Item
8.01 Other Events.
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a.
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Extension
of Limited License to Manufacture and Sell through March 24,
2008.
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By
letter
agreement dated February 12, 2008, Hercon Laboratories Corporation (“Hercon”)
and Key Pharmaceuticals, Inc. (“Key”) entered into a letter agreement whereby
Key agreed to extend the company’s right to manufacture and sell transdermal
nitroglycerin patches utilizing Key’s technology through March 10, 2008, which
limited license was further extended to March 24, 2008 to permit Key and Hercon
to continue to negotiate a resolution to Key’s claims. Hercon is a 98.5%
subsidiary of Transderm Laboratories Corporation (“Transderm”), 90% of the stock
of which is owned by Health-Chem Corporation (“Health-Chem,” which together with
its direct and indirect subsidiaries may be referred to collectively as “we”,
“us”, the “Company”).
Until
April 25, 2007, the Company had manufactured and sold drug-in-adhesive
transdermal nitroglycerin patch products (the “Hercon Products”) under the terms
of a license agreement between Key and Hercon dated March 13, 2000 (the “License
Agreement”). By letter dated April 26, 2007, Key notified Hercon that it was
terminating the License Agreement based on Hercon’s failure to pay royalties on
sales of the Hercon Products. On May 23, 2007, Key, on the one hand, and Hercon
and McTevia & Associates, LLC, as the purported trustee of the Company’s
assets pursuant to a so-called trust mortgage
under
which the Company purportedly granted to McTevia & Associates a security
interest in all of its real and personal property,
on the
other hand, executed a Final Judgment On Consent which, among other things,
granted the Company a limited right under the License Agreement to manufacture
and sell the Hercon Products through August 16, 2007 and outlined a financial
settlement between Key and Hercon as to royalties owed under the License
Agreement, as more fully described in Health-Chem’s quarterly report on Form
10-QSB for the period ended March 31, 2007 (the “Consent Judgment”). In July
2007, in consideration of the payment by Hercon of $150,000, Key agreed
to
forbear from enforcing its rights under the Consent Judgment and extended the
Company’s limited right to operate under the Consent Judgment through November
16, 2007
.
As
previously reported, on November 12, 2007, the Company terminated McTevia &
Associates and Mr. McTevia and the representatives appointed by it and him.
Mr.
McTevia acknowledged such termination and relinquished control to the Company
of
certain of its assets held by McTevia & Associates in early December 2007.
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, as described in the
foregoing paragraph. 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. 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 extended Hercon’s right to operate
under the License Agreement through March 24, 2008 to permit the parties to
continue negotiating a resolution to Key’s claims. The Company cannot provide
any assurances that such an acquisition can be negotiated on terms mutually
acceptable to the Company and Key. If the Company is unsuccessful in its efforts
to acquire the Consent Judgment or otherwise acquire a new license from Key,
it
may have to discontinue operations under the License Agreement, including
manufacturing and selling transdermal nitroglycerin patch products, and will
have no other source of revenue.
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b.
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York
Realty LLC Litigation.
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On
January 4, 2008, Transderm Laboratories Corporation, the Company’s 90% owned
subsidiary, 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.
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c.
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Aronowitz
Litigation
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In
June
2004, Plaintiffs Jack Aronowitz (“Aronowitz”) and his companies, Health-Chem
Diagnostics, LLC (“Diagnostics”) and Leon Services, LLC (“Leon,” which together
with Aronowitz and Diagnostics are herein referred to as the “Plaintiffs”),
filed a Complaint and subsequently, an Amended Complaint 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. 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 in favor of Plaintiffs,
including $2.6 million for lost royalties and profits as a result of a breach
of
an
agreement between the Plaintiffs and the Company executed in 2003
.
The
Court also entered judgment for the Company in the amount of $25,000 for
trademark infringement. The Company filed a Motion for Judgment As A Matter
Of
Law, and alternatively, Motion for New Trial to overturn the jury verdict. On
February 14, 2006, the Appellate Court for the Eleventh Circuit 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 and against the Company to the amount of $1.00
because
the Plaintiffs did not present evidence sufficient to provide a reasonable
certainty by which to calculate damages due to lost royalties and
profits.
On
February 27, 2006, the Plaintiffs filed an appeal from the Appellate Court’s
February 14, 2006 Amended Final Judgment seeking to overturn the Appellate
Court’s decision to, among other things, reduce the jury verdict from $2.6
million to $1.
On
January 15, 2008, 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.
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d.
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Termination
of Andy Yurowitz as President and Chief Executive
Officer.
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On
May
14, 2007, James McTevia, in his capacity as Chief Restructuring Officer of
the
Company, terminated Andy Yurowitz as a paid employee of Health-Chem and each
of
its subsidiaries. Mr. Yurowitz’s status as an officer of Health-Chem and its
subsidiaries was not affected by such termination. On November
22,
2007,
the Board ratified the prior termination of Andy Yurowitz as a paid employee
and
terminated him as the Company’s Chief Executive Officer and President, for
cause. Mr. Yurowitz continues to serve as a member of the board of Health-Chem
and its subsidiaries.
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.
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f.
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Appointment
of Acting Chief Executive Officer.
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On
November 22, 2007, the board of directors appointed Ron Burghauser, the chief
financial officer of the Company and each of its subsidiaries, as the acting
chief executive officer of the Company and each of its
subsidiaries.
Exhibits
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99.1
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Letter
Agreement dated February 12, 2008 between the Company and Key
Pharmaceuticals,
Inc.
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