<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, 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 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:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 Par Value
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, 1997, 40,000,000 shares of the registrant's Common Stock
were outstanding. The aggregate market value of the Common Stock (based on
the last reported sale price on such date) held by non-affiliates was
approximately $182,000.
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, 1997.
The Exhibit Index appears on page 33.
Page 1 of 37<PAGE>
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FORM 10-K PART
I
______________________________________________________________________________
ITEM 1. BUSINESS
Transderm Laboratories Corporation is a Delaware corporation and conducts its
business primarily through its subsidiary, Hercon Laboratories Corporation
("Hercon"). Unless the context otherwise requires, the term "Company"
includes Transderm Laboratories Corporation and Hercon, of which the Company
owns 98.5%. The Company's executive offices are located in New York, New
York.
The Company is engaged in the development, manufacture and marketing of
transdermal drug delivery systems. A transdermal drug delivery system is an
adhesive patch containing medication which is released through the skin into
the bloodstream at a controlled rate over an extended period of time.
Transdermal delivery can significantly enhance the therapeutic benefit of
certain drugs, through improved efficacy, safety and patient compliance, when
compared to conventional methods of drug administration, such as oral,
parenteral and continuous infusion. In addition, transdermal delivery systems
may provide additional commercial advantages compared to non-transdermal
delivery systems for certain drugs.
The Company has developed a base of technology in the design of transdermal
systems by applying its expertise in the area of skin biology, pharmaceutical
and polymer chemistry, drug diffusion, adhesive technology, pharmacokinetics
and clinical protocol design. The Company believes that integration of these
technologies with its manufacturing experience gives it a competitive
advantage by providing it with the capability to custom design and produce
individual, cost-effective transdermal delivery systems for specific drugs.
TRANSDERMAL DRUG DELIVERY
In general, a transdermal drug delivery system consists of four basic
elements. An inert backing, often the outermost component of the system,
protects the drug stored in the patch and provides support for the system.
The next element of the system is a drug storage section, which provides a
supply of the drug for subsequent migration into the skin of a patient. The
third element of the system is a mechanism by which the transdermal drug
delivery system is affixed to the patient. Nearly all transdermal systems
employ a pressure-sensitive adhesive in some fashion to adhere the patch to
the skin. Where the drug storage section is a pressure-sensitive adhesive
matrix, no separate adhesive element is required. The last element of the
system is a disposable protective layer which protects the drug and the
adhesive from contamination prior to use. The protective layer is removed
immediately prior to application, exposing the adhesive surface to the skin.
Other elements such as penetration enhancers and rate-controlling membranes
may be employed for specific transdermal drug delivery systems.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
Nitroglycerin Transdermal Systems
Since 1986, the Company has manufactured a transdermal nitroglycerin patch
which is used for transdermal relief of vascular and cardiovascular symptoms
related to angina pectoris. This patch was the first such product introduced
in the United States for the generic market. Since that time, the Company has
sold over 225 million of these patches. The Company sells this product to
Warner Chilcott Laboratories and Watson Laboratories, Inc. (which acquired
Circa Pharmaceuticals, Inc.) for distribution in the United States and to
Prodesfarma S.A. for distribution in Spain.
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Angina pectoris is a condition of intense pain caused by a lack of oxygen
to the heart. Historically, a common treatment of angina was a nitroglycerin
tablet placed under the tongue after an attack had begun. The tablet releases
the drug which diffuses through membranes beneath the tongue and into the
bloodstream and dilates the blood vessels to increase the flow of oxygenated
blood to the heart, ending the attack within a few minutes. Due to the body's
rapid metabolism and clearance of the drug, however, the tablets are not a
practical preventative for angina attacks. Nitroglycerin ointments, which
deliver continuous levels of nitroglycerin in the blood, are greasy and
difficult to dose accurately. Transdermal nitroglycerin patches, which
provide continuous therapeutic levels of nitroglycerin in the blood and
thereby help prevent angina attacks, became commercially available in 1982 and
are currently being marketed by several companies.
The Company is currently awaiting United States Food and Drug
Administration ("FDA") approval of its applications to market improved
transdermal nitroglycerin products which are thinner, smaller, more flexible
and more comfortable than the Company's current patches and which are expected
to improve patient acceptance. In July 1993, the FDA issued changes to the
regulatory status of nitroglycerin patches. The FDA established Novartis'
Transderm-Nitro(R) and Schering-Plough's Nitro-Dur(R) patches as suitable
reference standard products for bioequivalence comparisons and has given both
full New Drug Application ("NDA") approval. These changes allow the FDA to
issue approval of Abbreviated New Drug Applications ("ANDAs") and therapeutic
equivalence ratings for generically substitutable nitroglycerin patches. The
Company has conducted bioequivalence studies against both the Novartis and the
Schering-Plough products and is awaiting FDA approval of ANDAs referencing
each of these products. In August 1995, the Schering-Plough subsidiary which
owns the patent relating to the Nitro-Dur(R) patches initiated an action against
Hercon claiming that the submission of certain of Hercon's ANDAs to the FDA
constitutes patent infringement. See "Item 3. Legal Proceedings".
Products for Hormone Replacement Therapy
Estradiol and Estrogen/Progestin Combination Transdermal Systems
The Company is developing a number of transdermal products for female
hormone replacement therapy. Estrogen replacement therapy is the most
frequently prescribed therapy for prevention of menopausal symptoms and
osteoporosis. Approximately 10 million women in the United States are being
treated for menopausal symptoms such as hot flashes and excessive
perspiration. The loss of bone mass associated with osteoporosis is directly
related to the decrease in the amount of estrogen, a naturally occurring
hormone, which occurs during menopause. Estrogen may be administered in a
variety of forms, including tablets, injections, creams and transdermal
patches.
Transdermal delivery of estrogen avoids many of the problems inherent in
oral dosing. A substantial portion of orally administered estrogen is
metabolized by the liver. High oral doses are therefore necessary to achieve
and maintain the therapeutically effective level of estrogen in the
bloodstream, resulting in the production of substantially higher levels of
physiologically active estrogen metabolites. Clinical studies suggest that
these metabolites are associated with an increased risk of endometrial cancer.
By avoiding first pass metabolism through the GI tract and the liver, the
dosage required for the transdermal delivery of estrogen is 90% less than an
oral dose of estrogen and may significantly reduce production of harmful
metabolites. The current market for estrogen in the United States is
dominated by oral products.
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It is possible that unopposed estrogen administration might lead to pre-
cancerous conditions in many women unless counterbalanced by the co-
administration of a progestin. As with estrogen replacement, progestin
therapy is currently dominated by oral products which require higher levels of
progestin hormones and are associated with adverse side effects. Transdermal
patch development for female hormone replacement is an active field with
several companies developing estradiol and estrogen/progestin combination
patches. Several estradiol matrix patches offered by competitors of the
Company have recently received FDA approval. The Company believes that
transdermal products will capture a significant portion of the female hormone
replacement market and that its products may provide comparable efficacy and
better skin tolerance than competitive transdermal products.
The Company is developing several different products to compete in the
various segments of the hormone replacement market. It is expected that an
NDA for the Company's seven day estradiol product will be filed in 1999. The
Company's estrogen/progestin combination product is in the preclinical
development stage.
Testosterone Transdermal System
The Company is also developing a testosterone transdermal system for the
treatment of male hypogonadism. Male hypogonadism is a condition which
results in production of insufficient levels of testosterone. The
consequences of testosterone deficiency include decreased libido, impotence,
fatigue, depression, and muscle and bone weakness.
Unlike some currently marketed testosterone patches, the patch under
development by the Company is for application to non-scrotal skin sites, and
is being designed to provide testosterone and its active metabolites at levels
closely matching those which result from natural testosterone production and
metabolism in normal men. The Company has begun clinical trials on the
product.
Other Products
The Company is also developing transdermal, topical and/or transmucosal
systems for the delivery of drugs including antihistamines and anesthetics.
A number of other feasibility studies are currently being conducted. Several
products under evaluation are being targeted to compete in the non-
prescription or over-the-counter market.
There can be no assurance that additional FDA filings for any of these
additional products will be effected nor that FDA approval for any of these
products will be obtained.
To date, the Company has pursued the development of transdermal drug delivery
systems primarily using its own resources. The Company may, in the future,
seek collaborative partners to assist in funding the development of certain of
the Company's products currently under development after completion of Phase
I clinical trials with respect to a particular product. The Company's ability
to develop and commercialize products in the future may depend in part on its
ability to enter into collaborative arrangements with pharmaceutical
companies. There can be no assurance that the Company will be able to develop
products successfully or that the Company will be successful in the
manufacturing or commercialization of such products. In addition, no
assurances can be given that the Company will enter into collaborative
arrangements or that such collaborative arrangements will be successful.
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RESEARCH AND DEVELOPMENT
The Company's pharmaceutical research and development laboratory facilities
are maintained in its York, Pennsylvania facilities. At February 28, 1997,
the Company employed seventeen full time employees with varying technical
backgrounds, including pharmaceutics and pharmaceutical sciences, to conduct
its research and development efforts in this area. Independent laboratories
are often engaged for clinical testing. See the Consolidated Statements of
Operations included below under "Item 8. Financial Statements" for the amount
of research and development costs incurred during 1996, 1995 and 1994.
MANUFACTURING; SUPPLY
The Company manufactures its transdermal drug delivery systems at a fully-
equipped, state-of-the-art facility in York, Pennsylvania. The Company's
patches are manufactured in accordance with Good Manufacturing Practices
("GMP") prescribed by the FDA.
The manufacture of advanced transdermal drug delivery systems requires
specialized skills in several areas, as well as specialized manufacturing
equipment. The Company's process development and design engineers work
closely with the research and development department starting early in the
product design stage, resulting in efficiencies in the manufacturing
development process. All scale up work, commencing with initial product
development trials, is conducted on full-size, completely functional
manufacturing equipment, reducing delays in the development and approval
process and smoothing the transition to commercial production. Some of this
equipment is manufactured in-house; the balance is fabricated by outside
manufacturers to the Company's specifications. The Company believes that this
equipment provides a decided advantage in the manufacture of the complex
multilayer systems necessary for successful transdermal drug delivery. The
Company currently has equipment in place having a single shift capacity of
over 35 million patches annually. Additional equipment scheduled to be placed
in service in the first quarter of 1997 is intended to increase this capacity
to over 70 million patches and support the market introduction of the
Company's next generation of nitroglycerin patches. Further product growth
may require the Company to expand its equipment base; however, the Company
believes that its current approximately 61,000 square foot plant will be
sufficient for product expansion for the foreseeable future.
As part of the manufacturing process, the Company has developed and performs
appropriate quality control procedures including testing of all raw materials
and finished product.
Several raw materials used in the manufacture of the Company's products are
available from only a single source. These materials have generally been
available to the Company and the pharmaceutical industry on commercially
reasonable terms. To date, the Company has not experienced difficulty
acquiring necessary materials. The Company plans to negotiate supply
agreements, as appropriate, for certain components. Any interruption of
supply could have a material adverse effect on the Company's ability to
manufacture its products.
COMPETITION
The Company's primary competitors that develop and/or manufacture transdermal
drug delivery systems include Alza Corporation, Cygnus, Inc., Elan
Corporation, plc, Ethical Holdings, PLC, Mylan Laboratories Inc., Novartis
Pharmaceuticals Corp., Noven Pharmaceuticals, Inc., Sano Corporation,
Schering-Plough Corporation and TheraTech, Inc. Most of these companies have
substantially greater financial resources and larger research and development
staffs than the Company, and may have substantially greater experience in
developing products, in obtaining regulatory approvals and in manufacturing
and marketing pharmaceutical products. Many other pharmaceutical companies
have the financial resources to acquire the skills necessary to develop
transdermal systems.
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The Company's products also compete with drugs marketed in traditional dosage
forms, including oral doses, injections and continuous infusion. New drugs,
new therapeutic approaches or further developments or innovations in
alternative drug delivery methods, such as time release capsules, liposomes
and implants, may provide greater therapeutic benefits for a specific
indication or may offer comparable performance at lower cost, than those
offered by the Company's current transdermal drug delivery systems. There can
be no assurance that the Company will successfully develop technologies and
products that are more effective or affordable than those being developed by
its competitors. In addition, one or more of the Company's competitors may
achieve product commercialization or obtain patent protection earlier than the
Company. Competitive products have either been approved or are being
developed for most of the Company's current or development stage products.
The first pharmaceutical product to reach the market in a therapeutic area
often has a significant competitive advantage relative to later entrants to
the market. There can be no assurance that product introductions or
developments by others will not render the Company's products or technologies
non-competitive or obsolete.
The Company expects products approved for sale to compete primarily on the
basis of product efficiency, safety, patient convenience, reliability,
availability and price. The Company's competitive position will also depend
on its ability to attract and retain qualified scientific and other personnel,
develop effective proprietary products, implement production and marketing
plans, effect distribution of its products, obtain patent protection and
secure adequate capital resources.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that protection of its patents, proprietary products,
technologies, processes and know-how is important to its business. The
Company currently holds seven issued and allowed United States patents and one
additional pending United States patent application. Corresponding patents or
applications have been issued or filed in Canada, certain European countries
and Japan. There can be no assurance that the Company's patents or those of
its competitors would be held valid by a court of competent jurisdiction. Any
litigation or proceedings with respect to patents or proprietary rights could
result in substantial costs to the Company. Except for the litigation matter
with Key Pharmaceuticals, Inc. described below under "Item 3. Legal
Proceedings," the Company currently is not aware of any claims of infringement
against its products or technologies.
There can be no assurance that any of the Company's pending applications will
result in the issuance of any patents or whether any issued patents will
provide proprietary protection or be circumvented or invalidated. The Company
may be required or may desire to obtain licenses from others to develop,
manufacture and market commercially viable products. There can be no
assurance that such licenses will be obtainable on commercially reasonable
terms, if at all, or that any licensed patents or proprietary rights will be
valid and enforceable.
The Company also relies upon unpatented trade secrets. No assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to unpatented trade secrets.
It is Company policy to require its key employees, consultants and other
advisors to execute confidentiality agreements. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.
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GOVERNMENT REGULATION; ENVIRONMENTAL MATTERS
The research and development, manufacture and marketing of drug delivery
systems are subject to regulation by the FDA in the United States and by
comparable authorities in other countries. These national agencies and other
federal, state and local entities regulate, among other things, research and
development activities and the testing, manufacturing, safety, effectiveness,
labelling, storage, record keeping, approval, advertising and promotion of the
Company's products. The regulations and statutes applicable to the Company's
products may change as the currently limited number of approved transdermal
drug delivery products increases and regulators acquire additional experience
in this area.
Each domestic drug product manufacturing establishment must be registered with
and inspected by the FDA. Drug product manufacturing establishments located
in Pennsylvania must be registered with the Pennsylvania Department of Health.
Establishments handling controlled substances must be licensed by the United
States Drug Enforcement Administration ("DEA"). Domestic drug manufacturing
establishments are subject to periodic inspections by the FDA for GMP
compliance.
The process required by the FDA before a drug delivery system may be marketed
in the United States might depend on whether the pharmaceutically-active
ingredient has previously been approved by the FDA for use in other dosage
forms, and whether the drug has previously been approved by the FDA in the
particular dosage form. If the drug is a new chemical entity that has not
been previously approved, then the process includes (i) pre-clinical
laboratory and animal testing, (ii) the submission to the FDA of an acceptable
Investigational New Drug Application ("IND"), (iii) adequate and well-
controlled human clinical trials to establish the safety and efficacy of the
drug for its intended use, (iv) submission to the FDA of an NDA which
demonstrates the safety and efficacy of the product, and (v) approval of an
NDA. If the pharmaceutically-active ingredient has been previously approved,
then the approval process is similar, except that certain toxicity tests
normally required for the NDA should not be necessary.
If a product containing the pharmaceutically-active ingredient has previously
been approved by the FDA, then a firm seeking approval for another formulation
of that drug may in some circumstances be able to submit an ANDA. Under the
ANDA procedure, the FDA waives the requirement of submitting complete reports
of preclinical and clinical studies showing safety and efficacy, and instead
requires bioavailability data demonstrating that the applicant's drug
formulation is bioequivalent to the previously-approved drug. A drug is
deemed bioequivalent to another if it is not significantly different in the
rate and extent of absorption of the drug's active ingredient and its
availability at the site of drug action. These parameters are typically
measured by taking blood samples periodically after administration of a drug,
and analyzing those samples to determine the amount of drug and/or its
metabolites that are present.
Although ANDA procedures can reduce the time and cost required to bring a drug
to market, the statutory provisions which permit the ANDA procedure were also
designed to protect certain drugs approved under the IND/NDA procedure ("NDA
drugs") from immediate competition from drugs approved under the ANDA
procedure ("ANDA drugs"). The effective date of approval of an ANDA drug will
ordinarily be delayed until the expiration of patents, if any, covering the
NDA drug, or, in the event of a challenge to the validity or infringement of
an existing patent, until a final order that cannot be appealed has been
issued by a court that the patent is invalid or not infringed by the ANDA
drug. Existing product or use patents on NDA drugs may be extended for up to
five years to compensate the patent holder for the reduction of the effective
patented marketing life of the drug caused by the FDA review period. With
respect to NDA drugs not covered by existing patents, the FDA may award
periods of three or five years of marketing exclusivity, depending on the
nature of the NDA drug and the type of data submitted in the NDA, during which
period an ANDA cannot be submitted or the FDA will not make effective any
approval of an ANDA drug that refers to the NDA drug as a basis for approval.
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Although most of the Company's products currently under development would
follow the IND/NDA process in pursuit of marketing approval, some of these
products might be eligible for the ANDA procedure.
Depending on the distribution arrangements for a particular product, either
the Company or the Company's distributor would be responsible for the clinical
and regulatory approval procedures. In either case, the Company would be
responsible for providing the required data concerning the manufacturing
process for the product. The clinical research and regulatory review process
generally takes a number of years and requires the expenditure of substantial
resources. The Company's ability to manufacture and sell products depends
upon the satisfactory completion of clinical trials and obtaining the
foregoing approvals.
Sales of the Company's products outside the United States are subject to
regulatory requirements governing human clinical trials and marketing approval
for drugs and transdermal delivery systems. These requirements vary widely
from country to country.
There can be no assurance that problems will not arise that could delay or
prevent the commercialization of the Company's products, or that the FDA and
foreign regulatory agencies will be satisfied with the results of the clinical
trials and approve the marketing of any products.
The Company is also subject to regulation under U.S. federal, state and local
regulations regarding work place safety, environmental protection and
hazardous and controlled substance controls, among others.
The Company does not believe that its compliance 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.
CUSTOMERS; GOVERNMENT CONTRACTS
In August 1996, a former domestic customer of the Company obtained approval
from the FDA for the manufacture and sale of its own nitroglycerin patches and
now competes with the Company's nitroglycerin patches. This former customer
accounted for approximately 38% and 51% of the Company's sales for the years
ended December 31, 1996 and 1995, respectively.
See Note 1a of the Notes to Consolidated Financial Statements included below
under "Item 8. Financial Statements" for (i) the percentage of sales to each
major customer who was responsible for 10% or more of total revenues during
1996, 1995 and 1994 and (ii) foreign sales during the same three years.
The Company does not currently sell its transdermal nitroglycerin patches
under government contracts.
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EMPLOYEES
As of February 28, 1997, the Company employed sixty-eight full time employees.
Of these, seventeen were engaged in research and development, thirty-seven in
process development and manufacturing and fourteen in other disciplines.
Seventeen employees at the York facility are covered by a collective
bargaining agreement with a local of the R.W.D.S.U. (an AFL-CIO unit) for a
three year period ending December 10, 1998, subject to annual renewal
thereafter. The Company believes its relations with employees are good.
ITEM 2. PROPERTIES
The Company owns an approximately 61,000 square foot building in York,
Pennsylvania which is used for manufacturing, quality control, research and
development, warehousing and office space. The Company's manufacturing
facility complies with GMP standards and is operating under a license from the
DEA and pursuant to registration with the Pennsylvania Department of Health.
ITEM 3. LEGAL PROCEEDINGS
In August 1995, Key Pharmaceuticals, Inc. a subsidiary of Schering-Plough
Corporation ("Key") commenced an action against the Company's Hercon
Laboratories Corporation subsidiary ("Hercon") in the United States District
Court for the District of Delaware alleging that Hercon's submission to the
United States Food and Drug Administration ("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 not 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. All post-trial briefs were filed in
December 1996 and the Company is awaiting decision by the Court. Costs of
this litigation have adversely affected profitability in 1996 (see Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations). Management continues to believe that Key's claims are without
merit.
In October 1995, Gershon Yormack, a stockholder of the Company's parent,
Health-Chem Corporation ("Health-Chem"), initiated an action against Health-
Chem, its directors and the Company in the Delaware Chancery Court (New Castle
County) in which he sought injunctive and declaratory relief with respect to
certain options to purchase Common Stock of the Company granted to each of
Marvin M. Speiser, Health-Chem's Chairman of the Board and President, and
Robert D. Speiser, the Company's President and Health-Chem's Executive Vice
President. Pursuant to Employment Agreements entered into in April 1995, in
November 1995 Health-Chem caused the Company to issue an option to purchase
shares of the Company'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 Common Stock of the Company offered by Health-Chem to its
stockholders under a registered subscription rights offering (via a prospectus
dated September 18, 1995), was substantially less than the fair market value
of such Company Common Stock. Management believes that the claims are without
merit and intends to defend the action vigorously.
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.
<PAGE>
FORM 10-K PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ OTC Bulletin Board under
the symbol TLCC.
The Company's Common Stock commenced trading in November 1995 following
expiration of a Rights Offering on November 10, 1995. (See Note 1a of the
Notes to Consolidated Financial Statements included below under "Item 8.
Financial Statements" for a description of this Rights Offering.) Since the
commencement of trading, the high and low sales prices for the Company's
Common Stock, as reported by NASDAQ, have been as follows:
1996 1995
QUARTER High Low High Low
1st 1.00 0.125 -- --
2nd 0.28 0.125 -- --
3rd 0.50 0.25 -- --
4th 0.375 0.125 0.375 0.125
There were approximately 164 holders of record of the Company's Common Stock
as of February 28, 1997.
The Company has not paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial information
derived from the Company's consolidated financial statements and include the
Company, Hercon Laboratories Corporation (excluding the environmental
division) and the land and building in which Hercon Laboratories Corporation's
operations are conducted as of the dates and for the periods indicated. The
Selected Financial Data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements" included herein.
Year Ended December 31,
1996 1995 1994 1993 1992
(In Thousands, Except Share Amounts)
Net sales $12,146 $12,495 $12,104 $13,503 $ 8,978
Income <loss> from
continuing operations(1)(2) $ 84 $ 1,416 $ 1,129 $ 4,076 $<1,413>
Net income <loss> (1)(2) 84 1,416 1,129 4,076 <1,413>
Preferred dividends 674 233 -- -- --
Net <loss> income applicable
to common stockholders $ <590> $ 1,183 $ 1,129 $ 4,076 $<1,413>
Net <loss> income per common
share (primary and fully
diluted) $ <0.01> $ 0.03
Common shares outstanding 40,000,000 40,000,000
Dividends per share 0 0 0 0 0
Total assets $ 8,290 $ 9,319 $ 9,130 $ 9,419 $ 8,182
Long-term debt, less
current portion $ 7,000 $ 7,200 $ 7,692 $ 8,877 $12,221
Redeemable preferred stock $ 9,500 $10,000
(1) 1992 (loss) from continuing operations and net (loss) include a
litigation loss provision for $1,000,000, representing the settlement of
litigation with Circa Pharmaceuticals, Inc. (formerly Bolar
Pharmaceutical Co., Inc.).
(2) 1993 income from continuing operations and net income include the
recognition of a tax benefit of $2,400,000 related to net operating loss
and tax credit carryforwards.
<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 expresssed 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.
Year ended December 31, 1996 versus December 31, 1995
Net sales decreased by 2.8% to $12,100,000 in 1996 as compared to $12,500,000
in 1995. The decrease in net sales consists of an $800,000 decrease in
volume, partially offset by $400,000 in higher selling prices. The net sales
decrease is due to lower sales to a former domestic distributor of the
Company. This former distributor accounted for approximately 38% and 51% of
the Company's sales for the years ended December 31, 1996 and 1995,
respectively. 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 other domestic distributors of nitroglycerin patches increased
during 1996 as compared to 1995.
Gross profit decreased by 5.6% to $7,000,000 or 57.9% of net sales in 1996
from $7,400,000 or 59.6% of net sales in 1995. Gross profit decreased
primarily due to decreased domestic sales volumes of transdermal nitroglycerin
patches. Lower margins reflect increased domestic sales volumes of lower
margin products, as well as increased operating costs.
Selling, general and administrative expenses, excluding legal expenses, were
approximately $2,200,000 in 1996 as compared to $1,800,000 in 1995. The
$400,000 increase is due primarily to a higher allocation of expenses from
affiliates, amounting to approximately $170,000, and from higher consulting
costs of approximately $160,000. 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 in 1996 was higher than 1995 due to
Health-Chem's total expenses being higher, partially offset by the Company's
share of these expenses dropping from 27% in 1995 to 26% in 1996. The
increase in consulting costs is due primarily to outside consulting service
expenses related to the Company's applications with the FDA to market improved
transdermal nitroglycerin products.
Legal expenses increased $1,800,000 for the year ended December 31, 1996 as
compared to the same period 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
preparing for and conducting a two-week trial, which was completed on October
10, 1996.
Research and development expenses decreased $400,000, or 15.4%, for the year
ended December 31, 1996 as compared to the same period in 1995. The decrease
is due primarily to lower outside testing and clinical materials expenses. As
the Company proceeds to new phases of clinical studies, expenses will continue
to be incurred. The Company views this decrease as temporary and anticipates
total research and development expenses related to pharmaceutical products in
1997 to equal or exceed 1996 levels.
<PAGE>
Net interest expense decreased $90,000, or 16.8%, for the year ended December
31, 1996 as compared to the same period in 1995 due primarily to capitalized
interest related to new equipment under construction of $85,000 and to a
$30,000 reduction in interest associated with the note payable to Circa
Pharmaceuticals, Inc. which was paid in full in June 1996. This was partially
offset by $25,000 in additional interest related to higher average outstanding
balances on borrowings from affiliates.
Provision for income taxes was a $4,000 benefit in 1996 as compared to a
provision of $800,000 in 1995. During 1996, the Company reversed a portion of
the valuation allowance amounting to $25,000, with such reversal directly
reducing the income tax provision. Income tax provision or benefit varies
with the amount and nature of the components of income or loss from operations
before income taxes. See Note 6 of the Notes to Consolidated Financial
Statements.
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 has not yet been determined.
Year ended December 31, 1995 versus December 31, 1994
Net sales increased by 3.2% to $12,500,000 in 1995 as compared to $12,100,000
in 1994. This increase was due primarily to greater demand from both domestic
and foreign distributors for transdermal nitroglycerin patches ($200,000) and
to higher selling prices ($200,000).
Gross profit increased by 6.5% to $7,400,000 or 59.6% of net sales in 1995
from $7,000,000 or 57.8% of net sales in 1994. Gross profit increased
primarily due to increased domestic sales volumes of transdermal nitroglycerin
patches. Higher margins reflect domestic price increases and reduced
operating costs.
Selling, general and administrative expenses, excluding legal expenses, were
approximately $1,800,000 in 1995 as compared to $1,500,000 in 1994. This
$300,000 increase was due primarily to a higher allocation of expenses from
affiliates, amounting to approximately $230,000 and from higher payroll-
related and data processing costs of $60,000 and $50,000, respectively. The
Company's allocation of Health-Chem's total expenses was 27% in 1995 as
compared to 26% in 1994.
Legal expenses increased $150,000 for the year ended December 31, 1995 as
compared to the same period in 1994. 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 were
primarily due to the costs related to the defense of this action.
Research and development expenses decreased $400,000, or 12.7%, for the year
ended December 31, 1995 as compared to the same period in 1994. The decrease
was due primarily to lower outside testing expenses.
Net interest expense decreased $90,000, or 13.7%, for the year ended December
31, 1995 as compared to the same period in 1994 due primarily to lower average
outstanding balances on borrowings from affiliates.
<PAGE>
Provision for income taxes was $800,000 in 1995 as compared to a provision of
$600,000 in 1994. Income tax provision or benefit varies with the amount and
nature of the components of income or loss from operations before income
taxes. See Note 6 of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The following measures of liquidity are drawn from the Company's consolidated
financial statements:
December 31,
1996 1995
Working capital (in thousands) $ <309> $ 38
(Current assets less current liabilities)
Current ratio 0.9 1.0
(Current assets/current liabilities)
Quick ratio 0.5 0.4
(Cash and receivables/current liabilities)
Working capital decreased $347,000 from December 31, 1995 to December 31, 1996
due to an $818,000 increase in current liabilities, partially offset by a
$471,000 increase in current assets. Cash, accounts receivable, deferred
taxes and other current assets increased $13,000, $582,000, $27,000 and
$3,000, respectively, while inventory decreased $154,000. The increase in
accounts receivable reflects the timing of domestic distributor payments. The
decrease in inventory reflects reduced domestic distributor sales resulting
from one of the Company's domestic distributors obtaining approval from the
FDA in August 1996 to manufacture and sell its own nitroglycerin patches. The
increase in current liabilities is due to increases in accounts payable and
the current portion of redeemable preferred stock of $663,000 and $500,000,
respectively, partially offset by decreases in accrued expenses, state taxes
payable and dividends payable of $190,000, $88,000 and $67,000, respectively.
Cash provided by operations for the years ended December 31, 1996, 1995 and
1994 was $700,000, $3,300,000 and $1,800,000, respectively.
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 for property, plant and equipment were $357,000 in 1996,
$658,000 in 1995 and $460,000 in 1994. The majority of the expenditures in
1996 related to equipment needed to assemble and package the Company's second
generation nitroglycerin products. Capital expenditures in 1997 for property,
plant and equipment are projected to be approximately $800,000. 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 was 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. 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. The line of credit and term loan were subject to various
financial covenants. At December 31, 1996, Health-Chem and its affiliates
were not in compliance with certain of the covenants. 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
<PAGE>
up to $15,000,000 from IBJ Schroder Bank & Trust Company. 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 collateralized by a pledge of
substantially all of the assets of Health-Chem, the Company and Health-Chem's
other operating subsidiaries. The facility, which expires on January 9, 2002,
is subject to various financial covenants.
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 $998,000, $827,000 and $593,000 in 1996, 1995, and 1994,
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
December 31, 1996, 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 $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.
Inflation
The Company believes that inflation has not had a material effect upon its
results of operations and liquidity and capital resources.
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements.
PAGE
Reports of Independent Accountants 17-18
Consolidated Balance Sheets - December 31, 1996 and 1995 19
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994 20
Consolidated Cash Flow Statements
Years Ended December 31, 1996, 1995 and 1994 21
Consolidated Statements of Stockholders' Equity (Deficiency)
Years Ended December 31, 1996, 1995 and 1994 22
Notes to Consolidated Financial Statements 23-31
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
of Transderm Laboratories Corporation
We have audited the accompanying consolidated financial statements of
Transderm Laboratories Corporation (Company) as of December 31, 1996 and 1995
and for the years then ended listed in Item 14(a) of this Form 10-K. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 Transderm
Laboratories Corporation as of December 31, 1996 and 1995, and the
consolidated results of their operation and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, Pennsylvania
March 20, 1997
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Transderm Laboratories Corporation
We have audited the accompanying consolidated financial statements of
Transderm Laboratories Corporation for the year ended December 31, 1994 listed
in Item 14(a)1. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on the consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated 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 audit provides
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements of Transderm
Laboratories Corporation present fairly, in all material respects, the results
of their operations and their cash flows for the year ended December 31, 1994
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Baltimore, Maryland
June 29, 1995
<PAGE>
<PAGE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
ASSETS December 31,
<S> 1996 1995
CURRENT ASSETS <C> <C>
Cash (Note 1f) $ 21 $ 8
Accounts receivable (Note 1a) 1,232 650
Inventories (Notes 1b and 2) 780 934
Deferred income taxes - current (Note 6) 99 72
Other current assets 3 0
Total Current Assets 2,135 1,664
PROPERTY, PLANT AND EQUIPMENT (Note 1c)
Land 120 120
Building 2,734 2,734
Equipment 6,729 6,655
Construction-in-progress 1,158 875
Total Property, Plant and Equipment 10,741 10,384
Less accumulated depreciation and amortization 5,527 4,855
Net Property, Plant and Equipment 5,214 5,529
NON-CURRENT ASSETS
Deferred income taxes (Note 6) 907 989
Payable to Health-Chem as net operating loss and
tax credit carryforwards are used (Note 1a) <393> <803>
Long-term receivable - Health-Chem (Note 1f) 427 1,939
Other non-current assets 0 1
Total Non-Current Assets 941 2,126
TOTAL ASSETS $ 8,290 $ 9,319
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable $ 913 $ 250
Accrued expenses and other current
liabilities (Note 3) 362 552
Current portion of redeemable preferred stock
(Notes 1a and 7) 1,000 500
Preferred dividends payable 166 233
Income taxes payable (Note 6) 3 91
Total Current Liabilities 2,444 1,626
LONG-TERM LIABILITIES
Subordinated promissory note (Notes 1a and 1f) 7,000 7,000
Other long-term debt (Note 4) 0 200
Deferred income taxes (Note 6) 480 537
REDEEMABLE PREFERRED STOCK (Notes 1a and 7) 8,500 9,500
STOCKHOLDERS' EQUITY (DEFICIENCY) (Note 8)
Common stock 40 40
Retained deficit <10,174> <9,584>
Total Stockholders' Equity (Deficiency) <10,134> <9,544>
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 8,290 $ 9,319
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share amounts)
<CAPTION>
Year Ended December 31,
<S> 1996 1995 1994
REVENUE: <C> <C> <C>
Net sales (Note 1a) $12,146 $12,495 $12,104
Cost of goods sold 5,116 5,050 5,113
Gross profit 7,030 7,445 6,991
OPERATING EXPENSES:
Selling, general and administrative
expense (Note 1g) 2,183 1,838 1,524
Legal expense 2,088 271 124
Research and development expense (Note 1d) 2,265 2,678 3,067
Net interest expense (Note 9) 456 548 635
Total operating expenses 6,992 5,335 5,350
INCOME FROM OPERATIONS: 38 2,110 1,641
Other income - net 42 133 105
INCOME FROM OPERATIONS BEFORE TAXES: 80 2,243 1,746
Income tax <benefit> provision (Note 6) <4> 827 617
NET INCOME 84 1,416 1,129
PREFERRED DIVIDENDS (Note 7) 674 233 0
NET <LOSS> INCOME APPLICABLE TO COMMON
STOCKHOLDERS $ <590> $ 1,183 $ 1,129
Earnings per Common Share (primary & fully
diluted) (Note 1h):
NET <LOSS> INCOME PER COMMON SHARE $ <0.01> $ 0.03
Average number of common shares
outstanding (Note 1h)
Primary 47,156,544 46,000,000
Fully Diluted 47,240,250 47,333,333
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE> TRANSDERM LABORATORIES CORPORATION
CONSOLIDATED CASH FLOW STATEMENTS
(In thousands)
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash was Provided by <Used for>:
OPERATIONS:
Net income $ 84 $ 1,416 $ 1,129
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 672 703 720
Deferred income taxes <2> 652 448
Changes in:
Accounts receivable <582> 540 <432>
Inventories 154 161 41
Other current assets <3> 0 0
Other non-current assets 1 0 0
Accounts payable 663 <163> 86
Accrued expenses and other current liabilities <190> 40 <128>
Income taxes payable <88> <22> <109>
Net cash provided by operations 709 3,327 1,755
INVESTING:
Additions to property, plant and equipment <357> <658> <460>
Net cash used for investing <357> <658> <460>
FINANCING:
Borrowings from <payments to> affiliates, net 1,102 <2,391> <985>
Other long-term debt payments <200> <200> <200>
Redemption of preferred stock <500> 0 0
Preferred dividends paid <741> 0 0
Decrease in Health-Chem equity in land and
building 0 <73> <110>
Net cash used for financing <339> <2,664> <1,295>
Net Increase in Cash 13 5 0
Cash at beginning of period 8 3 3
Cash at end of period $ 21 $ 8 $ 3
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 604 $ 590 $ 635
Income taxes 116 176 279
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 (Note 1a) 0 $10,000 0
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 (Note 1a) 0 40 0
Increase in Health-Chem payable for the right
to use net operating loss and tax credit
carryforwards (Note 1a) 0 963 0
Issuance of a 9% Subordinated Promissory Note in
exchange for Health-Chem long-term debt (Note 1a) 0 7,000 0
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
(In Thousands)
Parent
Company
Equity in
Common Land and
Stock Retained Building
(Note 1a) Deficit (Note 1a) Total
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $ 100 $ <2,973> $ 2,163 $ <710>
Decrease in equity due to
depreciation charged to
operations <110> <110>
Net income 1994 1,129 1,129
Balance, December 31, 1994 100 <1,844> 2,053 309
Decrease in equity due to
depreciation charged to
operations <73> <73>
Issuance of redeemable preferred
stock in exchange for land and
building and the stock of
Hercon Laboratories Corporation <100> <7,920> <1,980> <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 40 <40> 0
Increase in Health-Chem payable
for the right to use net
operating loss and tax credit
carryforwards <963> <963>
Net income available to common
stockholders 1995 1,183 1,183
Balance, December 31, 1995 40 <9,584> 0 <9,544>
Net loss applicable to common
stockholders 1996 <590> <590>
Balance, December 31, 1996 $ 40 $<10,174> $ 0 $<10,134>
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE> TRANSDERM LABORATORIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
1. Presentation and Accounting Policies
a. Basis of Presentation and Nature of Operations
Transderm Laboratories Corporation (the "Company") is an indirect 90% owned
subsidiary of Health-Chem Corporation ("Health-Chem").
In April 1995, Health-Chem'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") 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, Herculite Products, Inc. ("Herculite"), which is a wholly-owned
subsidiary of Health-Chem, and Health-Chem entered into a Plan of
Reorganization and Asset Exchange Agreement effective August 31, 1995.
The Plan of Reorganization and Asset Exchange Agreement required:
. The transfer from Herculite to the Company of the manufacturing
facility in which Hercon's operations are conducted and the 985
shares of Hercon common stock owned by Herculite in exchange for
1,000,000 shares of the Company's Redeemable Preferred Stock,
$10.00 par value.
. Hercon's issuance to Health-Chem of a $7,000,000, 9% Subordinated
Promissory Note evidencing the approximate amount of intercompany
advances owed by Hercon to Health-Chem.
. The Company'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.
. The Company's payment to Health-Chem as the Company uses its net
operating loss and tax credit carryforwards to offset future
taxable income as a result of entering into a Tax Sharing
Agreement.
. The Company's participation in a Corporate Services Agreement with
Health-Chem (See Note 1g).
In September 1995, subscription rights to purchase up to 4,000,000 shares of
the Company's Common Stock for $.10 per share were issued to holders of
Health-Chem common stock. The Rights Offering expired November 10, 1995, with
shareholders subscribing to the 4,000,000 shares of the Company's Common Stock
by exercising their Basic Subscription Rights and Oversubscription Privileges.
The accompanying financial statements of the Company, which are consolidated
for 1996 and 1995 and combined for 1994 (collectively referred to as
"consolidated"), include the operations of the following:
. Transderm Laboratories Corporation, an inactive company until
August 31, 1995, which was originally incorporated in 1989.
. Hercon, excluding its former environmental division which was
transferred to another subsidiary of Health-Chem effective April
28, 1995.
. The land and building, previously owned by Herculite, in which
Hercon's operations are conducted.
<PAGE>
The Company is engaged in the development, manufacture and marketing of
transdermal drug delivery systems. Currently, the Company manufactures and
markets a transdermal nitroglycerin patch which it sells to two customers for
distribution in the United States and to one customer for distribution in
Spain. In August 1996, Customer A obtained approval from the United States
Food and Drug Administration ("FDA") for the manufacture and sale of its own
nitroglycerin patches and now competes with the Company's nitroglycerin
patches. The percentage of sales to each major customer who was responsible
for 10% or more of total revenues is as follows:
Year Ended December 31,
1996 1995 1994
Customer A........................ 38% 51% 45%
Customer B........................ 31 20 29
Customer C........................ 26 23 20
At December 31, 1996 and 1995, accounts receivable of approximately $1,222,000
and $489,000, respectively, were from such customers. To reduce credit risk,
the Company performs ongoing credit evaluations of its customers' financial
condition but does not generally require collateral.
Foreign sales, consisting of sales to a distributor in Spain, were $558,000,
$718,000, and $667,000, or 4.6%, 5.7%, and 5.5% of sales in 1996, 1995 and
1994, respectively.
The Company is currently awaiting approval from the FDA for the sale of new
nitroglycerin patches which are thinner, more flexible and smaller than the
Company's current patches. While the Company hopes to receive approvals in
1997, no assurances can be made that any new nitroglycerin patches will be
approved by the FDA or that they will achieve the same or greater success than
the Company's currently marketed nitroglycerin patches. The first
pharmaceutical product to reach the market in a specific therapeutic area
often obtains and maintains significant market share relative to later
entrants to the market. There can be no assurance that developments by others
will not render the Company's products or technologies uncompetitive or
obsolete.
In addition, the Company is also developing a number of other transdermal
products. These products will also require approval from the FDA. There can
be no assurance that FDA filings for any of these additional products will be
effected nor that FDA approval for any of these products will be obtained.
b. Inventories
Inventories are stated at lower of cost (first-in, first-out basis) or market.
c. 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, and
range from 4 to 25 years. 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.
d. Research and Development
Research and development costs are charged to operations as incurred.
e. Income Taxes
The Company is included in the consolidated federal income tax return of its
parent, Health-Chem, and is party to a Tax Sharing Agreement. Income taxes
are provided by the Company on a stand-alone basis as the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities (See Note 6). Deferred tax assets and
liabilities are provided
<PAGE>
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.
f. Cash Management
The Company participates in Health-Chem's cash management practice, wherein
all cash requirements are borrowed from Health-Chem and all excess cash is
advanced to Health-Chem. The intercompany balance is expected to be paid out
of future cash flow and is therefore considered to be long-term. Interest is
charged based upon the average outstanding intercompany balance and interest
rate on Health-Chem's line of credit which, since July 1994 and through
December 1996, had been with The First National Bank of Maryland. The average
interest rate charged was 8.27%, 8.83% and 7.81% during 1996, 1995 and 1994,
respectively. On August 31, 1995, Hercon issued to Health-Chem a $7,000,000,
9% Subordinated Promissory Note in exchange for the then outstanding
borrowings from affiliates. The Company is required to make semi-annual
interest payments each March and September on this note, with the principal
amount of $7,000,000 payable on March 31, 1999.
At December 31, 1996, Health-Chem was 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. 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. The line of credit and term loan were subject to various
financial covenants. At December 31, 1996, Health-Chem and its affiliates
were not in compliance with certain of the covenants. 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. 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 collateralized by a pledge of
substantially all of the assets of Health-Chem, the Company and Health-Chem's
other operating subsidiaries. The facility, which expires on January 9, 2002,
is subject to various financial covenants (See Note 11).
g. Expenses Charged by Health-Chem
Pursuant to a Corporate Services Agreement between the Company and Health-
Chem, Health-Chem pays for certain expenses on behalf of the Company for which
Health-Chem is reimbursed, including all of the costs related to the building
in which the Company operates. The Company is also charged by Health-Chem for
the cost of certain administrative expenses, comprised mainly of an allocation
of corporate services including executive, legal, accounting, human resources,
public relations, and office rent. The allocation of these costs,
approximately $998,000, $827,000 and $593,000 for 1996, 1995, and 1994,
respectively, reflect Health-Chem's estimate of their cost for these services
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 estimates that these expenses, on a
stand-alone basis, would not have been materially different from the costs
allocated.
<PAGE>h. Per Share Information
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 has not yet been determined.
i. Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets at December
31, 1996 and 1995 for cash, accounts receivable, accounts payable, and accrued
expenses and other current liabilities approximate fair value due to the
short-term nature of these instruments. The carrying amounts of the Company's
long-term receivable with Health-Chem approximate fair value because the
underlying instrument reprices frequently. The fair value of the fixed rate
Subordinated Promissory Note is estimated by discounting future cash flows
using the Company's incremental borrowing rate. At December 31, 1996 and
1995, the estimated fair values approximated the carrying values. Management
believes that determining a fair value for the Company's Redeemable Preferred
Stock is impractical due to the closely-held nature of these securities.
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. Reclassifications
Certain amounts included in the consolidated financial statements relating to
prior periods have been reclassified to conform to the current presentation.
2. Inventories (In thousands)
December 31,
1996 1995
Raw materials $ 659 $ 749
Finished goods and work in process 121 185
Total inventories $ 780 $ 934
At December 31, 1996 and 1995 the inventory valuation allowance balance was
$125,000.
Several raw materials used in the manufacture of the Company's products are
available only from sole source suppliers. These materials have generally
been available to the Company and the pharmaceutical industry on commercially
reasonable terms. To date, the Company has not experienced difficulty
acquiring materials necessary to manufacture its products. The Company plans
to negotiate supply agreements, as appropriate, for certain components. Any
interruption of supply could have a material adverse effect on the Company's
ability to manufacture its products.
<PAGE>
3. Accrued Expenses and Other Current Liabilities (In thousands)
December 31,
1996 1995
Accrued interest $ 158 $ 210
Deferred revenue 110 110
Accrued research and development 0 135
Accrued payroll and related liabilities 58 62
Accrued bonuses 20 0
Accrued accounting fees 15 18
Accrued royalties 0 17
Accrued legal fees 1 0
Total accrued expenses and other current liabilities $ 362 $ 552
4. Long-Term Debt
The Company's long-term debt balances are as follows (in thousands):
December 31,
1996 1995
Subordinated promissory note (Note 1f) $ 7,000 $ 7,000
Other notes payable 0 200
Total long-term debt $ 7,000 $ 7,200
The other notes payable balance of $200,000 at December 31, 1995 represents
the portion of the settlement with Circa Pharmaceuticals, Inc. (formerly Bolar
Pharmaceutical Co., Inc.) which was paid in 1996. In 1992, the Company
settled this litigation for $1,000,000, payable in five annual installments,
and recorded it as general and administrative expense.
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 United States Food and Drug Administration ("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 not 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. All post-trial briefs were filed in
December 1996 and the Company is awaiting decision by the Court. Management
continues to believe that Key's claims are without merit.
In October 1995, Gershon Yormack, a stockholder of Health-Chem, initiated an
action against Health-Chem, its directors and the Company in the Delaware
Chancery Court (New Castle County) in which he sought injunctive and
declaratory relief with respect to certain options to purchase Common Stock of
the Company granted to each of Marvin M. Speiser, Health-Chem's Chairman of
the Board and
<PAGE>
President, and Robert D. Speiser, the Company's President and Health-Chem's
Executive Vice President. Pursuant to Employment Agreements entered into in
April 1995, in November 1995 Health-Chem caused the Company to issue an option
to purchase shares of the Company'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 Common Stock of the Company offered by Health-Chem to
its stockholders under a registered subscription rights offering (via a
prospectus dated September 18, 1995), was substantially less than the fair
market value of such Company Common Stock. Management believes that the
claims are without merit and intends to defend the action vigorously.
6. Taxes on Income (In thousands)
Year Ended December 31,
1996 1995 1994
Taxes on income include provision <benefit> for:
Federal income taxes $ 42 $ 667 $ 453
State and local income taxes <46> 160 164
Total $ <4> $ 827 $ 617
Taxes on income are comprised of:
Current $ <2> $ 175 $ 169
Deferred <2> 652 448
Total $ <4> $ 827 $ 617
A reconciliation of taxes on income to the federal statutory rate is as
follows:
Year Ended December 31,
1996 1995 1994
Tax provision at statutory rate $ 27 $ 763 $ 593
<Decrease> increase resulting from:
State and local taxes, net of federal tax
benefit <23> 115 116
Decrease in <recognition of> tax loss and tax
credit carryforwards (not previously recognized) 16 <52> <93>
Reversal of valuation allowance <25> 0 0
Other 1 1 1
Tax <benefit> provision $ <4> $ 827 $ 617
At December 31, 1996 and 1995, the deferred tax assets and liabilities result
from the following temporary differences and carryforwards:
1996 1995
Deferred tax assets:
Net operating loss carryforwards $ 502 $ 566
Tax credit carryforwards 421 444
Litigation settlement costs 0 81
Inventory reserves 51 51
Capitalization of overhead costs as
inventory in accordance with tax laws 13 21
Total deferred tax assets 987 1,163
Deferred tax liabilities:
Accelerated depreciation <445> <610>
Total deferred tax liabilities <445> <610>
Net deferred tax asset before valuation allowance 542 553
Valuation allowance <16> <29>
Net deferred tax asset $ 526 $ 524
<PAGE>
At December 31, 1996, the Company had a net operating loss carryforward and
tax credit carryforwards, on a stand-alone basis, of approximately $1,327,000
and $421,000, respectively, available to offset future stand-alone income tax
liabilities which expire through 2007 and 2010, respectively (See Note 1a).
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss and credit carryforwards. Although realization is not
assured, management believes it is more likely than not that all of the
deferred tax asset will 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.
The net deferred tax assets for the years ended December 31, 1996 and 1995 of
$526,000 and $524,000, respectively, are included in the deferred income taxes
accounts in the Balance Sheet. For the year ended December 31, 1996, the
valuation allowance decreased by $13,000.
7. Redeemable Preferred Stock
On August 31, 1995, the Company issued to Herculite 1,000,000 shares of the
Company's Redeemable Preferred Stock, $10.00 par value, in exchange for the
manufacturing facility in which Hercon's operations are conducted and the 985
shares of Hercon common stock owned by Herculite. The Company is required to
make semi-annual preferred dividend payments to Herculite each March and
September at the annual rate of $.70 per share on the then-outstanding shares.
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. In the event of default, the Preferred
Stockholders have the right to elect a majority of the Board of Directors of
the Company.
8. Stock Options
In April 1995, Health-Chem entered into five-year Employment Agreements with
Robert D. Speiser and Marvin M. Speiser. The Employment Agreements provide
that if Health-Chem issues or directly or indirectly causes a subsidiary to
issue to its security holders any securities representing a direct or indirect
interest in Hercon, then upon the date of issuance Robert D. Speiser and
Marvin M. Speiser are to be granted separate options allowing each of them to
purchase ten percent (10%) of the outstanding Common Stock of the Company on
a fully-diluted basis at a per share purchase price equal to the fair market
value of such shares as of the date of grant exercisable in full commencing
the first anniversary of the grant date.
In September 1995, subscription rights to purchase up to 4,000,000 shares of
the Company's Common Stock for $.10 per share were issued to holders of
Health-Chem common stock. The Rights Offering expired November 10, 1995, with
shareholders subscribing to the 4,000,000 shares of the Company's Common
Stock.
Subsequent to the expiration of the Rights Offering, on November 13, 1995 the
Company entered into stock option agreements with Robert D. Speiser and Marvin
M. Speiser allowing each of them to purchase 5,000,000 shares of the Company's
Common Stock at $.10 per share, exercisable in full commencing November 13,
1996 and expiring ten years from the grant date. The Company has reserved
10,000,000 shares of Common Stock for issuance to Robert D. Speiser and Marvin
M. Speiser pursuant to these stock option agreements ("Agreements").
In April 1996, the Company adopted the 1996 Performance Equity Plan ("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 Plan, up to an
aggregate of 2,000,000 shares of the Company's Common Stock are 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
<PAGE>
employees allowing them to purchase up to an aggregate of 1,400,000 shares
under the Plan. The Company has reserved 1,400,000 shares of Common Stock
pursuant to these stock option agreements.
The Agreements and Plan are collectively referred to as "Plans".
On January 1, 1996, the Company 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" (APB 25) and related
Interpretations in accounting for its Plans. Accordingly, no compensation
cost has been recognized for options granted under the Plans. Had
compensation cost for the Company's Plans been determined based on the fair
value at the grant dates for awards under the Plans consistent with the method
of SFAS 123, the Company's net <loss> income and net <loss> income per share
would have been <increased> reduced to the pro forma amounts indicated below.
The Company did not award any option grants during the year ended December 31,
1994. Therefore, there is no pro forma amount for that period.
1996 1995
Net <loss> income As reported $ <590,000> $1,183,000
applicable to common Pro forma $<1,301,000> $1,041,000
stockholders
Primary and fully diluted As reported $<0.01> $0.03
<loss> earnings per share Pro forma $<0.03> $0.02
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 Company's Plans as of December 31, 1996 and
1995 and changes during the years ended on those dates is presented below:
1996 1995
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
Outstanding at
beginning of year 10,000,000 $0.10 0 $0
Granted 1,400,000 0.125 10,000,000 0.10
Exercised 0 0 0 0
Forfeited 0 0 0 0
Outstanding at end
of year 11,400,000 0.103 10,000,000 0.10
Options exercisable
at year-end 10,000,000 0
Weighted-average
fair value of
options granted
during the year $0.106 $0.085
<PAGE>
The following table summarizes information about the Plans' stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
$0.10- 11,400,000 9.0 years $0.103 10,000,000 $0.10
$0.125
9. Net Interest Expense (In thousands)
Year Ended December 31,
1996 1995 1994
Interest expense - promissory note $ 630 $ 210 $ 0
Interest expense - long-term
<receivable>/payable - Health-Chem, net <96> 299 575
Interest expense - note payable 9 39 60
Capitalized interest <87> 0 0
Total net interest expense $ 456 $ 548 $ 635
10. 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 $21,000,
$21,000, and $20,000 in 1996, 1995 and 1994, respectively.
11. Subsequent Event
On January 9, 1997, Health-Chem obtained an aggregate of up to $15,000,000 in
senior secured financing from IBJ Schroder Bank & Trust Company (the "Bank"),
individually and as agent for various other financial institutions. Pursuant
to a Revolving Credit Term Loan and Security Agreement dated as of January 9,
1997 (the "Loan Agreement'), Health-Chem will be provided with up to
$7,000,000 in term loans and up to $8,000,000 in revolving credit. The
revolving credit line will bear interest at the Bank's prime rate and the term
loans will bear interest at the Bank's prime rate plus .375%. The financing
is secured by a pledge of substantially all the assets of Health-Chem, the
Company and Health-Chem's other operating subsidiaries.
Proceeds from borrowings under the Loan Agreement have been used by Health-
Chem to repay outstanding indebtedness under the aggregate $7,750,000 million
facility with comparable terms with The First National Bank of Maryland and
will also be used to repurchase, repay and/or redeem up to $7,000,000 of
Health-Chem's 10 3/8% Convertible Subordinated Debentures due April 15, 1999,
as market conditions warrant, and for general working capital purposes.
Health-Chem will pay a facility fee of 3/8 of 1% on the amount of the unused
available financing facility. The borrowing agreement, which expires on
January 9, 2002, contains various covenants which, among other things, require
Health-Chem and its affiliates 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.
<PAGE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
FORM 10-K PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information responsive to this item is incorporated herein by reference to
the Company's Proxy Statement in connection with the registrant's Annual
Meeting of Stockholders to be held on May 12, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information responsive to this item is incorporated herein by reference to
the Company's Proxy Statement in connection with the registrant's Annual
Meeting of Stockholders to be held on May 12, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information responsive to this item is incorporated herein by reference to
the Company's Proxy Statement in connection with the registrant's Annual
Meeting of Stockholders to be held on May 12, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information responsive to this item is incorporated herein by reference to
the Company's Proxy Statement in connection with the registrant's Annual
Meeting of Stockholders to be held on May 12, 1997.
<PAGE>
<PAGE>
FORM 10-K PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
(a) 1. FINANCIAL STATEMENTS
Reports of Independent Accountants 17-18
Consolidated Balance Sheets - December 31, 1996 and 1995 19
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995 and 1994 20
Consolidated Cash Flow Statements
Years Ended December 31, 1996, 1995 and 1994 21
Consolidated Statements of Stockholders' Equity (Deficiency)
Years Ended December 31, 1996, 1995 and 1994 22
Notes to Consolidated Financial Statements 23-31
(a) 2. FINANCIAL STATEMENT SCHEDULES
All 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 Health-Chem Corporation, ("HCH") Herculite
Products, Inc. ("HPI") and Transderm Laboratories Corporation (the
"Company"), filed as Exhibit 2 to the Company's Registration Statement
on Form S-1 No. 33-95080 filed with the Commission on July 28, 1995
("Registration Statement") and incorporated herein by reference.
3.1 Restated Certificate of Incorporation dated April 27, 1995, filed as
Exhibit 3.1 to the Registration Statement and incorporated herein by
reference.
3.2 Amendment to Restated Certificate of Incorporation dated July 13,
1995, filed as Exhibit 3.2 to the Registration Statement and
incorporated herein by reference.
3.3 By-Laws, filed as Exhibit 3.3 to the Registration Statement and
incorporated herein by reference.
10.1 Employment Agreement between HCH and Marvin M. Speiser dated April 4,
1995. Incorporated herein by reference to Exhibit 10.1 to HCH's
Report on Form 10-Q for the quarter ended March 31, 1995.
10.2 Employment Agreement between HCH and Robert D. Speiser dated April 4,
1995. Incorporated herein by reference to Exhibit 10.2 to HCH's
Report on Form 10-Q for the quarter ended March 31, 1995.
10.3 Stock Option Agreement between the Company and Marvin M. Speiser dated
November 13, 1995. Incorporated herein by reference to Exhibit 10.3
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
<PAGE>
10.4 Assignment of Stock Option Agreement dated December 6, 1996 between
Marvin M. Speiser and the Marvin M. Speiser 1996 Trust. Incorporated
herein by reference to Item 7.(c) to Schedule 13D for Marvin M.
Speiser et al. filed with the Commission on February 20, 1997.
10.5 Stock Option Agreement between the Company and Robert D. Speiser dated
November 13, 1995. Incorporated herein by reference to Exhibit 10.4
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.6 Distribution Agreement between Hercon Laboratories Corporation ("HLC")
and Circa Pharmaceuticals, Inc. (f/k/a Bolar Pharmaceutical Co., Inc.)
dated as of January 4, 1993. Incorporated herein by reference to
Exhibit 10.14 to HCH's Report on Form 10-K for the year ended December
31, 1992.
10.7 Agreement between HLC and Local 1034-R.W.D.S.U.--AFL-CIO dated
December 11, 1995. Incorporated herein by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.8(a) Loan and Security Agreement dated as of July 15, 1994 by and between
The First National Bank of Maryland ("FNBM") and HCH, HLC, HPI and
Pacific Combining Corp. ("Pacific"). Incorporated herein by reference
to Exhibit 3.2 to HCH's Report on Form 8-K filed July 25, 1994.
10.8(b) Modification Agreement dated August 31, 1995 by and between FNBM, HCH,
HLC, HPI, Pacific, Hercon Environmental Corporation ("HEC") and the
Company, filed as Exhibit 10.6(b) to Amendment No. 1 filed with the
Commission on September 6, 1995 ("Amendment No. 1") to the Company's
Registration Statement on Form S-1 No. 33-95080 filed with the
Commission on July 28, 1995 and incorporated herein by reference.
10.8(c) Second Modification Agreement dated as of October 11, 1995 by and
between FNBM, HCH, HLC, HPI, Pacific, HEC and the Company, filed as
Exhibit 10.5 to HCH's Report on Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by reference.
10.8(d) Master Modification Agreement dated as of June 30, 1996 by and between
FNBM, Marvin M. Speiser, HCH, Pacific, HLC, HPI, HEC and the Company,
filed as Exhibit 10.1 to HCH's Report on Form 10-Q for the quarter
ended June 30, 1996 and incorporated herein by reference.
10.9 Asset Acquisition Agreement dated April 28, 1995 between HEC and HLC,
filed as Exhibit 10.7 to the Registration Statement and incorporated
herein by reference.
10.10 $7,000,000 principal amount Subordinated Promissory Note of HLC, filed
as Exhibit 10.8 to Amendment No. 1 and incorporated herein by
reference.
10.11 Corporate Services Agreement between HCH and the Company, dated as of
August 31, 1995, filed as Exhibit 10.9 to Amendment No. 1 and
incorporated herein by reference.
10.12 Tax Sharing Agreement between HCH and the Company, dated as of August
31, 1995, filed as Exhibit 10.10 to Amendment No. 1 and incorporated
herein by reference.
10.13 Loan and Security Agreement dated as of October 11, 1995 by and
between Pacific, HCH, HLC, HPI, HEC and the Company and FNBM, filed
as Exhibit 1 to HCH's October 11, 1995 Current Report on Form 8-K and
incorporated herein by reference.
<PAGE>
10.14 Revolving Credit, Term Loan and Security Agreement dated as of January
9, 1997 by and between HCH, HPI, HEC, Pacific, HLC and the Company and
IBJ Schroder Bank & Trust Company, filed as Exhibit 1 to HCH's Current
Report on Form 8-K filed with the Commission on January 22, 1997 and
incorporated herein by reference.
21 Subsidiaries of Registrant. Filed herewith on page 37.
(b) REPORTS ON FORM 8-K
During the quarter ended December 31, 1996 the Company did not file any
reports on Form 8-K.
<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.
TRANSDERM LABORATORIES CORPORATION
Date: March 20, 1997
/s/ Robert D. Speiser /s/ Ronald J. Burghauser
By: Robert D. Speiser By: Ronald J. Burghauser
President Controller
(Principal Executive Officer) (Principal Financial Officer)
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Name and Signature Titles Date
/s/ Robert D. Speiser President, Chief Executive March 20, 1997
Robert D. Speiser Officer and Director
(Principal Executive
Officer)
/s/ Thomas J. Atkins Vice President and Director March 20, 1997
Thomas J. Atkins
/s/ Joyce F. Brown Director March 20, 1997
Joyce F. Brown
/s/ Ronald J. Burghauser Treasurer, Secretary and March 20, 1997
Ronald J. Burghauser Controller, (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Michael J. Campbell Director March 20, 1997
Michael J. Campbell
/s/ David N. Dinkins Director March 20, 1997
David N. Dinkins
/s/ Ester R. Fuchs Director March 20, 1997
Ester R. Fuchs
/s/ Donald E. Kauffman, Jr Vice President and Director March 20, 1997
Donald E. Kauffman, Jr.
/s/ Murray Lieber Vice President and Director March 20, 1997
Murray Lieber
/s/ Marvin M. Speiser Director March 20, 1997
Marvin M. Speiser
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Hercon Laboratories Corporation, incorporated in the State of Delaware, is the
only subsidiary of the Registrant.
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8500
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