<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997 Commission File Number 0-27642
TRANSDERM LABORATORIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3518345
(State of Incorporation) (I.R.S. Employer Identification No.)
1212 Avenue of the Americas, 24th Floor, New York, NY 10036
(Address of principal executive offices)
Registrant's Telephone Number: 212-398-0700
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and has been subject to such filing requirements for the past 90 days.
As of October 31, 1997, 40,000,000 shares of Common Stock, $.001 Par Value,
were outstanding.
Page 1<PAGE>
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TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED BALANCE SHEETS (Unaudited) Item 1
(In thousands) Page 2
September 30, December 31,
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 15 $ 21
Accounts receivable 789 1,232
Inventories (Note 3) 622 780
Deferred income taxes-current 38 99
Other current assets 0 3
Total Current Assets 1,464 2,135
PROPERTY, PLANT & EQUIPMENT
Land and building 2,854 2,854
Other property, plant & equipment 7,899 7,887
Total Property, Plant & Equipment 10,753 10,741
Less accumulated depreciation & amortization 5,961 5,527
Net Property, Plant & Equipment 4,792 5,214
NON-CURRENT ASSETS
Deferred income taxes 0 907
Payable to Health-Chem as net operating loss
and tax credit carryforwards are used 0 <393>
Other non-current assets 1 0
Total Non-Current Assets 1 514
TOTAL ASSETS $ 6,257 $ 7,863
LIABILITIES AND STOCKHOLDERS' EQUITY <DEFICIENCY>
CURRENT LIABILITIES
Accounts payable $ 472 $ 913
Accrued expenses and other current liabilities 304 362
Current portion of redeemable preferred stock 1,000 1,000
Preferred dividends payable 297 166
Income taxes payable 0 3
Total Current Liabilities 2,073 2,444
LONG-TERM LIABILITIES
Subordinated promissory note 7,000 7,000
Long-term payable <receivable> - Health-Chem 2,451 <427>
Other long-term debt 25 0
Deferred income taxes 80 480
REDEEMABLE PREFERRED STOCK 7,500 8,500
STOCKHOLDERS' EQUITY <DEFICIENCY>
Common stock 40 40
Retained deficit <12,912> <10,174>
Total Stockholders' Equity <Deficiency> <12,872> <10,134>
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
<DEFICIENCY> $ 6,257 $ 7,863
<FN>
See Notes to Consolidated Financial Statements.
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</TABLE>
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TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except share data) Page 3
For the Nine Months
Ended September 30,
<S> 1997 1996
REVENUE: <C> <C>
Net sales $ 3,537 $10,022
Cost of goods sold 2,028 4,198
Gross profit 1,509 5,824
OPERATING EXPENSES:
Selling, general and administrative expense 1,202 1,696
Legal expense 166 1,514
Research and development expense 1,753 1,667
Net interest expense 561 330
Total operating expenses 3,682 5,207
<LOSS> INCOME FROM OPERATIONS <2,173> 617
Other income, net 71 42
<LOSS> INCOME FROM OPERATIONS BEFORE TAXES <2,102> 659
Income tax provision (Note 2) 172 201
NET <LOSS> INCOME <2,274> 458
PREFERRED DIVIDENDS 464 507
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $<2,738> $ <49>
Earnings per Common Share (primary & fully diluted)
(Note 4):
NET LOSS PER COMMON SHARE $ <0.07> $ 0.00
Average number of common shares outstanding
(primary and fully diluted) (Note 4) 40,000,000 40,000,000
<FN>
See Notes to Consolidated Financial Statements.
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</TABLE>
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TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Item 1
(In thousands, except share data) Page 4
For the Three Months
Ended September 30,
<S> 1997 1996
REVENUE: <C> <C>
Net sales $ 983 $ 2,990
Cost of goods sold 515 1,325
Gross profit 468 1,665
OPERATING EXPENSES:
Selling, general and administrative expense 486 554
Legal expense 52 753
Research and development expense 757 523
Net interest expense 202 69
Total operating expenses 1,497 1,899
LOSS FROM OPERATIONS <1,029> <234>
Other expense 24 0
LOSS FROM OPERATIONS BEFORE TAXES <1,053> <234>
Income tax benefit 3 105
NET LOSS <1,050> <129>
PREFERRED DIVIDENDS 149 166
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $<1,199> $ <295>
Earnings per Common Share (primary & fully diluted)
(Note 4):
NET LOSS PER COMMON SHARE $ <0.03> $ <0.01>
Average number of common shares outstanding
(primary and fully diluted) (Note 4) 40,000,000 40,000,000
<FN>
See Notes to Consolidated Financial Statements.
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</TABLE>
<TABLE>
TRANSDERM LABORATORIES CORPORATION Part I
CONSOLIDATED CASH FLOW STATEMENTS (Unaudited) Item 1
(In thousands) Page 5
For the Nine Months
Ended September 30,
<S> 1997 1996
Cash was <Used for> Provided by: <C> <C>
OPERATIONS:
Net <loss> income $<2,274> $ 458
Adjustments to reconcile net <loss> income to
net cash <used for> provided by operations:
Depreciation and amortization 454 511
Deferred income taxes 175 162
Loss on disposal of property, plant and
equipment, net 10 0
Changes in:
Accounts receivable 443 <517>
Inventories 158 <190>
Other current assets 3 <24>
Other non-current assets <1> 1
Accounts payable <441> 1,007
Accrued expenses and other current
liabilities <71> <356>
Income taxes payable <3> <75>
Net cash <used for> provided by operations <1,547> 977
INVESTING:
Additions to property, plant and equipment <118> <310>
Disposal of property, plant and equipment 121 0
Net cash provided by <used for> investing 3 <310>
FINANCING:
Borrowings from affiliates, net 2,878 773
Other long-term debt payments <7> <200>
Redemption of preferred stock <1,000> <500>
Preferred dividends paid <333> <740>
Net cash provided by <used for> financing 1,538 <667>
Net <Decrease> Increase in Cash <6> 0
Cash at beginning of period 21 8
Cash at end of period $ 15 $ 8
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 723 $ 482
Income taxes 1 114
Supplemental Schedule of Noncash Investing and
Financing:
Acquisition of fixed assets through capital
lease obligations $ 45 $ 0
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
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TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 6
1. Basis of Presentation and Nature of Operations
The consolidated financial statements include the accounts of Transderm
Laboratories Corporation and its subsidiary, Hercon Laboratories
Corporation ("Hercon"). Transderm Laboratories Corporation and Hercon
Laboratories Corporation are sometimes hereinafter referred to
collectively as the "Company". The Company is an indirect 90% owned
subsidiary of Health-Chem Corporation ("Health-Chem").
The Consolidated Balance Sheet as of September 30, 1997, the
Consolidated Statements of Operations and the Consolidated Cash Flow
Statements for the interim periods ended September 30, 1997 and 1996
have been prepared by the Company, without audit. In the opinion of the
Company, all necessary adjustments, consisting of normal recurring
items, have been made to present fairly the financial position, results
of operations and cash flows at September 30, 1997 and for all periods
presented. Certain amounts included in the consolidated financial
statements relating to prior periods have been reclassified to conform
to the current presentation.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's December 31, 1996 Annual Report on Form 10-K. The results of
operations for the periods ended September 30, 1997 and 1996 are not
necessarily indicative of the operating results for the full years.
2. Taxes on Income (In thousands) For the Nine Months
Ended September 30,
1997 1996
Taxes on income include
provision <benefit> for:
Federal income taxes $ 160 $ 212
State and local income taxes 12 <11>
Total $ 172 $ 201
Taxes on income are comprised of:
Current $ <3> $ 39
Deferred 175 162
Total $ 172 $ 201
A reconciliation of taxes on income to the federal statutory rate
is as follows:
For the Nine Months
Ended September 30,
1997 1996
Tax <benefit> provision at statutory rate $ <715> $ 225
Increase <decrease> resulting from:
State and local taxes, net of federal
tax benefit 13 1
Provision for <reversal of> valuation
allowance 874 <25>
Tax provision $ 172 $ 201
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 7
At September 30, 1997, the Company recorded an $874,000 net valuation
allowance relating to federal tax loss and tax credit carryforwards,
with such valuation allowance directly increasing the income tax
provision. This net valuation allowance consists of a $1,267,000
decrease in tax loss and tax credit carryforwards, partially offset by
a $393,000 decrease in a payable to Health-Chem, which is only payable
as certain net operating loss and tax credit carryforwards are used.
Management determined the valuation allowance was necessary as a result
of delays in the anticipated approvals from the United States Food and
Drug Administration ("FDA") for the sale of the Company's new
transdermal nitroglycerin patches, with such delays contributing to the
operating losses of the Company.
3. Inventories (In thousands)
September 30, 1997 December 31, 1996
Raw materials $ 407 $ 659
Finished goods and work in process 215 121
Total inventories $ 622 $ 780
4. Earnings Per Share
Primary and fully diluted earnings per share are computed based upon the
weighted average number of common shares outstanding after adjustment
for any dilutive effect of the Company's stock options.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
(SFAS 128). SFAS 128 establishes standards for computing and presenting
earnings per share and applies to entities with publicly-held common
stock or potential common stock. SFAS 128 simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15,
"Earnings Per Share," by replacing the presentation of primary earnings
per share with a presentation of basic earnings per share. It also
requires dual presentation of basic and diluted earnings per share on
the face of the income statement for all entities with complex capital
structures.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Earlier application
is not permitted; however, restatement of all prior-period earnings per
share data is required upon adoption. The impact of adopting SFAS 128
on the Company's earnings per share data is not expected to be
significant.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Item 1
(Unaudited) Page 8
5. Litigation
In August 1995, Key Pharmaceuticals, Inc. a subsidiary of Schering-
Plough Corporation ("Key") commenced an action against Hercon in the
United States District Court for the District of Delaware ("Delaware
District Court") alleging that Hercon's submission to the FDA of three
Abbreviated New Drug Applications ("ANDAs") relating to some of Hercon's
transdermal nitroglycerin products, for which the Company is seeking FDA
approval, constituted infringement of Key's patent for its Nitro-Dur(R)
products. Key sought certain injunctive relief, monetary damages if
commercial manufacture, use or sale occurs, and a judgment that the
effective date for FDA approval of the above-referenced ANDAs be no
earlier than February 16, 2010, the expiration date of Key's patent.
Hercon denied the material allegations of the complaint, asserting,
among other things, that the Key patent is invalid and unenforceable and
that Hercon had not infringed and did not infringe any claim of the
patent. Hercon counterclaimed against Key for declaratory judgment of
patent noninfringement, invalidity and unenforceability. A two-week,
non-jury trial was completed on October 10, 1996. On September 30,
1997, the Delaware District Court ruled in favor of Key: (a) on its
infringement claim; and (b) on Hercon's claim that Key's patent is
invalid and unenforceable. On October 29, 1997, Hercon filed an appeal
against the Delaware District Court's judgment with the United States
District Court for the Federal Circuit in Washington, DC. Management
believes that Hercon has strong grounds for appeal.
<PAGE>
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 9
Results of Operations
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
remarks regarding important factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. The following discussion
includes certain forward-looking statements. Such forward-looking statements
are subject to a number of factors, including material risks and
uncertainties, including those referred to herein and in the Company's Reports
on Form 10-K and Form 10-Q, which could cause actual results to differ
materially from the forward-looking statements.
Net sales decreased $6,485,000 for the nine months ended September 30, 1997 as
compared to the same period in 1996. The decrease in net sales consists of a
$6,550,000 decrease in volume, partially offset by $65,000 in higher selling
prices. The net sales decrease is due primarily to the absence of sales to a
former domestic distributor who had accounted for approximately 46% of the
Company's sales for the nine months ended September 30, 1996. The most recent
sales to this distributor were during the fourth quarter of 1996. In August
1996, this former distributor obtained approval from the FDA for the
manufacture and sale of its own nitroglycerin patches and now competes with
the Company's nitroglycerin patches. Sales to both of the Company's current
domestic distributors of nitroglycerin patches also decreased during the nine
months ended September 30, 1997 as compared to the same period in 1996.
During the first half of 1997, in anticipation of increased market pressures
and delays in approvals from the FDA for the sale of new nitroglycerin
patches, Hercon undertook an organizational restructuring which is expected to
reduce annual payroll-related expenses by approximately $1,100,000. While the
Company hopes to receive approvals for its new nitroglycerin patches in 1998,
no assurances can be made that any new nitroglycerin patches will be approved
by the FDA. Moreover, the Company's ability to exploit its new nitroglycerin
products may be limited in the absence of a favorable resolution to its
litigation with Key (See Note 5 above and discussion below).
Net sales decreased $2,007,000 for the quarter ended September 30, 1997 as
compared to the same period in 1996. The fluctuation in sales is attributable
to the factors noted above -- lower volume ($1,986,000) and lower selling
prices ($21,000).
Gross profit decreased $4,315,000, or 74%, for the nine months ended September
30, 1997 as compared to the same period in 1996. Gross profit as a percentage
of net sales decreased from 58% for 1996 to 43% 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. Plant overhead decreased $552,000, including a
$391,000 decrease for payroll-related expenses, for the nine months ended
September 30, 1997 as compared to the same period in 1996 reflecting, in part,
the organizational restructuring.
Gross profit decreased $1,197,000, or 72%, for the quarter ended September 30,
1997 as compared to the same period in 1996. Gross profit as a percentage of
net sales decreased from 56% for 1996 to 48% for 1997. Plant overhead
decreased $311,000, including a $196,000 decrease for payroll-related
expenses, for the quarter ended September 30, 1997 as compared to the same
period in 1996. These decreases in gross profit and plant overhead are
attributable to the factors noted above.
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
Selling, general and administrative expenses, excluding legal expenses,
decreased $494,000 for the nine months ended September 30, 1997 as compared to
the same period in 1996. This decrease is due primarily to a lower allocation
of expenses from affiliates of $473,000 and from lower payroll-related costs.
Pursuant to a Corporate Services Agreement between the Company and Health-
Chem, selling, general and administrative expenses incurred by Health-Chem
which cannot be directly attributed to a specific subsidiary are allocated to
the Company based upon its net sales as a percentage of Health-Chem's
consolidated net sales. The Company's allocation of Health-Chem's total
expenses for the nine months ended September 30, 1997 was lower than the
comparable period in 1996 due to Health-Chem's total expenses being lower and
the Company's share of these expenses dropping from 26% in 1996 to 12% in
1997. For the quarter ended September 30, 1997, selling, general and
administrative expenses, excluding legal expenses, decreased $68,000 due
primarily to the reasons described above.
Legal expenses for the nine months and quarter ended September 30, 1997
decreased $1,348,000 and $701,000, respectively, as compared to the same
periods in 1996. The decreased legal expenses are due primarily to reduced
activity associated with the defense of the action brought by Key against
Hercon Laboratories, for which a two-week trial was completed in October 1996
(See Note 5 above).
Research and development expenses for the nine months and quarter ended
September 30, 1997 increased $86,000 and $234,000, respectively, as compared
to the same periods in 1996. Payroll-related expenses decreased $261,000 and
$205,000, respectively, reflecting the organizational restructuring changes.
However, these decreases were more than offset by higher outside testing
expenses of $429,000 and $518,000, respectively. The Company expects total
research and development expenses related to pharmaceutical products in 1997
to be lower than 1996 levels.
Net interest expense for the nine months and quarter ended September 30, 1997
increased $231,000 and $133,000, respectively, as compared to the same periods
in 1996. These increases are due primarily to higher average outstanding
balances on borrowings from affiliates.
Other income, net increased $29,000 for the nine months ended September 30,
1997 as compared to the same period in 1996. The increase is due primarily to
nonrecurring proceeds of $75,000 received in the second quarter of 1997
related to a distribution agreement and from $14,000 of first quarter 1997
nonrecurring proceeds related to an insurance recovery, partially offset by a
loss of $24,000 on the disposal of equipment in the third quarter of 1997 and
by $42,000 of second quarter 1996 development work income. Other expense
increased $24,000 for the quarter ended September 30, 1997 as compared to the
same period in 1996. This increase is due to the disposal of equipment
described above.
Income from operations before taxes decreased $2,761,000 and $819,000 for the
nine months and quarter ended September 30, 1997, respectively, as compared to
the same periods in 1996 due primarily to the factors discussed above. The
Company reported a $172,000 tax provision on a $2,102,000 loss from operations
for the nine months ended September 30, 1997 as compared to a $201,000 tax
provision on income from operations of $659,000 for the same period in 1996.
Income tax provision or benefit varies with the amount and nature of the
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
components of income or loss from operations before income taxes. At
September 30, 1997, the Company recorded a $874,000 net valuation allowance
relating to federal tax loss and tax credit carryforwards, with such valuation
allowance directly increasing the income tax provision. This net valuation
allowance consists of a $1,267,000 decrease in tax loss and tax credit
carryforwards, partially offset by a $393,000 decrease in a payable to Health-
Chem which is only payable as certain net operating loss and tax credit
carryforwards are used (See Note 2).
Preferred dividends of $464,000 and $149,000 for the nine months and quarter
ended September 30, 1997, respectively, reflect dividends associated with the
Company's Redeemable Preferred Stock, $10.00 par value. On March 31, 1997,
the Company, as required, redeemed 100,000 shares of the then-outstanding
950,000 shares of its redeemable preferred stock. Annual dividend payments
required are $.70 per share.
The results of operations for the periods ended September 30, 1997 and 1996
are not necessarily indicative of the operating results for the full years.
Liquidity and Capital Resources
The following measures of liquidity are drawn from the Company's consolidated
financial statements:
September 30, December 31,
1997 1996
Working capital (current assets less
current liabilities, in thousands) $ <609> $ <309>
Current ratio (current assets/current
liabilities) 0.7 0.9
Quick ratio (cash and receivables/
current liabilities) 0.4 0.5
Working capital decreased $300,000 from December 31, 1996 to September 30,
1997 due to a $671,000 decrease in current assets, partially offset by a
$371,000 decrease in current liabilities. Cash, accounts receivable,
inventory, deferred taxes and other current assets decreased $6,000, $443,000,
$158,000, $61,000 and $3,000, respectively. The decrease in accounts
receivable resulted from a decrease in sales in the third quarter of 1997 as
compared to the fourth quarter of 1996. The decrease in inventory reflects
reduced domestic distributor sales and the timing of raw material purchases.
The decrease in current liabilities is due to decreases in accounts payable,
accrued expenses and income taxes payable of $441,000, $58,000 and $3,000,
respectively, partially offset by an increase in dividends payable of
$131,000.
Cash used for operations for the nine months ended September 30, 1997 was
$1,547,000.
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.
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
Capital expenditures in 1997 for property, plant and equipment are projected
to be approximately $250,000. These capital expenditures will primarily
consist of equipment needed to assemble and package the Company's second
generation nitroglycerin products.
At December 31, 1996, Health-Chem and its affiliates, including the Company,
were borrowers under the terms of a $6,000,000 line of credit with The First
National Bank of Maryland. At December 31, 1996, Pacific Combining
Corporation ("Pacific"), a subsidiary of Health-Chem, was a borrower under the
terms of a $1,750,000 term loan with The First National Bank of Maryland.
Borrowings under the line of credit and term loan were collateralized by a
pledge of substantially all of the assets of Health-Chem, Pacific, the
Company, and Health-Chem's other operating subsidiaries with the exception of
real estate. In January 1997, Health-Chem, Pacific, the Company and Health-
Chem's other operating subsidiaries replaced both the $6,000,000 line of
credit and $1,750,000 term loan from The First National Bank of Maryland with
senior secured financing of up to $15,000,000 from IBJ Schroder Bank & Trust
Company ("IBJ Schroder"). The new credit facility is comprised of up to
$7,000,000 in term loans and up to $8,000,000 in revolving credit. The line
of credit's borrowing base is limited to the sum of 85% of eligible accounts
receivable and 50% of eligible inventory on a consolidated Health-Chem basis.
Advances on the term loan are limited to $4,000,000 until such time as the Key
Pharmaceuticals, Inc. litigation is resolved in such a way as to be immaterial
on the future operations of Health-Chem. Borrowings under the facility are
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.
As of September 30, 1997, Health-Chem and its affiliates were in compliance
with the covenants, except for the net worth, current ratio, fixed charge
coverage and minimum level of earnings before taxes, depreciation and
amortization covenants. IBJ Schroder has granted the Company a waiver for
these covenants. The Company is currently in negotiations with IBJ Schroder
to amend the facility and anticipates a successful completion of these
negotiations prior to the end of December 1997.
The Company is required to make semi-annual interest payments each March and
September on its $7,000,000, 9% Subordinated Promissory Note, with the
principal amount of $7,000,000 payable on March 31, 1999. The Company made
the required 1997 semi-annual interest payments in March and September.
The Company is required to make semi-annual preferred dividend payments out of
funds legally available therefor each March and September at the annual rate
of $.70 per share on the then-outstanding shares of its redeemable preferred
stock, $10.00 par value. In March 1997, the Company, as required, made the
semi-annual dividend payment and redeemed, for $1,000,000, 100,000 shares.
Additional required redemption payments are $1,000,000 annually in 1998
through 2004 and $1,500,000 in 2005. Legally available funds were not
available to make the September 1997 preferred dividend payment. In the event
dividends payable on the preferred stock shall be in default in an amount
equal to two full semi-annual dividend payments, Herculite Products, Inc., a
wholly-owned subsidiary of Health-Chem and the holder of all of the
outstanding shares of the preferred stock, shall be entitled to elect the
smallest number of Directors necessary to constitute a majority of the
Company's Board of Directors until such time as the default is cured.
<PAGE>
TRANSDERM LABORATORIES CORPORATION Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF Item 2
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
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 $348,000 and $821,000 for the
nine months ended September 30, 1997 and 1996, respectively. The Agreement
has an initial term expiring on December 31, 1997 and will automatically renew
for successive one-year terms. The Company will be required to provide 30
days' notice prior to cancellation of the Agreement.
Pursuant to a tax sharing agreement between the Company and Health-Chem, the
Company is required to pay Health-Chem as the Company uses its net operating
loss and tax credit carryforwards to offset future taxable income. At
September 30, 1997, the maximum amount of such payments which may be made in
the future was $393,000.
The semi-annual interest payment on the subordinated promissory note is
$315,000 and the semi-annual dividend on the preferred stock currently
outstanding is $297,500. In addition to the cumulative dividends and interest
payments, the Company is obligated to redeem the preferred stock and repay the
promissory note as described above. The Company anticipates that internally
generated funds may not be sufficient to provide the Company with cash to meet
all of these retirement and redemption obligations and thus the Company may
need to raise additional capital from third parties.
<PAGE>
<PAGE>
Part II
Item 1
Page 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 5 of the Notes to Consolidated Financial Statements
for an update on the litigation between Key Pharmaceuticals, Inc. and Hercon
Laboratories Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) During the quarter ended September 30, 1997, the Company did not file
any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSDERM LABORATORIES CORPORATION
November 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> 9-MOS
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