income 95 42
<LOSS> INCOME FROM OPERATIONS BEFORE TAXES <1,049> 893
Income tax provision (Note 2) 175 306
NET <LOSS> INCOME <1,224> 587
PREFERRED DIVIDENDS 315 341
NET <LOSS> INCOME APPLICABLE TO COMMON
STOCKHOLDERS $<1,539> $ 246
Earnings per Common Share (primary & fully diluted)
(Note 4):
NET <LOSS> INCOME PER COMMON SHARE $ <0.04> $ 0.01
Average number of common shares outstanding (Note 4)
Primary 40,000,000 44,406,880
Fully Diluted 40,000,000 46,428,571
<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
For the Three Months
Ended June 30,
<S> 1997 1996
REVENUE: <C> <C>
Net sales $ 1,442 $ 3,230
Cost of goods sold 792 1,373
Gross profit 650 1,857
OPERATING EXPENSES:
Selling, general and administrative expense 363 537
Legal expense 67 546
Research and development expense 375 584
Net interest expense 195 135
Total operating expenses 1,000 1,802
<LOSS> INCOME FROM OPERATIONS <350> 55
Other income 77 42
<LOSS> INCOME FROM OPERATIONS BEFORE TAXES <273> 97
Income tax provision (Note 2) 433 45
NET <LOSS> INCOME <706> 52
PREFERRED DIVIDENDS 149 166
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ <855> $ <114>
Earnings per Common Share (primary & fully diluted)
(Note 4):
NET LOSS PER COMMON SHARE $ <0.02> $ 0.00
Average number of common shares outstanding
(primary and fully diluted) (Note 4) 40,000,000 40,000,000
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED CASH FLOW STATEMENTS (Unaudited) Item 1
(In thousands) Page 5
For the Six Months
Ended June 30,
<S> 1997 1996
Cash was <Used for> Provided by: <C> <C>
OPERATIONS:
Net <loss> income $<1,224> $ 587
Adjustments to reconcile net <loss> income to
net cash <used for> provided by operations:
Depreciation and amortization 311 348
Deferred income taxes 175 262
Gain on disposal of property, plant and equipment <14> 0
Changes in:
Accounts receivable 489 <142>
Inventories 423 73
Other current assets 3 <47>
Other non-current assets <1> 1
Accounts payable <814> 286
Accrued expenses and other current
liabilities 19 <185>
Income taxes payable 0 <44>
Net cash <used for> provided by operations <633> 1,139
INVESTING:
Additions to property, plant and equipment <109> <120>
Disposal of property, plant and equipment 16 0
Net cash used for investing <93> <120>
FINANCING:
Borrowings from affiliates, net 2,059 97
Other long-term debt payments <5> <200>
Redemption of preferred stock <1,000> <500>
Preferred dividends paid <332> <408>
Net cash provided by <used for> financing 722 <1,011>
Net <Decrease> Increase in Cash <4> 8
Cash at beginning of period 21 8
Cash at end of period $ 17 $ 16
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 363 $ 324
Income taxes 1 89
Supplemental Schedule of Noncash Investing and
Financing:
Acquisition of fixed assets through capital
lease obligations $ 45 $ 0
<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 and Nature of Operations
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 June 30, 1997, the Consolidated
Statements of Operations and the Consolidated Cash Flow Statements for
the interim periods ended June 30, 1997 and 1996 have been prepared by
the Company, without audit. In the opinion of the Company, all
necessary adjustments, consisting of normal recurring items, have been
made to present fairly the financial position, results of operations and
cash flows at June 30, 1997 and for all periods presented. Certain
amounts included in the consolidated financial statements relating to
prior periods have been reclassified to conform to the current
presentation.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's December 31, 1996 Annual Report on Form 10-K. The results of
operations for the periods ended June 30, 1997 and 1996 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,
1997 1996
Taxes on income include
provision for:
Federal income taxes $ 160 $ 289
State and local income taxes 15 17
Total $ 175 $ 306
Taxes on income are comprised of:
Current $ 0 $ 44
Deferred 175 262
Total $ 175 $ 306
A reconciliation of taxes on income to the federal statutory rate
is as follows:
For the Six Months
Ended June 30,
1997 1996
Tax <benefit> provision at statutory rate $ <357> $ 304
Increase <decrease> resulting from:
State and local taxes, net of federal
tax benefit 15 27
Provision for <reversal of> valuation
allowance 517 <25>
Tax provision $ 175 $ 306
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
At June 30, 1997, the Company recorded a $517,000 net valuation
allowance relating to federal tax loss and tax credit carryforwards,
with such valuation allowance directly increasing the income tax
provision. This net valuation allowance consists of a $910,000 decrease
in tax loss and tax credit carryforwards, partially offset by a $393,000
decrease in a payable to Health-Chem, which is only payable as certain
net operating loss and tax credit carryforwards are used. Management
determined the valuation allowance was necessary as a result of delays
in the anticipated approvals from the United States Food and Drug
Administration ("FDA") for the sale of the Company's new transdermal
nitroglycerin patches, with such delays contributing to the operating
losses of the Company.
3. Inventories (In thousands)
June 30, 1997 December 31, 1996
Raw materials $ 270 $ 659
Finished goods and work in process 87 121
Total inventories $ 357 $ 780
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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128). SFAS 128 establishes standards for computing and presenting
earnings per share and applies to entities with publicly-held common
stock or potential common stock. SFAS 128 simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share," by replacing the presentation of primary earnings
per share with a presentation of basic earnings per share. It also
requires dual presentation of basic and diluted earnings per share on
the face of the income statement for all entities with complex capital
structures.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Earlier application
is not permitted; however, restatement of all prior-period earnings per
share data is required upon adoption. The impact of adopting SFAS 128
on the Company's earnings per share data is not expected to be
significant.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 8
5. Litigation
In August 1995, Key Pharmaceuticals, Inc. a subsidiary of Schering-
Plough Corporation ("Key") commenced an action against Hercon in the
United States District Court for the District of Delaware alleging that
Hercon's submission to the FDA of three Abbreviated New Drug
Applications ("ANDAs") relating to some of Hercon's transdermal
nitroglycerin products, for which the Company 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 no earlier than
February 16, 2010, the expiration date of Key's patent. In its answer,
Hercon denied the material allegations of the complaint, asserting,
among other things, that the Key patent is invalid and unenforceable and
that Hercon has not infringed and does not infringe any claim of the
patent. Hercon has counterclaimed against Key for declaratory judgment
of patent noninfringement, invalidity and unenforceability. Following
extensive discovery, a two-week, non-jury trial was completed on October
10, 1996. Post-trial briefs were filed in December 1996 and
supplemental post-trial briefs, requested by the Court, were filed in
June 1997. The Company is awaiting decision by the Court. Management
continues to believe that Key's claims are without merit.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 9
Results of Operations
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
remarks regarding important factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. The following discussion
includes certain forward-looking statements. Such forward-looking statements
are subject to a number of factors, including material risks and
uncertainties, including those referred to herein and in the Company's Reports
on Form 10-K and Form 10-Q, which could cause actual results to differ
materially from the forward-looking statements.
Net sales decreased $4,478,000 for the six months ended June 30, 1997 as
compared to the same period in 1996. The decrease in net sales consists of a
$4,564,000 decrease in volume, partially offset by $86,000 in higher selling
prices. The net sales decrease is due primarily to the absence of sales to a
former domestic distributor who had accounted for approximately 52% of the
Company's sales for the six months ended June 30, 1996. The most recent sales
to this distributor were during the fourth quarter of 1996. In August 1996,
this former distributor obtained approval from the FDA for the manufacture and
sale of its own nitroglycerin patches and now competes with the Company's
nitroglycerin patches. Sales to both of the Company's current domestic
distributors of nitroglycerin patches also decreased during the six months
ended June 30, 1997 as compared to the same period in 1996. 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, Hercon
undertook an organizational restructuring which is expected to reduce annual
payroll-related expenses by approximately $1,100,000. While the Company hopes
to receive approvals for its new nitroglycerin patches in 1997 and 1998, no
assurances can be made that any new nitroglycerin patches will be approved by
the FDA.
Net sales decreased $1,788,000 for the quarter ended June 30, 1997 as compared
to the same period in 1996. The fluctuation in sales is attributable to the
factors noted above -- lower volume ($1,861,000), partially offset by higher
selling prices ($73,000).
Gross profit decreased $3,118,000, or 75%, for the six months ended June 30,
1997 as compared to the same period in 1996. Gross profit as a percentage of
net sales decreased from 59% for 1996 to 41% for 1997. Gross profit decreased
primarily due to decreased domestic sales volumes of transdermal nitroglycerin
patches. Lower margins reflect the allocation of fixed costs over decreased
revenue.
Gross profit decreased $1,207,000, or 65%, for the quarter ended June 30, 1997
as compared to the same period in 1996. Gross profit as a percentage of net
sales decreased from 57% for 1996 to 45% for 1997. These decreases in gross
profit are attributable to the factors noted above.
Selling, general and administrative expenses, excluding legal expenses,
decreased $426,000 for the six months ended June 30, 1997 as compared to the
same period in 1996. This decrease is due primarily to a lower allocation of
expenses from affiliates of $332,000 and from lower payroll-related costs.
Pursuant to a Corporate Services Agreement between the Company and Health-
Chem, 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
consolidated net sales. The Company's allocation of Health-Chem's total
expenses for the six months ended June 30, 1997 was lower than the comparable
<PAGE> TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
period in 1996 due to Health-Chem's total expenses being lower and the
Company's share of these expenses dropping from 27% in 1996 to 13% in 1997.
For the quarter ended June 30, 1997, selling, general and administrative
expenses, excluding legal expenses, decreased $174,000 due primarily to the
reasons described above.
Legal expenses for the six months and quarter ended June 30, 1997 decreased
$647,000 and $479,000, respectively, as compared to the same periods in 1996.
In August 1995, Key Pharmaceuticals, Inc. commenced an action against the
Company's Hercon subsidiary relating to some of Hercon's improved transdermal
nitroglycerin products. The decreased legal expenses are due primarily to
reduced activity associated with the defense of this action, with respect to
which a two-week trial was completed in October 1996. Post-trial briefs were
filed in early December 1996 and supplemental post-trial briefs, requested by
the Court, were filed in June 1997. The Company is awaiting a decision by the
Court.
Research and development expenses for the six months and quarter ended June
30, 1997 decreased $148,000 and $209,000, respectively, as compared to the
same periods in 1996. These decreases are due primarily to lower outside
testing and payroll-related expenses. The Company expects total research and
development expenses related to pharmaceutical products in 1997 to be lower
than 1996 levels.
Net interest expense for the six months and quarter ended June 30, 1997
increased $98,000 and $60,000, respectively, as compared to the same periods
in 1996. These increases are due primarily to higher average outstanding
balances on borrowings from affiliates.
Other income for the six months and quarter ended June 30, 1997 increased
$53,000 and $35,000, respectively, as compared to the same periods in 1996.
These increases are due primarily to nonrecurring proceeds of $75,000 received
in the second quarter of 1997 related to a distribution agreement and from
$14,000 of first quarter 1997 nonrecurring proceeds related to an insurance
recovery, partially offset by $42,000 of second quarter 1996 development work
income.
Income from operations before taxes decreased $1,942,000 and $370,000 for the
six months and quarter ended June 30, 1997, respectively, as compared to the
same periods in 1996 due primarily to the factors discussed above. The
Company reported a $175,000 tax provision on a $1,049,000 loss from operations
for the six months ended June 30, 1997 as compared to a $306,000 tax provision
on income from operations of $893,000 for the same period 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. At June 30, 1997, the
Company recorded a $517,000 net valuation allowance relating to federal tax
loss and tax credit carryforwards, with such valuation allowance directly
increasing the income tax provision. This net valuation allowance consists of
a $910,000 decrease in tax loss and tax credit carryforwards, partially offset
by a $393,000 decrease in a payable to Health-Chem which is only payable as
certain net operating loss and tax credit carryforwards are used (See Note 2).
Preferred dividends of $315,000 and $149,000 for the six months and quarter
ended June 30, 1997, respectively, reflect dividends associated with the
Company's Redeemable Preferred Stock, $10.00 par value. On March 31, 1997,
the Company, as required, redeemed 100,000 shares of the then-outstanding
950,000 shares of its redeemable preferred stock. Annual dividend payments
required are $.70 per share.
The results of operations for the periods ended June 30, 1997 and 1996 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 11
Liquidity and Capital Resources
The following measures of liquidity are drawn from the Company's consolidated
financial statements:
June 30, December 31,
1997 1996
Working capital (current assets less
current liabilities, in thousands) $ <489> $ <309>
Current ratio (current assets/current
liabilities) 0.7 0.9
Quick ratio (cash and receivables/
current liabilities) 0.5 0.5
Working capital decreased $180,000 from December 31, 1996 to June 30, 1997 due
to a $980,000 decrease in current assets, partially offset by an $800,000
decrease in current liabilities. Cash, accounts receivable, inventory,
deferred taxes and other current assets decreased $4,000, $489,000, $423,000,
$61,000 and $3,000, respectively. The decrease in accounts receivable
resulted from a decrease in sales in the second quarter of 1997 as compared to
the fourth quarter of 1996. The decrease in inventory reflects reduced
domestic distributor sales and the timing of raw material purchases. The
decrease in current liabilities is due to decreases in accounts payable and
dividends payable of $814,000 and $17,000, respectively, partially offset by
an increase in accrued expenses of $31,000.
Cash used for operations for the six months ended June 30, 1997 was $633,000.
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 1997 for property, plant and equipment are projected
to be approximately $250,000. These capital expenditures will primarily
consist of equipment needed to assemble and package the Company's second
generation nitroglycerin products.
At December 31, 1996, Health-Chem and its affiliates, including the Company,
were borrowers under the terms of a $6,000,000 line of credit with The First
National Bank of Maryland. At December 31, 1996, Pacific Combining
Corporation ("Pacific"), a subsidiary of Health-Chem, was 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 were 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. In January 1997, Health-Chem, Pacific, the Company and Health-
Chem's other operating subsidiaries replaced both the $6,000,000 line of
credit and $1,750,000 term loan from The First National Bank of Maryland with
senior secured financing of up to $15,000,000 from IBJ Schroder Bank & Trust
Company ("IBJ Schroder"). The new credit facility is comprised of up to
$7,000,000 in term loans and up to $8,000,000 in revolving credit. The line
of credit's borrowing base is limited to the sum of 85% of eligible accounts
receivable and 50% of eligible inventory on a consolidated Health-Chem basis.
Advances on the term loan are limited to $4,000,000 until such time as the Key
Pharmaceuticals, Inc. litigation is resolved in such a way as to be immaterial
on the future operations of Health-Chem. Borrowings under the facility are
collaterlizaed by a pledge of substantially all of the assets of Health-Chem,
<PAGE> TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
the Company and Health-Chem's other operating subsidiaries. The facility,
which expires on January 9, 2002, is subject to various financial covenants.
As of June 30, 1997, Health-Chem and its affiliates were in compliance with
the covenants, except for the minimum level of earnings before taxes,
depreciation and amortization covenant. IBJ Schroder has granted the Company
a waiver for this covenant. The Company is currently in negotiations with IBJ
Schroder to amend the facility and anticipates a successful completion of
these negotiations prior to the end of September 1997.
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 1997, the
Company made the required semi-annual interest payment.
The Company is required to make semi-annual preferred dividend payments out of
funds legally available therefor 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 1997, the Company, as required, made the
semi-annual dividend payment and redeemed, for $1,000,000, 100,000 shares.
Additional required redemption payments are $1,000,000 annually in 1998
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 $238,000 and $570,000 for the
six months ended June 30, 1997 and 1996, 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 the Company uses its net operating
loss and tax credit carryforwards to offset future taxable income. At June
30, 1997, the maximum amount of such payments which may be made in the future
was $393,000.
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 $297,500. 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.
The Company anticipates that legally available funds will not be available to
make the September 1997 preferred dividend payment. In the event dividends
payable on the preferred stock shall be in default in an amount equal to two
full semi-annual dividend payments, Herculite Products, Inc., a wholly-owned
subsidiary of Health-Chem and the holder of all of the outstanding shares of
the preferred stock, shall be entitled to elect the smallest number of
Directors necessary to constitute a majority of the Company's Board of
Directors until such time as the default is cured.
<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, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 12, 1997. The
following members were elected to the Company's Board of Directors to hold
office for the ensuing year:
Nominee In Favor Withheld
Thomas J. Atkins 39,772,066 65,885
Joyce F. Brown 39,771,866 66,085
Michael J. Campbell 39,772,066 65,885
David N. Dinkins 39,770,966 66,985
Ester R. Fuchs 39,771,966 65,985
Donald E. Kauffman, Jr. 39,772,066 65,885
Murray Lieber 39,772,066 65,885
Marvin M. Speiser 39,768,018 69,933
Robert D. Speiser 39,768,018 69,933
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) During the quarter ended June 30, 1997, the Company did not file any
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSDERM LABORATORIES CORPORATION
August 14, 1997 /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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 17
<SECURITIES> 0
<RECEIVABLES> 743
<ALLOWANCES> 0
<INVENTORY> 357
<CURRENT-ASSETS> 1155
<PP&E> 10873
<DEPRECIATION> 5818
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7500
0
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</TABLE>
