<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1997 Commission File Number 0-27642
TRANSDERM LABORATORIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3518345
(State of Incorporation) (I.R.S. Employer Identification No.)
1212 Avenue of the Americas, 24th Floor, New York, NY 10036
(Address of principal executive offices)
Registrant's Telephone Number: 212-398-0700
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and has been subject to such filing requirements for the past 90 days.
As of April 30, 1997, 40,000,000 shares of Common Stock, $.001 Par Value, were
outstanding.
Page 1<PAGE>
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<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED BALANCE SHEETS (Unaudited) Item 1
(In thousands) Page 2
March 31, December 31,
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 19 $ 21
Accounts receivable 466 1,232
Inventories (Note 3) 563 780
Deferred income taxes - current 91 99
Other current assets 3 3
Total Current Assets 1,142 2,135
PROPERTY, PLANT & EQUIPMENT
Land and building 2,854 2,854
Other property, plant & equipment 7,972 7,887
Total Property, Plant & Equipment 10,826 10,741
Less accumulated depreciation & amortization 5,663 5,527
Net Property, Plant & Equipment 5,163 5,214
NON-CURRENT ASSETS
Deferred income taxes 1,169 907
Payable to Health-Chem as net operating loss and
tax credit carryforwards are used <393> <393>
Other non-current assets 1 0
Total Non-Current Assets 777 514
TOTAL ASSETS $ 7,082 $ 7,863
LIABILITIES AND STOCKHOLDERS' EQUITY <DEFICIENCY>
CURRENT LIABILITIES
Accounts payable $ 183 $ 913
Accrued expenses and other current liabilities 225 362
Current portion of redeemable preferred stock 1,000 1,000
Preferred dividends payable 0 166
Income taxes payable 3 3
Total Current Liabilities 1,411 2,444
LONG-TERM LIABILITIES
Subordinated promissory note 7,000 7,000
Long-term payable <receivable> - Health-Chem 1,482 <427>
Other long-term debt 31 0
Deferred income taxes 476 480
REDEEMABLE PREFERRED STOCK 7,500 8,500
STOCKHOLDERS' EQUITY <DEFICIENCY>
Common stock 40 40
Retained deficit <10,858> <10,174>
Total Stockholders' Equity (Deficiency) <10,818> <10,134>
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
<DEFICIENCY> $ 7,082 $ 7,863
<FN>
See Notes to Consolidated Financial Statements.<PAGE>
<PAGE>
</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except share data) Page 3
For The Three Months
Ended March 31,
1997 1996
<S> <C> <C>
REVENUE:
Net sales $ 1,112 $ 3,802
Cost of goods sold 721 1,500
Gross profit 391 2,302
OPERATING EXPENSES:
Selling, general and administrative expense 353 605
Legal expense 47 215
Research and development expense 621 560
Net interest expense 164 126
Total operating expenses 1,185 1,506
<LOSS> INCOME FROM OPERATIONS <794> 796
Other income 18 0
<LOSS> INCOME FROM OPERATIONS BEFORE TAXES <776> 796
Income tax <benefit> provision (Note 2) <258> 261
NET <LOSS> INCOME <518> 535
PREFERRED DIVIDENDS 166 175
NET <LOSS> INCOME APPLICABLE TO COMMON STOCKHOLDERS $ <684> $ 360
Earnings per Common Share (primary & fully
diluted) (Note 4):
NET <LOSS> INCOME PER COMMON SHARE $ <0.01> $ 0.01
Average number of common shares outstanding
(primary & fully diluted) (Note 4) 48,417,767 48,813,760
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED CASH FLOW STATEMENTS Item 1
(Unaudited) Page 4
(In thousands)
For The Three Months
Ended March 31,
1997 1996
<S> <C> <C>
Cash was <Used for> Provided by:
OPERATIONS:
Net <loss> income $ <518> $ 535
Adjustments to reconcile net <loss> income to net
cash <used for> provided by operations:
Depreciation and amortization 156 174
Deferred income taxes <258> 210
Gain on disposal of property, plant and equipment <14> 0
Changes in:
Accounts receivable 766 <506>
Inventories 217 125
Other current assets 0 <31>
Other non-current assets <1> 0
Accounts payable <730> 260
Accrued expenses and other current liabilities <151> <345>
Income taxes payable 0 4
Net cash <used for> provided by operations <533> 426
INVESTING:
Additions to property, plant and equipment <60> <58>
Disposal of property, plant and equipment 16 0
Net cash used for investing <44> <58>
FINANCING:
Borrowings from affiliates, net 1,909 545
Other long-term debt payments <2> 0
Redemption of preferred stock <1,000> <500>
Preferred dividends paid <332> <408>
Net cash provided by <used for> financing 575 <363>
Net <Decrease> Increase in cash <2> 5
Cash at beginning of period 21 8
Cash at end of period $ 19 $ 13
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 326 $ 162
Income taxes 1 47
Supplemental Schedule of Noncash Investing and
Financing:
Acquisition of fixed assets through capital
lease obligations $ 47 $ 0
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 5
1. Basis of Presentation and Nature of Operations
The consolidated financial statements include the accounts of Transderm
Laboratories Corporation and its subsidiary, Hercon Laboratories
Corporation ("Hercon"). Transderm Laboratories Corporation and Hercon
Laboratories Corporation are sometimes hereinafter referred to
collectively as the "Company". The Company is an indirect 90% owned
subsidiary of Health-Chem Corporation ("Health-Chem").
The Consolidated Balance Sheet as of March 31, 1997, the Consolidated
Statements of Operations and the Consolidated Cash Flow Statements for the
interim periods ended March 31, 1997 and 1996 have been prepared by the
Company, without audit. In the opinion of the Company, all necessary
adjustments, consisting of normal recurring items, have been made to
present fairly the financial position, results of operations and cash
flows at March 31, 1997 and for all periods presented. Certain amounts
included in the consolidated financial statements relating to prior
periods have been reclassified to conform to the current presentation.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's December 31, 1996 Annual Report on Form 10-K. The results of
operations for the periods ended March 31, 1997 and 1996 are not
necessarily indicative of the operating results for the full years.
2. Taxes on Income (In thousands) For the Three Months
Ended March 31,
1997 1996
Taxes on income include <benefit> provision for:
Federal income taxes $ <264> $ 253
State and local income taxes 6 8
Total $ <258> $ 261
Taxes on income are comprised of:
Current $ 0 $ 51
Deferred <258> 210
Total $ <258> $ 261
A reconciliation of taxes on income to the federal statutory rate is as
follows:
For the Three Months
Ended March 31,
1997 1996
Tax <benefit> provision at statutory rate $ <264> $ 270
Increase <decrease> resulting from:
State and local taxes, net of federal
tax benefit 6 16
Reversal of valuation allowance 0 <25>
Tax <benefit> provision $ <258> $ 261
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 6
3. Inventories (In thousands)
March 31, 1997 December 31, 1996
Raw materials $ 465 $ 659
Finished goods and work in process 98 121
Total inventories $ 563 $ 780
4. Earnings Per Share
Primary and fully diluted earnings per share are computed based upon
the weighted average number of common shares outstanding after
adjustment for any dilutive effect of the Company's stock options.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" (SFAS 128). SFAS 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly-
held common stock or potential common stock. SFAS 128 simplifies the
standards for computing earnings per share previously found in APB
Opinion No. 15, "Earnings Per Share," by replacing the presentation of
primary earnings per share with a presentation of basic earnings per
share. It also requires dual presentation of basic and diluted
earnings per share on the face of the income statement for all
entities with complex capital structures.
SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier
application is not permitted; however, restatement of all prior-period
earnings per share data is required upon adoption. The impact of
adopting SFAS 128 on the Company's earnings per share data is not
expected to be significant.
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 no earlier than February 16,
2010, the expiration date of Key's patent. In its answer, Hercon
denied the material allegations of the complaint, asserting, among
other things, that the Key patent is invalid and unenforceable and
that Hercon has not infringed and does not infringe any claim of the
patent. Hercon has counterclaimed against Key for declaratory
judgment of patent noninfringement, invalidity and unenforceability.
Following extensive discovery, a two-week, non-jury trial was
completed on October 10, 1996. 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.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 7
Results of Operations
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
remarks regarding important factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. The following discussion
includes certain forward-looking statements. Such forward-looking statements
are subject to a number of factors, including material risks and
uncertainties, including those referred to herein and in the Company's Reports
on Form 10-K and Form 10-Q, which could cause actual results to differ
materially from the forward-looking statements.
Net sales decreased $2,690,000 for the three months ended March 31, 1997 as
compared to the same period in 1996. The decrease in net sales consists of a
$2,703,000 decrease in volume, partially offset by $13,000 in higher selling
prices. The net sales decrease is due primarily to lower sales to a former
domestic distributor who had accounted for approximately 44% of the Company's
sales for the three months ended March 31, 1996. The most recent sales to
this distributor were during the fourth quarter of 1996. In August 1996, this
former distributor obtained approval from the United States Food and Drug
Administration for the manufacture and sale of its own nitroglycerin patches
and now competes with the Company's nitroglycerin patches. Sales to both of
the Company's current domestic distributors of nitroglycerin patches also
decreased during the three months ended March 31, 1997 as compared to the same
period in 1996. These decreases were due to these distributors' adjusting of
inventory levels.
Gross profit decreased $1,911,000, or 83%, for the three months ended March
31, 1997 as compared to the same period in 1996. Gross profit as a percentage
of net sales decreased from 61% for 1996 to 35% for 1997. Gross profit
decreased primarily due to decreased domestic sales volumes of transdermal
nitroglycerin patches. Lower margins reflect the allocation of fixed costs
over decreased revenue.
Selling, general and administrative expenses, excluding legal expenses,
decreased $252,000 for the three months ended March 31, 1997 as compared to
the same period in 1996. This decrease is due primarily to a lower allocation
of expenses from affiliates of $188,000 and from lower payroll-related costs.
Pursuant to a Corporate Services Agreement between the Company and Health-
Chem, selling, general and administrative expenses incurred by Health-Chem
which cannot be directly attributed to a specific subsidiary are allocated to
the Company based upon its net sales as a percentage of Health-Chem's
consolidated net sales. The Company's allocation of Health-Chem's total
expenses in 1997 was lower than 1996 due to Health-Chem's total expenses being
lower and the Company's share of these expenses dropping from 29% in 1996 to
13% in 1997.
Legal expenses decreased $168,000 for the three months ended March 31, 1997 as
compared to the same period in 1996. In August 1995, Key Pharmaceuticals,
Inc. commenced an action against Hercon relating to some of Hercon's improved
transdermal nitroglycerin products. The decreased legal expenses are due
primarily to reduced activity associated with the defense of this action, with
respect to which a two-week trial was completed in October 1996. All post-
trial briefs were filed in early December 1996 and the Company is awaiting a
decision by the Court.
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 8
Research and development expenses increased $61,000 for the three months ended
March 31, 1997 as compared to the same period in 1996. The increase is due
primarily to higher clinical materials and outside testing expenses. The
Company expects total research and development expenses related to
pharmaceutical products in 1997 to be lower than 1996 levels.
Net interest expense increased $38,000 for the three months ended March 31,
1997 as compared to the same period in 1996 due primarily to higher average
outstanding balances on borrowings from affiliates.
Other income for the three months ended March 31, 1997 increased $18,000 as
compared to the same period in 1996. This increase is due primarily to
nonrecurring proceeds of $14,000 related to an insurance recovery.
Income from operations before taxes decreased $1,572,000 for the three months
ended March 31, 1997 as compared to the same period in 1996 due primarily to
the factors discussed above. 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 2).
Preferred dividends of $166,000 for the three months ended March 31, 1997
reflect dividends associated with the Company's Redeemable Preferred Stock,
$10.00 par value. On March 31, 1997, the Company, as required, redeemed
100,000 shares of the then-outstanding 950,000 shares of its redeemable
preferred stock. Annual dividend payments required are $.70 per share.
The results of operations for the periods ended March 31, 1997 and 1996 are
not necessarily indicative of the operating results for the full years.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 9
Liquidity and Capital Resources
The following measures of liquidity are drawn from the Company's consolidated
financial statements:
March 31, December 31,
1997 1996
Working capital (in thousands) $ <269> $ <309>
(Current assets less current liabilities)
Current ratio 0.8 0.9
(Current assets/current liabilities)
Quick ratio 0.3 0.5
(Cash and receivables/current liabilities)
Working capital increased $40,000 from December 31, 1996 to March 31, 1997 due
to a $1,033,000 decrease in current liabilities, partially offset by a
$993,000 decrease in current assets. Cash, accounts receivable, inventory and
deferred taxes decreased $2,000, $766,000, $217,000 and $8,000, respectively.
The decrease in accounts receivable resulted from a decrease in sales in the
first quarter of 1997 as compared to the first quarter of 1996. The decrease
in inventory reflects reduced domestic distributor sales and the timing of raw
material purchases. The decrease in current liabilities is due to decreases
in accounts payable, accrued expenses and preferred dividends payable of
$730,000, $137,000 and $166,000, respectively.
Cash used for operations for the three months ended March 31, 1997 was
$533,000.
The Company has not paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.
The Company has financed its capital requirements primarily from cash flow
generated from operations and borrowings from its affiliates.
Capital expenditures in 1997 for property, plant and equipment are projected
to be approximately $500,000. 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.
Borrowing 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
<PAGE> TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION & RESULTS OF OPERATIONS Page 10
real estate. In January 1997, Health-Chem, Pacific, the Company and Health-
Chem's other operating subsidiaries replaced both the $6,000,000 line of
credit and $1,750,000 term loan from The First National Bank of Maryland with
senior secured financing of up to $15,000,000 from IBJ Schroder Bank & Trust
Company. 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 1997, the
Company made the required semi-annual interest payment.
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 1997, the Company, as required, made the semi-annual dividend payment
and redeemed, for $1,000,000, 100,000 shares. Additional required redemption
payments are $1,000,000 annually in 1998 through 2004 and $1,500,000 in 2005.
Pursuant to a Corporate Services Agreement between the Company and Health-
Chem, Health-Chem provides or otherwise makes available to the Company certain
general corporate services provided by Health-Chem's corporate staff,
including, but not limited to, accounting, tax, corporate communications,
legal, data processing, purchasing, human resources, financial and other
administrative staff functions, and arranges for administration of insurance
and employee benefit programs. The Company reimburses Health-Chem for the
actual out-of-pocket cost to Health-Chem or, for those services not directly
attributable to the Company, reimburses them based upon a method (allocation
based upon the Company's net sales as a percentage of Health-Chem's
consolidated net sales) which is considered by the Company to be reasonable.
The Company reimbursed Health-Chem approximately $114,000 and $302,000 for the
three months ended March 31, 1997 and 1996, respectively. The Agreement has
an initial term expiring on December 31, 1997 and will automatically renew for
successive one-year terms. The Company will be required to provide 30 days'
notice prior to cancellation of the Agreement.
Pursuant to a tax sharing agreement between the Company and Health-Chem, the
Company is required to pay Health-Chem as the Company uses its net operating
loss and tax credit carryforwards to offset future taxable income. At March
31, 1997, the maximum amount of such payments which may be made in the future
was $393,000.
The semi-annual interest payment on the subordinated promissory note is
$315,000 and the semi-annual dividend on the preferred stock currently
outstanding is $297,500. In addition to the cumulative dividends and interest
payments, the Company is obligated to redeem the preferred stock and repay the
promissory note as described above. The Company anticipates that internally
generated funds may not be sufficient to provide the Company with cash to meet
all of these retirement and redemption obligations and thus the Company may
need to raise additional capital from third parties.
<PAGE>
Part II
Item 1
Page 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments in any pending legal proceedings in the
quarter ended March 31, 1997.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) During the three months ended March 31, 1997, the Company did not file any
reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSDERM LABORATORIES CORPORATION
May 14, 1997 /s/ Robert D. Speiser
By: Robert D. Speiser
President
(Principal Executive Officer)
/s/ Ronald J. Burghauser
By: Ronald J. Burghauser
Controller
(Principal Financial Officer)
(Principal Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 19
<SECURITIES> 0
<RECEIVABLES> 466
<ALLOWANCES> 0
<INVENTORY> 563
<CURRENT-ASSETS> 1142
<PP&E> 10826
<DEPRECIATION> 5663
<TOTAL-ASSETS> 7082
<CURRENT-LIABILITIES> 1411
<BONDS> 7000
<COMMON> 40
7500
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7082
<SALES> 1112
<TOTAL-REVENUES> 1112
<CGS> 721
<TOTAL-COSTS> 721
<OTHER-EXPENSES> 1185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164
<INCOME-PRETAX> (776)
<INCOME-TAX> (258)
<INCOME-CONTINUING> (518)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (684)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
