NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
Basis
of Presentation
Health-Chem
Corporation (“Health-Chem”) and its direct and indirect subsidiaries
(collectively the “Company”) are engaged in the development, manufacture and
marketing of transdermal drug delivery systems.
Health-Chem
conducts a majority of its business through its 90%-owned subsidiary, Transderm
Laboratories Corporation (“Transderm”), which conducts its business primarily
through Hercon Laboratories Corporation (“Hercon”), Transderm’s 98.5% owned
subsidiary.
As
of
June 30, 2007, the Company’s sole product and continuing source of revenues was
a transdermal nitroglycerin patch used for transdermal relief of the vascular
and cardiovascular symptoms related to angina pectoris which it has manufactured
and sold pursuant to the terms of a license agreement between Key
Pharmaceuticals, Inc. (“Key”) and Hercon entered into in March 2000 (the “Key
License”). Subsequent to the close of the period covered by this report, the Key
License will expire on March 24, 2008, as more fully described in Notes 4
and 10
- Going Concern and Subsequent Events, respectively.
Since
1986, the Company has manufactured a transdermal nitroglycerin patch which
was
the
first
such product introduced for the generic market in the United States. This
product is used for transdermal relief of vascular and cardiovascular symptoms
related to angina pectoris. The Company sells the transdermal nitroglycerin
patch to distributors and wholesalers who distribute it in the United States.
In
addition to its transdermal nitroglycerin products, the Company is developing
other transdermal products for client companies and will be the contract
manufacturer of these products if United States Food and Drug Administration
(“FDA”) approval is obtained. The Company is also conducting a number of
feasibility studies on drugs to be developed independently or for client
companies and pursuing additional contract manufacturing opportunities. There
can be no assurance that FDA filings for additional products will be submitted
or that FDA approval for any additional products will be obtained.
The
accompanying unaudited consolidated financial statements include the accounts
of
Health-Chem Corporation and those of its wholly-owned and majority-owned
subsidiaries. As of December 31, 2004, the consolidated financial statements
also include a Variable Interest Entity (“VIE”), York Realty Leasing LLC, of
which Health-Chem Corporation is the primary beneficiary as further described
in
Note 5. All significant intercompany accounts and transactions, including
those
involving the VIE, have been eliminated in consolidation.
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with generally accepted accounting principles in the United States
of
America for interim financial information. Accordingly, they do not include
all
of the information and footnotes required by generally accepted accounting
principles in the United States for full year financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included and are of a normal, recurring nature. Operating
results for the six month period ended June 30, 2007 are not necessarily
indicative of the results that may be expected for the year ended December
31,
2007. These consolidated financial statements should be read in conjunction
with
the consolidated financial statements and notes thereto that are included
in the
Company’s Annual Report on Form 10-KSB for the fiscal period ended December 31,
2006.
2.
Per
Share Information
Basic
and
diluted earnings per share are computed based upon the weighted average number
of common shares outstanding during each period after adjustment for any
dilutive effect of the Company's stock options.
3.
Stock
Options
In
accordance with SFAS No. 123,
Accounting
for Stock-Based Compensation
and SFAS
No. 148,
Accounting
for Stock-Based Compensation-Transition and Disclosure
,
the
Company accounts for its stock option plans under the intrinsic-value-based
method as defined in APB No. 25,
Accounting
for Stock Issued to Employees
.
The
following table illustrates the effect on net earnings and earnings per share
if
the Company had applied the fair value recognition provisions of SFAS No.
123 to
stock-based employee compensation (in thousands, except per share
amounts):
|
|
|
Six
Months Ended
|
|
Three
Months Ended
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income <loss>, as reported:
|
|
$
|
65
|
|
$
|
<754>
|
|
$
|
587
|
|
$
|
<409>
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Stock-based compensation expense recognized under the intrinsic
value
method
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Stock-based compensation expense determined under fair value based
method
|
|
|
<1
|
>
|
|
<1
|
>
|
|
<1
|
>
|
|
<1
|
>
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income <loss>
|
|
$
|
64
|
|
$
|
<755
|
>
|
$
|
586
|
|
$
|
<410
|
>
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income <loss> per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
.01
|
|
$
|
<.07
|
>
|
$
|
.05
|
|
$
|
<.04
|
>
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- pro forma
|
|
$
|
.01
|
|
$
|
<.07
|
>
|
$
|
.05
|
|
$
|
<.04
|
>
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
.01
|
|
$
|
<.07
|
>
|
$
|
.05
|
|
$
|
<.04
|
>
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- pro forma
|
|
$
|
.01
|
|
$
|
<.07
|
>
|
$
|
.05
|
|
$
|
<.04
|
>
|
4.
Going
Concern
As
of
June 30, 2007, the Company’s financial and operating condition raised
significant doubt about its ability to continue as a going concern. At said
date, the Company
had
aggregate debts and liabilities of $21,968,000 and had a working capital
deficiency of $15,777,000. These debts and liabilities include $11,779,000
due
under outstanding debentures which became due in 1999 and under which the
Company is currently in default and $7,072,000 of royalties due under the
Key
License which allows the Company to utilize certain technology incorporated
into
our current transdermal patch. The Company has been able to continue to operate
over the last several years because it has not made any payments under the
debentures since 1999 and because it did not make any royalties under the
Key
License since its inception in March 2000 until May 2007. Apart from these
obligations, the Company has been paying its other current debts and liabilities
as they become due from cash flow generated from operations. The Company
does
not have cash on hand to pay the entire amount of the royalties due under
the
Key License or to repay the amount due under the debentures.
In
April
2007, Key terminated the License Agreement for, among other things, Hercon’s
failure to pay accrued royalties and thereafter filed a complaint against
Hercon
demanding payment of all amounts due under the License Agreement. The Company
could not make such payment and on May 23, 2007, Key and Hercon entered into
a
Final Judgment on Consent under which Hercon paid Key the sum of $500,000
and
which granted a judgment to Key in the amount of $8 million and provided,
among
other things, that Hercon could continue to operate under the Key License
until
August 16, 2007 for the purpose of maximizing that company’s assets and
inventory for the benefit of its creditors and
wind
down
and cease business operations by August 16, 2007. On several
occasions
subsequent to the close of the period covered by this report, Key agreed
to
extend Hercon’s right to operate under the Key License, with the most recent
extension extending this right to operate under the Key License through March
24, 2008. These extensions
are more
fully described in Note 10 - Subsequent Events.
In
late
May 2007, Health-Chem received approximately $1,859,000 from the State of
Pennsylvania representing amounts held by such agency on Health-Chem’s behalf.
Health-Chem is using the funds to pay its immediate expenses but the board
of
directors has not yet determined how to apply this cash.
The
Company does not have cash on hand to repay the entire amount due under either
of the debentures or the Key License. The Company’s financial condition has
prevented it from securing financing or obtaining loans from which it could
repay all or a portion of the amounts due.
If
the
holders of the debentures were to take legal action against the Company for
payment of the amount due thereunder, it would not be able to continue as
a
going concern unless there was an increase in profitability and/or an infusion
of additional funds in order to meet these obligations for both the past
amounts
due and ongoing amounts as they become due. Even assuming the Company is
successful in its efforts to raise the cash required to pay the amount due
under
the debentures, the impending termination of the Key License on March 24,
2008
would leave the Company without any ongoing source of revenues or other
business. In light of these conditions, Health-Chem may have to seek protection
under federal bankruptcy laws in which case it would not be able to continue
as
a going concern.
Management
has not developed a firm plan for addressing the conditions that give rise
to
its ability to continue operating as a going concern, but at a minimum
will:
|
|
·
|
negotiate
with Key to obtain a new license for the technology on commercial
terms
corresponding to the market for generic transdermal
products;
|
|
|
·
|
continue
negotiating with th
e
holders of the debentures through the trustee to develop a payment
plan
which accounts for the Company’s current financial and operating
condition;
|
|
|
·
|
seek
to develop other business opportunities for the Company, in the
pharmaceutical industry or otherwise;
|
|
|
·
|
investigate
the possibility of selling Hercon Laboratories Corporation;
|
|
|
·
|
seek
to raise working capital through borrowing or through issuing equity;
and
|
|
|
·
|
evaluate
new directions for the Company.
|
Management
will continue to develop and modify its plans to adapt to business and financial
conditions as they evolve. However, management can offer no assurance that
it
will be successful in developing a plan which permits the Company to continue
as
a going concern. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
5.
Property,
Plant and Equipment
In
December 2004, the Company sold its real property, buildings, improvements
and
equipment located in Emigsville, Pennsylvania to York Realty Leasing LLC,
an
affiliated company, for a sale price of $1.9 million. Concurrent with the
sale,
the Company entered into a 15-year net lease with York Realty Leasing LLC
for
the property expiring in December 2019, which can be extended by the Company
for
an additional five years. The agreement provides for a Company repurchase
option
at a price of $1,995,000. The base annual lease cost during the initial 15
year
term is $212,400, and the base lease expense for the remaining term of the
lease
is as follows: 2007 - $212,400; 2008 - $212,400; 2009 - $212,400; 2010 -
$212,400; 2011 - $212,400; and 2012 and thereafter - $1,699,200. In December
2002, the Company received an appraisal for the real property, including
the
structures and appurtenances, which appraised the market value of the property
at $1,850,000. The proceeds from the sale were used to satisfy a $1.6 million
first mortgage associated with the property and to substantially pay off
a
$367,500 second mortgage, a portion of which was held by related parties.
Andy
Yurowitz, the Company’s Chairman of the Board, President, Chief Executive
Officer and a member of the Board of Directors, is a 50% owner of York Realty
Leasing LLC. As a result of Financial Interpretation 46(R), effective as
of
December 31, 2004, the Company’s consolidated balance sheet includes the assets
and liabilities of York Realty Leasing LLC. In December 2005, York Realty
Leasing LLC obtained a $1.4 million mortgage on this property with a financial
institution.
I
n
September 2007, subsequent to the close of the period covered by this report,
Andy Yurowitz sold his 50% interest in York Realty Leasing LLC,
as
more
fully described in Note 10 - Subsequent Events.
6.
Settlement
Liability: Royalties
During
March 2006, the Company received notice from Key that it was in default under
the License Agreement for failing to make royalty payments due. The License
Agreement includes a provision affording Key the right to terminate the License
Agreement if a breach of the agreement was continuing for thirty days after
the
receipt from Key of notice of and a demand to cure the breach. Hercon did
not
have the financial resources to pay the accrued royalties within the prescribed
time and, on April 26, 2007, Key terminated the License and Hercon’s right to
manufacture and sell products utilizing its technology.
On
April
27, 2007, Key filed a complaint against Hercon in the United States District
Court, District of New Jersey (the “Court”) demanding, among other things, that
Hercon pay accrued royalties under the License Agreement (the
“Complaint”).
On
May
23, 2007, the Court entered a Final Judgment On Consent between Key and Hercon
(the “Consent Judgment”) which set aside the Complaint and serves as the basis
for settling the amount due by Hercon to Key under the License Agreement
and
governs the relationship between the parties thereafter. The Consent Judgment
was predicated on Hercon’s intention to wind down and cease business operations
by August 16, 2007 while remaining operational until such date in order to
maximize the value of its assets and inventory for the benefit of its creditors.
Under the Consent Judgment, the parties agreed, among other things, that
(i)
Hercon owed Key accrued royalties in the amount of $8,000,000 (the “Judgment
Amount”); (ii) Hercon would have a limited right to operate under the License
Agreement until August 16, 2007, provided that Hercon paid to Key the sum
of
$500,000 upon the execution of the Consent Judgment, which sum Hercon paid
as
ordered on May 23, 2007, which, under the Consent Order, reduced the Judgment
Amount to $7 million; and (iii) any additional payments made to Key would
reduce
the Judgment Amount by twice as much as any payment made. The $7 million
Judgment Amount is included in the June 30, 2007 royalties payable balance
of
$7,072,000. Additional royalty expense of $332,000 was recorded pursuant
to the
Consent Judgment.
On
several occasions subsequent to June 30, 2007,
Key
agreed to extend Hercon’s right to operate under the Key License, with the most
recent extension extending this right to operate under the Key License through
March 24, 2008. These extensions
are more
fully described in Note 10 - Subsequent Events.
7.
Commitments
& Contingencies
In
December 2004, the Company entered into a lease for office space in Suffern,
New
York for a one year period commencing January 1, 2005, and renewed the lease
for
additional one year periods commencing January 1, 2006 and January 1, 2007.
The
annual rental was $7,200 and $7,416, inclusive of utilities, for 2005 and
2006,
respectively, and will be $7,691 for 2007.
Approximately
forty-five percent of the Company’s employees are covered by a collective
bargaining agreement with a local unit of the Retail Wholesale and Department
Store Union, AFL-CIO (“R.W.D.S.U.”). The R.W.D.S.U. agreement is for a three
year period ending December 10, 2007. The contract is subject to annual renewal
thereafter and acknowledges that the R.W.D.S.U. is the exclusive bargaining
agent for the Company’s regular production employees, excluding all other
employees including but not limited to supervisors, foremen, clerical employees,
time-keepers, watchmen, guards, maintenance personnel and part-time
employees.
Certain
raw materials and components used in the manufacture of our products are
available from limited sources, and, in some cases, a single source. Generally,
regulatory authorities must approve raw material sources for transdermal
products. Without adequate approved supplies of raw materials or packaging
supplies, our manufacturing operations could be interrupted until another
supplier is identified, our products approved and trading terms with it
negotiated. We may not be able to identify an alternative supplier and any
supplier that we do identify may not be able to obtain the requisite regulatory
approvals in a timely manner, or at all. Furthermore, we may not be able
to
negotiate favorable terms with an alternative supplier. Any disruptions in
our
manufacturing operations from the loss of an approved supplier may cause
us to
incur increased costs and lose revenues and may have an adverse effect on
our
relationships with our partners and customers, any of which could have adverse
effects on our business and results of operations. Our business also faces
the
risk that third party suppliers may supply us with raw materials that do
not
meet required specifications, which, if undetected by us, could cause our
products to test out of specification and require us to recall the affected
product.
We
market
all of our products through a single marketing representative. If we were
to
lose the services of such marketing agent for any reason or said entity does
not
maintain a steady demand for our product, and we are unable to identify an
adequate replacement, our business, results of operations and financial
condition would be materially adversely affected.
We
rely
on insurance to protect us from many business risks, including product
liability, business interruption, property and casualty loss and employment
practices liability. The cost of insurance has risen significantly in recent
years. In response, we may increase deductibles and/or decrease certain
coverages to mitigate these costs. There can be no assurance that the insurance
that we maintain and intend to maintain will be adequate, or that the cost
of
insurance and limitations in coverage will not adversely affect our business,
financial position or results of operations. Furthermore, it is possible
that,
in some cases, coverage may not be available at any price.
During
January 2007, the Company was notified verbally by representatives of the
State
of Pennsylvania that there was approximately $300,000 due in state income
taxes
dating back as far as 1972. The Company believes it is not obligated for
such
taxes and is pursuing the settlement of such Notices.
8.
Litigation
In
June
2004, Plaintiffs Jack Aronowitz and his companies, Health-Chem Diagnostics,
LLC
(“Diagnostics”) and Leon Services, LLC (“Leon”) filed a Complaint and
subsequently, an Amended Complaint (collectively, the “Aronowitz Litigation”) in
the United States District Court Southern District of Florida (the “Court”) for
breach of contract and foreclosure of a security interest against the Company.
The contracts at issue were a Master Agreement along with an associated License
Agreement and Security Agreement, executed jointly and dated February 15,
2002
(the “2002 Agreements”), and a November 6, 2003 Outline Agreement (the “2003
Agreement”) terminating the Company’s obligations under the 2002 Agreements and
effectuating a purchase of certain assets by the Company in exchange for
monies
and a 25% equity stake in Diagnostics. The Company filed a counterclaim for
breach of the 2003 Agreement, based on Plaintiffs’ failure to render payment for
the assets which were transferred to Plaintiffs, as well as a claim for
trademark infringement. The Company also asserted a claim for a declaratory
judgment determining that the 2003 Agreement superseded the 2002 Agreements,
consistent with the conclusions in the Order. The jury rendered its verdict
on
November 21, 2005, finding in favor of Plaintiffs on the counts for breach
of
the 2002 and 2003 Agreements. The jury found that Plaintiffs were guilty
of
copyright infringement, but did not find a breach of the 2003 Agreement on
the
part of Plaintiffs. On December 2, 2005, the Court entered a Final Judgment
and
Order Closing Case, and ordered judgment on the jury verdict in the amount
of
$2,931,000.00 in favor of Plaintiffs and against the Company. The Court also
entered judgment for the Company in the amount of $25,000.00 for trademark
infringement. The Company filed a Motion for Judgment As A Matter Of Law,
and
alternatively, Motion for New Trial. On February 14, 2006 the Court issued
an
Amended Final Judgment, vacating the Court’s December 2, 2005 Final Judgment and
Order Closing Case. The February 14, 2006 judgment reduced the award to the
Plaintiffs Jack Aronowitz, Health-Chem Diagnostics, LLC and Leon Services,
LLC
and against the Company to the amount of $1.00. The February 14, 2006 judgment
also awarded $25,000.00 to the Company and against the Plaintiffs Jack
Aronowitz, Health-Chem Diagnostics, LLC and Leon Services, LLC for trademark
infringement. The February 14, 2006 judgment also included a permanent
injunction in favor of the Company and against the Plaintiffs Jack Aronowitz,
Health-Chem Diagnostics, LLC and Leon Services, LLC to cease and desist any
present or future use of the “Health-Chem” trademark or any other marks similar
to the Company’s trademark. On February 27, 2006 the Plaintiffs filed an appeal
from the Court’s February 14, 2006 Amended Final Judgment, with the appeal being
heard on April 20, 2007. O
n
January
15, 2008, subsequent to the close of the period covered by this report, the
Court rendered a decision with respect to this appeal,
as
more
fully described in Note 10 - Subsequent Events.
The
ultimate outcome of this litigation cannot be ascertained at this
time.
On
January 4, 2008,
subsequent
to the close of the period covered by this report,
Transderm
filed a Complaint for Declaratory Relief, Breach of Contract and Monetary
Damages against York Realty Leasing LLC
,
as
more
fully described in Note 10 -
Subsequent
Events.
On
January 24, 2008,
subsequent
to the close of the period covered by this report,
the
Company filed a Motion to Vacate Consent Judgment
seeking
to vacate the Consent Judgment because, among other things, the Consent Judgment
was not properly authorized or consented to by the Company. On January 25,
2008,
also
subsequent
to the close of the period covered by this report,
the
Company
filed
an
Order
to Show Cause Seeking Temporary Restraints u
nder
which it sought injunctive relief to prevent Key from enforcing the Consent
Judgment based upon the likelihood that the Company would prevail on the
Motion
to Vacate the Consent Judgment. See
Note 10
-
Subsequent
Events for a further discussion of these actions.
On
February 25, 2008,
subsequent
to the
close of the period covered by this report,
Andy
Yurowitz, a director and the former chief executive of Health-Chem and each
of
its subsidiaries, served each of Health-Chem and Hercon with a summons without
complaint which was filed in The Supreme Court of the State of New York,
Kings
County on February 7, 2008
,
as
more
fully described in Note 10 -
Subsequent
Events.
9.
Other
Income <Expense> - Net
Other
income <expense> - net for the six months ended June 30, 2007 was
$2,293,000. This amount consists of
$1,859,000
from the State of Pennsylvania representing amounts held by such agency on
Health-Chem’s behalf,
income
of $500,000 related to the execution of the Consent Judgment, as more fully
described in Note 6 - Settlement Liability: Royalties, and $26,000 of proceeds
received from a trademark infringement claim settlement, partially offset
by a
loss of $92,000 related to the write-off of certain property, plant and
equipment.
10.
Subsequent
Events
On
July
23, 2007, Key and Hercon entered into a letter agreement whereby Key granted
Hercon’s request to extend its ability to operate under the Consent Judgment.
Key has agreed to extend Hercon’s limited right to operate under the Consent
Judgment through November 16, 2007 subject to Hercon’s payment of $150,000 in
three monthly installments of $50,000 in immediately available funds to be
received by Key by August 18, 2007, September 15, 2007 and October 13, 2007,
respectively. Such payments are to be deemed additional consideration and
shall
not affect Hercon’s obligation to comply with all of its obligations under the
Consent Judgment, which remains in full force and effect. The payments required
by the letter agreement shall reduce the principle due under the Consent
Judgment by the amount of the actual payment. Additional payments against
principle made by Hercon and received by Key by November 16, 2007, excluding
the
$150,000 due under the letter agreement and any royalties that are otherwise
due
pursuant to the limited license granted under the Consent Judgment, shall
reduce
the Consent Judgment by twice the amount of such additional payment. Hercon
has
made the required August 18, 2007, September 15, 2007 and October 13, 2007
installment payments. On November 8, 2007, prior to its termination by the
Company, McTevia & Associates entered into a letter of intent with a third
party that describes a transaction in which such party would acquire the
Consent
Judgment from Key for the purposes of acquiring the assets of Hercon and
its
existing business as a going concern through a consensual foreclosure under
the
Consent Judgment (the “Letter of Intent”). The transactions contemplated by the
Letter of Intent were subject to numerous conditions, including the third
party’s ability to enter into agreements and secure the required regulatory
approvals that would allow it seamlessly to continue the operation of Hercon’s
business at its current facilities. By letter dated December 3, 2007, the
Company notified the third party that McTevia did not have the power or
authority to enter into the Letter of Intent and that such document is not
a
binding and valid agreement of the Company or of any of its constituent
corporations.
On
November 21, 2007, Key advised the Company that it would continue to forebear
from enforcing its rights under the Consent Judgment solely to permit a third
party to complete due diligence relating to the Company in connection with
such
party’s proposed purchase of the Consent Judgment from Key. By letter dated
December 28, 2007, the Company (i) requested that Key agree to forebear from
executing on the Consent Judgment retroactive from November 16, 2007 and
for an
additional 90 days to commence on the date that such extension was to have
been
granted, if at all, and (ii) advised Key that it would submit a
proposal
to satisfy the Consent Judgment in an economically feasible manner and continue
operations
.
On
December 28, 2007, representatives of the Company transmitted a proposal
to Key
to satisfy the amount due under the Consent Judgment or otherwise acquire
the
Consent Judgment, to which offer Key did not respond. By letter dated January
18, 2008, representatives of Key advised Hercon that it had rejected Hercon’s
request for an extension of the
limited
right to operate under the Consent
Judgment
and that Hercon was required to immediately cease manufacturing and selling
transdermal nitroglycerin patch products which were the subject of the License
Agreement. The Company discontinued selling the transdermal nitroglycerin
patch
products as of the close of business on January 18, 2008 and discontinued
manufacturing the transdermal nitroglycerin patch products as of the close
of
business on January 21, 2008. On January 24, 2008, the Company filed a Motion
to
Vacate Consent Judgment
seeking
to vacate the Consent Judgment because, among other things, the Consent Judgment
was not properly authorized or consented to by the Company. On January 25,
2008,
the Company filed
an
Order
to Show Cause Seeking Temporary Restraints u
nder
which it sought injunctive relief to prevent Key from enforcing the Consent
Judgment based upon the likelihood that the Company would prevail on the
Motion
to Vacate the Consent Judgment.
On
January 25, 2008, counsel for Key informally notified the Company that it
would
not seek sanctions against the Company for any resumption of operations pending
resolution of the Company’s motion for interim relief, and the Company
immediately resumed manufacturing and selling transdermal patches. On February
12, 2008, the Company and Key entered into a letter agreement whereby Key
agreed
to extend the Company’s limited right to operate under the Consent Judgment
through March 10, 2008 in exchange for the Company’s immediate withdrawal, with
prejudice, of the Motion to Vacate Consent Judgment and Order to Show Cause
Seeking Temporary Restraints and the Company’s acknowledgment that the Consent
Judgment is legally valid and binding upon the Company. The Company currently
is
manufacturing and selling transdermal nitroglycerin patches based upon the
License Agreement. In connection with the negotiation of the February 12,
2008
letter, Key agreed to consider any proposal made by the Company to acquire
the
Consent Judgment without foreclosing its option to accept a third party offer
to
purchase the Consent Judgment. Since the execution of the February 12, 2008
letter agreement, the Company has been in negotiations with Key with respect
to
the Company’s possible acquisition of the Consent Judgment. On March 11, 2008,
Key agreed to extend the Company’s limited right to operate under the Consent
Judgment through March 24, 2008 to permit the parties to continue negotiating
a
resolution to Key’s claims, including the possible acquisition of the Consent
Judgment by the Company from Key
.
The
note
payable of $167,000 at June 30, 2007 relates to the purchase of certain fixed
assets. The purchase of these fixed assets was pursuant to a development,
manufacturing and supply agreement that Hercon entered into with a client
company. Payment terms of the note are contingent upon certain performance
criteria under the agreement. One such performance criteria applicable to
the
client company may result in the note being forgiven. On August 20, 2007,
the
client company and Hercon entered into a letter amendment to the development,
manufacturing and supply agreement whereby the $167,000 note was immediately
forgiven.
On
September 25, 2007, Andy Yurowitz sold his 50% interest in York Realty Leasing
LLC at cost to William Robbins, an unrelated third party, making Mr. Robbins
the
100% owner of York Realty Leasing LLC. Prior to this sale, Mr. Robbins had
owned
the remaining 50% of York Realty Leasing LLC.
On
January 4, 2008, Transderm filed a Complaint for Declaratory Relief, Breach
of
Contract and Monetary Damages against York Realty Leasing LLC (“York”) in the
Court of Common Pleas of York County, Pennsylvania (the “Complaint”). The action
arises out of York’s various correspondences to Transderm alleging that it is in
breach of and default under the lease between the parties dated December
7, 2004
for failure to pay rent as provided in the lease. In the Complaint, the Company
is seeking, among other things, a declaratory judgment to the effect that
the
lease is in full force and effect, that the Company is not in default under
the
lease and that Transderm is owed an amount on account with York which York
has
refused to credit to Transderm. On January 23, 2008, the Company filed an
amended complaint in this matter seeking to clarify certain facts but otherwise
requesting the same relief. York did not file a timely answer to the Company’s
complaint and, upon further notice to York, the Court entered a default judgment
in favor of the Company on February 26, 2008.
On
January 15, 2008, the US Court of Appeals for the Eleventh Circuit issued
a
ruling in the Aronowitz Litigation
.
The US
Court of Appeals for the Eleventh Circuit affirmed the
Appellate
Court’s
ruling on all counts except to allow the
Appellate
Court to
reconsider the amount of damages sustained by the Plaintiffs in connection
with
the breach of the 2003 agreement. The Company believes, but cannot be certain,
that unless the Plaintiffs present evidence sufficient to provide a reasonable
certainty by which to calculate lost royalties and profits under the 2003
agreement, which it could not successfully achieve at the trial court, the
jury’s initial $2.6 million award will not be reinstated, though there remain
issues with respect to other claims for damages under the 2003 agreement
in an
amount equal to approximately $109,000. The case is set for trial commencing
April 28, 2008.
On
February 25, 2008, Andy Yurowitz, a director and the former chief executive
of
Health-Chem and each of its subsidiaries, served each of Health-Chem and
Hercon
with a summons without complaint which was filed in The Supreme Court of
the
State of New York, Kings County on February 7, 2008. The summons also indicated
that Andrew Levinson and Manfred Mayerfeld, members of the Boards of Health-Chem
and Hercon, will be named in this action. The summons requires that each
party
file a notice of appearance in the action within a specified time after being
served. The summons states that the nature of the action and the relief sought
is defendant’s breach of contract and failure to pay wages. Until the Company is
served with and reviews the complaint with counsel, it is unable to comment
upon
the allegations or any potential defenses.