-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SpC7LiCDX7I8BzTHjPtd3tscUxCtc72obLyOrzCJUkLwXZ26N2rzYLug6EeN0sL2 Oj3uRz6BBmDP+BSKhtXgGg== 0000924921-99-000013.txt : 19990517 0000924921-99-000013.hdr.sgml : 19990517 ACCESSION NUMBER: 0000924921-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECHNICAL CHEMICALS & PRODUCTS INC CENTRAL INDEX KEY: 0000924921 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 650308922 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25406 FILM NUMBER: 99622156 BUSINESS ADDRESS: STREET 1: P O BOX 8726 CITY: FT LAUDERDALE STATE: FL ZIP: 33310 BUSINESS PHONE: 9549790400 MAIL ADDRESS: STREET 1: PO BOX 8726 CITY: FT LAUDERDALE STATE: FL ZIP: 33310 10-Q 1 QUARTERLY REPORT 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 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 0-25406 TECHNICAL CHEMICALS AND PRODUCTS, INC. (Exact name of registrant as specified in its charter) Florida 65-0308922 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3341 S.W. 15th Street, Pompano Beach, Florida 33069 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (954) 979-0400 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Class Outstanding As Of May 1, 1999 ----- ----------------------------- Common Stock $ .001 par value 10,577,893 Transitional Small Business Disclosure Format (check one): YES NO x --- --- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
March 31, 1999 December 31, 1998 --------------------------------------------- ASSETS (Unaudited) *(Audited) Current assets: Cash and cash equivalents $1,702 $5,207 Investments 7,110 5,048 Accounts receivable, net 1,113 1,605 Inventory 2,399 2,550 Due from related party 836 836 Other 358 210 --------------------------------------------- Total current assets 13,518 15,456 --------------------------------------------- Property and equipment, net 2,342 2,503 Patents and trademarks, net 11,970 12,190 Goodwill, net 1,936 1,979 Deferred tax asset, net 4,140 4,140 Other assets 101 101 --------------------------------------------- Total assets $ 34,007 $36,369 ============================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 598 $ 390 Accrued expenses 248 323 --------------------------------------------- Total current liabilities 846 713 --------------------------------------------- Other liabilities 168 169 Stockholders' equity: Preferred stock, $.001 par value: Authorized shares--25,000,000; Series A 6% Convertible Preferred stock, $.001 par value: Issued and outstanding shares--13,800 and 14,700 at 3/31/99 and 12/31/98 12,595 13,131 Common stock, $.001 par value: Authorized shares--100,000,000; Issued and outstanding shares-- 10,570,893 and 10,006,316 at 3/31/99 and 12/31/98 11 10 Additional paid-in capital 41,242 40,697 Accumulated deficit (20,855) (18,351) --------------------------------------------- Total stockholders' equity 32,993 35,487 --------------------------------------------- Total liabilities and stockholders' equity $ 34,007 $36,369 =============================================
(*) The Balance Sheet at December 31, 1998 has been derived from the audited financial statements at that date. See accompanying notes to the consolidated financial statements. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except share data)
Three Months Ended March 31, ------------------------------------ 1999 1998 ------------------------------------ Net product sales $ 1,386 $ 1,631 Cost of product sales 814 764 ------------------------------------ Gross profit 572 867 R&D contract revenue 155 105 Operating expenses: Selling, general and administrative 2,328 2,048 Research and development 549 744 Depreciation and amortization 472 453 ------------------------------------ 3,349 3,245 ------------------------------------ Loss from operations (2,622) (2,273) Other income (expense): Interest income 149 113 Interest expense (3) (6) ------------------------------------ Net loss (2,476) (2,166) ------------------------------------ Accrued preferred redemption accretion and dividends 399 -- ------------------------------------ Loss attributable to common stock $ (2,875) $ (2,166) ==================================== Net loss per common share - Basic and Diluted $ (.28) $ (.22) ==================================== Weighted average number of common shares outstanding 10,399,144 10,015,036 ====================================
See accompanying notes to the consolidated financial statements. PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Three Months Ended March 31, ------------------------------------------- 1999 1998 ------------------------------------------- OPERATING ACTIVITIES Net loss $ (2,476) $ (2,166) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 472 453 Deferred income taxes -- -- Changes in operating assets and liabilities: Accounts receivable 492 131 Inventory 151 (824) Accounts payable and accrued expenses 133 90 Other current assets (157) (75) ------------------------------------------- Net cash used in operating activities (1,385) (2,391) INVESTING ACTIVITIES Purchase of property and equipment (14) (98) Investment in patents and trademarks (34) 1 Purchase of investments (2,218) (1,108) Proceeds from sale of investments 146 999 ------------------------------------------- Net cash used in investing activities (2,120) (206) ------------------------------------------- Net increase (decrease) in cash and cash equivalents (3,505) (2,597) Cash and cash equivalents at beginning of period 5,207 3,316 ------------------------------------------- Cash and cash equivalents at end of period $ 1,702 $ 719 ===========================================
See accompanying notes to the consolidated financial statements. TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements (the "Financial Statements") of Technical Chemicals and Products, Inc. and Subsidiaries (the "Company" or "TCPI") are unaudited, and in the opinion of management, include all normal and recurring adjustments which are necessary for a fair presentation. The Financial Statements should be read in conjunction with more complete disclosures contained in the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes". Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. INVENTORIES Inventories, consisting of raw materials and finished goods, are valued at the lower of cost (computed on the first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The cost of maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized and depreciated over their estimated useful lives. INTANGIBLE ASSETS Purchased patents and trademarks are amortized using the straight-line method over a composite life of 15 years based on the shorter of their legal life or estimated useful life of the individual patents and trademarks, which range from 11 to 17 years. Goodwill is amortized using the straight-line method over 15 years. The Company periodically reviews its intangible assets to assess recoverability and a charge will be recognized in the consolidated statement of operations if a permanent impairment is determined to have occurred. Recoverability of intangibles is determined based on undiscounted future operating cash flows from the related business unit or activity. The amount of impairment, if any, would be measured based on discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of intangible assets will be affected if estimated future operating cash flows are not achieved. The Company does not believe that any impairment has occurred and that no reduction of the estimated useful lives is warranted. TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. DETAILS OF BALANCE SHEET Details of selected balance sheet accounts are as follows (in thousands):
March 31, 1999 December 31, 1998 ----------------------------------------------------- Accounts receivable Accounts receivable $ 1,202 $ 1,680 Allowance for doubtful accounts (89) (75) ----------------------------------------------------- Accounts receivable, net $ 1,113 $ 1,605 ===================================================== Property and equipment Furniture, fixtures and equipment $ 3,202 $ 3,191 Real property 217 217 Leasehold improvements 910 907 ----------------------------------------------------- 4,329 4,315 Accumulated depreciation (1,987) (1,812) ----------------------------------------------------- $ 2,342 $ 2,503 ===================================================== Patents and trademarks Patents and trademarks $ 15,351 $ 15,317 Accumulated amortization (3,381) (3,127) ----------------------------------------------------- $ 11,970 $ 12,190 ===================================================== Goodwill Goodwill $ 2,494 $ 2,494 Accumulated amortization (558) (515) ----------------------------------------------------- $ 1,936 $ 1,979 =====================================================
3. STOCKHOLDERS' EQUITY In May 1998, the Company completed a private placement of 15,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") to a single institutional investor (the "Investor"). To date, the Investor has converted 1,200 shares of Preferred Stock and received 643,818 shares of the Company's common stock. See the Company's Report on Form 10-K for the year ended December 31, 1998 and the Company's Report on Form 8-K filed on May 21, 1998 for additional information related to the Preferred Stock transaction. 4. RELATED PARTY TRANSACTION During August 1998, the Company's outside directors unanimously approved the Company's guarantee for a period of up to 90 days of $750,000 of the collateral obligations of the Company's Chairman, President and Chief Executive Officer's ("Chairman") family limited partnership ("Partnership") to a brokerage house. Under the terms of the Company's agreement with the Partnership, the brokerage house called on the Company's guarantee, the Partnership then executed and delivered to the Company a promissory note personally guaranteed by Mr. Aronowitz in an amount equal to the amount of the guarantee. The note is a six month note payable on demand and bears interest at the rate of interest charged by the brokerage house (7 3/4% at March 31, 1999). In February 1999, accrued interest was paid and the note was extended an TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. RELATED PARTY TRANSACTION (Continued) additional three months. The balance of funds advanced under the note is approximately $747,000 at March 31, 1999 and is included in due from related party in the balance sheet. 5. LEGAL PROCEEDINGS The Company is subject to claims and suits arising in the ordinary course of business. Management believes, after consultation with counsel, that each of the allegations against the Company included in the lawsuits described herein is without merit and the Company is defending each of the allegations vigorously. At this time, it is not possible to estimate the ultimate loss or gain, if any, related to these lawsuits, nor if any such loss will have a material adverse effect on the Company's results of operations or financial position. In December 1998, a jury returned a verdict against TCPI, the Company's Chairman of the Board, Jack L. Aronowitz, and other unrelated corporate and individual defendants (the Lawsuit). In its verdict, the jury found that Mr. Aronowitz had misappropriated trade secrets and awarded damages of $500,000 against him, individually. Additionally, the jury found that both the Company and Mr. Aronowitz intentionally interfered with the plaintiffs' business relationships. The jury awarded approximately $328,000 in damages against the Company in connection with the second claim, but awarded no damages against Mr. Aronowitz, individually, in connection with that claim. In January 1999, a judgment against the Company and Mr. Aronowitz was entered by the trial court in accordance with the verdict. In January 1999, the Company filed a Notice of Appeal seeking to have the verdicts against both the Company and Mr. Aronowitz set aside. In the event that Mr. Aronowitz is ultimately required to pay the damages to the plaintiffs, the Company will indemnify Mr. Aronowitz to the extent permitted by law. The Company has obtained an appeal bond staying enforcement of the judgment against the Company and Mr. Aronowitz until such time as the Appellate Court issues its ruling. Management believes, after consultation with both in-house and outside counsel, that the Company is likely to prevail on its appeal to set aside the damages awarded and a new trial will be granted by the Appellate Court. The liability, if any, that may result from a new trial cannot be reasonably estimated at this time and therefore no accrual for loss has been recorded in the financial statements as of March 31, 1999. In November 1998, a purported shareholder class action lawsuit was filed against the Company ("Class Action"). Eight additional complaints were subsequently filed in the same court. These claims were filed on behalf of a purported class of persons who purchased the Company's stock between November 27, 1995 and October 6, 1998. The complaints allege, among other things, that the Company and certain officers and directors artificially inflated the Company's stock price by issuing false and misleading statements related primarily to the development, clinical testing and viability of the Company's TD Glucose(TM) Monitoring System. The claims do not specify the damages resulting from the alleged conduct. These cases were consolidated in March 1999. The Company believes the claims lack merit and plans to contest the allegations vigorously. At this time, it is not possible to estimate the ultimate loss, if any, related to these claims and therefore no accrual for loss has been recorded at March 31, 1999. On April 19, 1999, the Amended Consolidated Class Action Complaint was served upon the Company. The Company intends to respond to this Amended Complaint. TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. SUBSEQUENT EVENTS On May 7, 1999, the Company entered into an agreement to retain Janssen/Meyers Associates, L.P. for investment banking and financial consulting services. Janssen/Meyers will act as TCPI's investment banker and financial consultant, providing advice on matters relating to the financial markets in general as well as corporate finance, including possible equity or debt offerings and potential mergers, acquisitions and other strategic transactions. On May 11, 1999, Elliott Block, Ph.D. was appointed as the Company's new Chief Executive Officer. Dr. Block will be responsible for the Company's strategic direction and day-to-day business operations while Jack L. Aronowitz will remain President and Chairman of the Board of Directors. Mr. Aronowitz will also continue as the Company's Chief Technical Officer and focus his full-time efforts on the development and commercialization of TCPI's non-invasive TD Glucose Monitoring System, the Company's new total and HDL cholesterol monitoring products, and new product development. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STRATEGIC DIRECTION AND COMPANY BACKGROUND Technical Chemicals and Products, Inc. (the "Company" or "TCPI") is completing a transition towards becoming an integrated designer, developer, manufacturer and global marketer of a wide range of point-of-care medical diagnostic products for use at home, in physician offices, and other healthcare locations which are distributed through domestic and international channels. In addition, the Company's Pharmetrix Division is also involved in the research, development and commercialization of transdermal and dermal drug delivery technologies and skin permeation enhancers. TCPI also manufactures high purity specialty biochemicals. TCPI was formerly a developmental Company that manufactured and sold a narrow range of medical diagnostic products and specialty chemicals on an Original Equipment Manufacture ("OEM") basis. During the past 29 years, TCPI or its founder have developed more than 330 medical diagnostic and pharmaceutical products which have received marketing clearance by the United States Food and Drug Administration (the "FDA"). Many of the currently marketed products incorporate the Company's patented and proprietary membrane-based technology platform, as do those in various stages of development and regulatory approvals. TCPI presently holds 26 U.S. and foreign patents, and has 23 domestic and foreign patent applications pending. TCPI is currently scaling-up to manufacture and market in the U.S. and internationally more than 47 diagnostic tests which utilize the Company's patented membrane-based technology, 29 of which have received 510(k) clearance from the FDA. In addition, the Company has more than 20 other diagnostic and transdermal drug delivery products in various stages of development and regulatory approval in the United States and/or various foreign countries. Foremost in TCPI's product portfolio are its non-invasive TD Glucose(TM) Monitoring System (the "TD Glucose Monitoring System") for diabetics, its new Total and HDL (good) cholesterol monitoring products, and its HealthCheck(R) and private-label brands of over-the-counter diagnostic tests and screens for at-home use by consumers. At present, the Company's portfolio of diagnostic products includes tests and screening kits for cholesterol monitoring, pregnancy, ovulation timing, glucose, urinary tract infection, kidney and bladder infection, skin cancer, deteriorating vision, infectious diseases, drugs of abuse, cardiac markers and certain types of cancer. TCPI's portfolio of transdermal drug delivery technology focuses on smoking addiction, hormone replacement therapy, cardiovascular disease and other areas. The Company's products are distributed worldwide under both OEM marketing relationships with multinational pharmaceutical and diagnostic companies, and are also available to consumers on an over-the-counter basis under TCPI's proprietary HealthCheck and private-label brands. In the OEM sector, most of TCPI's tests for pregnancy and fertility are sold through corporate Roche Boehringer Mannheim Diagnostics distributors as well as independent distributors around the world. In January 1999, TCPI opened its international sales and marketing office in Milan, Italy to focus on expanding distribution of the Company's core diagnostic products in Europe, Asia, Africa, the Middle East and Latin America. International expansion of the Company's OEM family planning and HealthCheck diagnostic testing and screening products is ongoing. Product sales and/or registration has begun in Argentina, Australia, Austria, Bangladesh, Canada, Chile, China, Cyprus, Denmark, Egypt, Germany, Hong Kong, Macao, Malaysia, Netherlands, Norway, Oman, Philippines, Portugal, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Tunisia, and ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) STRATEGIC DIRECTION AND COMPANY BACKGROUND (Continued) Turkey. TCPI's HealthCheck and private-label products are marketed directly and indirectly to pharmacies, supermarkets and mass merchandise retail stores, as well as leading drug wholesale distributors. The Company private labels its family planning products for approximately 20 leading drug, discount and supermarket chains and catalog retailers. On July 27, 1998, the Company formed Technical Electronics Corporation, a Joint Venture between TCPI and privately held Micro Weiss Electronics of Babylon, New York in which TCPI holds an 80% equity ownership in the joint venture with Micro Weiss Electronics holding the remaining 20%. The Company retains all rights, title, and interest, including patent rights, to the technology for its meter devices. Technical Electronics Corporation will develop and manufacture electronic measuring devices for TCPI's non-invasive TD Glucose Monitoring System, Total and HDL cholesterol testing meter, and other diagnostic monitoring products being developed by TCPI. FORWARD LOOKING STATEMENTS Information in this Form 10-Q, including any information incorporated by reference herein, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, and is subject to the safe-harbor created by such sections. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. Statements regarding future products, future prospects, business plans and strategies, future revenues and revenue sources, future liquidity and capital resources, health care market directions, future acceptance of the Company's products, possible recommendations of health care professionals or governmental agencies regarding use of diagnostic products, possible growth in markets for at-home diagnostic testing, as well as other statements contained in this report that address activities, events or developments that the Company expects, believes or anticipates will or may occur in the future, and similar statements are forward looking statements. These statements are based upon assumptions and analyses made by the Company in light of current conditions, future developments and other factors the Company believes are appropriate in the circumstances, or information obtained from third parties and are subject to a number of assumptions, risks and uncertainties. Readers are cautioned that forward-looking statements are not guarantees of future performance and that actual results might differ materially from those suggested or projected in the forward-looking statements. Factors that may cause actual future events to differ from those predicted or assumed include, but are not limited to: the satisfactory completion of clinical trials demonstrating efficacy of the TD Glucose Monitoring System; delays in product development; risks associated with the Company's ability to successfully develop and market new products on a profitable basis or at all; availability of labor and sufficient parts and materials to complete the design, construction and manufacturing scale-up of required equipment; ability to complete the design, construction and manufacturing scale-up on a timely basis within budget parameters; receipt of any required regulatory approvals for manufacturing equipment or related facilities; future advances in technologies and medicine; the uncertainties of health care reform; risks related to the early stage of the Company's existence and its products' development; the Company's ability to execute on its business plans; engineering development; lead time for delivery of equipment; the Company's dependence on ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FORWARD LOOKING STATEMENTS (Continued) outside parties such as its key customers, suppliers and alliance partners; competition from major pharmaceutical, medical and diagnostic companies; risks and expense of government regulation and affects of changes in regulation (including risks associated with obtaining requisite governmental approvals for the Company's products); the limited experience of the Company in manufacturing and marketing products; uncertainties connected with product liability exposure and insurance; risks associated with domestic and international growth and expansion; risks associated with international operations (including risk associated with international economies, currencies and business conditions); risks associated with obtaining patents and other protections on intellectual property; results of litigation and appeals; the Company's limited cash reserves and sources of liquidity; uncertainties in availability of expansion capital in the future and other risks associated with capital markets, as well as those listed in the Company's other press releases and in its other filings with the Securities and Exchange Commission. The Company may determine to discontinue or delay the development of any or all of its products under development at any time. For a complete description of the Company's products and business, see Part I, Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS The Company's operations during the first quarter of 1999 continued to reflect the ongoing manufacturing scale-up, and expansion of facilities necessary to expand existing products as well as introduce more than 20 new diagnostic testing and screening products for infectious diseases, drug of abuse and certain types of cancer which are planned for future distribution worldwide. Product Sales. The Company's net product sales for the first quarter ended March 31, 1999 were $1.4 million as compared to $1.6 million in the same period a year earlier. During the first quarter of 1999, the Company experienced significantly higher sales of its private label family planning products which were offset by lesser sales of the Company's other diagnostic products. Through April 1999, the Company has experienced higher year-to-date product sales as compared to the same period of 1998 primarily due to overseas marketing efforts related to TCPI's OEM family planning products. In addition, the Company has in place an exclusive marketing and distribution relationship for its HealthCheck(R) products in Mexico and is presently negotiating other distribution programs throughout Latin America. Additional international expansion opportunities are also moving forward with programs such as the Company's recently completed marketing agreement to bring HealthCheck and other TCPI diagnostic products to China and several other Asian markets. Gross Profit. TCPI's gross profit on product sales for the first quarter of 1999 was $572,000 as compared to $867,000 in the first quarter of 1998. Gross profit as a percent of net sales for the first three month period of 1999 moved lower to 41.2% from 53.2% achieved in the prior year period due to a shift in the mix of products sold. Selling, General and Administrative. Selling general and administrative ("SG&A") expenses for the first quarter of 1999 was $2.3 million as compared to $2.0 million in the same period 1998. This increase was primarily due to the establishment of the Company's international sales and marketing office in Milan, Italy, ongoing marketing programs, and engineering and manufacturing scale-up related to the TD Glucose Patches. Research and Development. The Company continued to advance its various diagnostic testing products and transdermal drug delivery technologies through development towards commercialization. For the first quarter of 1999, the Company's R&D expenses decreased to $549,000 as compared to $744,000 in the same period a year ago due to the timing of certain R&D expenditures. The Company continued to incur expenses related to the ongoing development and clinical activity related to the Company's non-invasive TD Glucose(TM) Monitoring System and its new Total and HDL cholesterol monitoring products. The future level of R&D expenditures will depend on, among other things, the outcome of clinical testing of products under development (including the TD Glucose Monitoring System and Total and HDL cholesterol monitoring products), delays or changes in government required testing and approval procedures, technological and competitive developments and strategic marketing decisions. Net Loss. The Company posted a net loss $2.5 million for the first three months of 1999, which increased from a loss of $2.2 million in the same period a year earlier. The net loss attributable to common stock was $2.9 million for the first quarter of 1999 and $2.2 million loss for the first quarter of 1998. The increase in loss attributable to common stock was primarily due to the accrued redemption accretion and accrued dividends of the preferred stock as well as changes in gross profit. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) FINANCIAL CONDITION The Company had cash and investments of $8.8 million at March 31, 1999, as compared to $10.3 million at December 31, 1998. Working capital at the end of the first quarter of 1999 was $12.7 million, as compared to $14.7 million at December 31, 1998. The Company had current assets of $13.5 million and stockholders' equity of $33 million at March 31, 1999. This compares to current assets of $15.5 million and stockholders' equity of $35.5 million at December 31, 1998. The Company expects to continue to draw upon its working capital to purchase production equipment, complete clinical trials and regulatory submissions relating to the TD Glucose Monitoring System and Total and HDL cholesterol monitoring products, engage in research and development related to transdermal drug delivery technology, develop new diagnostic products, conduct clinical trials, continue its investment in marketing and facility expansion, and continue its day-to-day business. In addition, on July 28, 1998, TCPI's Board of Directors authorized a stock repurchase program to buy-back up to 10 percent of the Company's outstanding common stock. Purchases of common stock by the Company may be made from time-to-time in the open market and/or through privately negotiated transactions at prevailing market prices depending on market conditions. To date, the Company has repurchased 87,961 shares. The funds used for any such purchase will come from the Company's working capital. LIQUIDITY AND CAPITAL RESOURCES Throughout 1998 and into 1999, the Company has continued to sustain operating losses which have resulted in the use of its cash reserves. TCPI's future long-term capital expenditure requirements and its ability to ultimately return to profitability will depend on the following factors: (i) the time required to obtain regulatory approvals; (ii) the progress of the Company's research and development program; (iii) the ability of the Company to develop additional marketing and distribution alliances, and (iv) the Company's ability to develop and obtain regulatory approval to market new and improved products. The Company anticipates that it will continue to incur net losses until such time, if any, as the Company is able to generate sufficient revenues from product sales to sustain its operations and cover expenses related to its growth. There is no assurance that the Company will generate sufficient cash to fund operations and the necessary cash requirements thereof. The Company continues to seek additional financing, however, there can be no assurance that the Company will be able to fund all of its cash requirements and operating losses or that any additional financing will be available to the Company on acceptable terms or at all. The Company's future working capital and capital expenditure requirements may vary materially from those now planned depending on numerous factors, including additional manufacturing scale-up costs for the Company's current and future products, possible future acquisitions, the focus and direction of the Company's research and development programs, competitive and technological advances, future strategic alliances and relationships with marketing partners, the FDA regulatory process, the regulatory process in foreign countries, and the Company's marketing and distribution strategy. If the Company's growth exceeds its plans, additional working capital may be needed. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) LIQUIDITY AND CAPITAL RESOURCES (Continued) YEAR 2000 The Company, its division and operating subsidiaries, each are in the process of implementing a Year 2000 readiness program with the objective of having all significant business systems function properly with respect to the Year 2000 issue before January 1, 2000. Since 1997, the Company has added to its existing computer capabilities as well as installed new computer systems and programs to accommodate anticipated future growth of TCPI's business and internal operations. Due to the recent nature of any computer-related additions, as well as discussions with key vendors and customers, the Company believes the Year 2000 computer issue is not likely have a material impact on its business, operations or financial condition. Due to the general uncertainty with respect to the Year 2000 issue, however, there can be no assurance that all Year 2000 issues will be foreseen and corrected on a timely basis, or that no material disruption of the Company's business will occur. Further, the Company's expectations are based on the assumption that there will be no general failure of external local, national or international systems (including power, communications, postal or transportation systems) necessary for the ordinary conduct of business. The Company will, however, continue to assess the risks presented by the Year 2000 problem and will develop contingency plans if and when such plans become necessary. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is subject to claims and suits arising in the ordinary course of business. Management believes, after consultation with counsel, that each of the allegations against the Company included in the lawsuits described herein is without merit and the Company is defending each of the allegations vigorously. At this time, it is not possible to estimate the ultimate loss or gain, if any, related to these lawsuits, nor if any such loss will have a material adverse effect on the Company's results of operations or financial position. HIV Saliva Collector Technology. A lawsuit was brought against the Company in 1995 in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida (Joseph D'Angelo, Americare Transtech, Inc., Americare Biologicals, Inc. and International Medical Associates, Inc. v. Technical Chemicals & Products, Inc., Jack Aronowitz, Henry Schur, Analyte Diagnostics, Inc., John Faro and Nicholas Levandoski) related to saliva collector technology for an HIV diagnostic test. On December 30, 1998, a jury returned a verdict in this lawsuit finding that TCPI did not misappropriate the plaintiffs' trade secrets but found that Mr. Aronowitz had intentionally misappropriated such trade secrets and assessed damages of $500,000 against him, individually. Additionally, the jury found that both the Company and Mr. Aronowitz intentionally interfered with the plaintiffs' business relationships. The jury assessed approximately $328,000 in damages against TCPI in connection with this second claim but awarded no damages against Mr. Aronowitz, individually, in connection with that claim. Separately, the jury assessed more than $4.1 million in damages against the other unrelated corporate and individual defendants. On January 29, 1999, one day after receiving the final judgment, TCPI and Mr. Aronowitz filed their appeal. This matter is presently pending before the Fourth Appellate District Court of Appeals in West Palm Beach, Florida. In the event that Mr. Aronowitz is ultimately required to pay damages to the plaintiffs, the Company will indemnify Mr. Aronowitz to the extent permitted by law. Non-Invasive Glucose Monitoring Technology. In November of 1997, a lawsuit was brought against the Company and Mr. Aronowitz in the United States District Court Southern District of Florida (Americare Diagnostics, Inc. and Joseph D'Angelo vs. Technical Chemicals and Products, Inc.) related to non-invasive glucose monitoring technology in which the plaintiffs alleged, among other things, patent infringement, misappropriation of trade secrets, breach of contract, breach of fiduciary duty, breach of confidential relations, breach of trust, unfair competition and conversion against the Company and its Chairman and Chief Executive Officer. The Company has pending against Americare Diagnostics and Mr. D'Angelo counter-claims for libel and slander related to TCPI's non-invasive glucose monitoring technology. On September 23, 1998, the Company's motion to dismiss six of the nine counts of the patent infringement lawsuit was granted. The order dismissed all of the counts alleging misappropriation of trade secrets, breach of fiduciary duty, breach of confidential relations, breach of trust, unfair competition and conversion. Prior to the court rendering its decision and order to dismiss, on September 8, 1998, the plaintiffs filed an amended Complaint which contained some of the same counts based on substantially the same facts as in the original Complaint. TCPI's motion to dismiss the amended Complaint is presently pending before the court. PART II OTHER INFORMATION (Continued) ITEM 1. LEGAL PROCEEDINGS (Continued) Shareholder Class Action. During November 1998 through January 1999, several lawsuits were filed in the United States District Court for the Southern District of Florida against the Company and its Chief Executive Officer on behalf of various shareholders of TCPI alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder. Plaintiffs have brought this action on behalf of all persons, other than defendants and other related or affiliated entities or persons, who purchased the common stock of the Company from November 27, 1995 through and including October 6, 1998. In general, plaintiffs allege that defendants made untrue statements of material facts necessary to make statements not misleading in the Company's public disclosure documents and in certain press releases, articles and reports. The disclosures relate primarily to the development, clinical testing and viability of the Company's TD Glucose Monitoring System. The plaintiffs are seeking an unspecified amount of damages, interest, costs and attorneys' fees. The Company believes these claims are without merit and is vigorously defending this matter. The Court has moved forward with the anticipated consolidation of the lawsuits and, on March 2, 1999, appointed two law firms as co-lead counsel and also appointed the lead plaintiffs. The Court also established a schedule for filing the consolidated amended complaint and anticipated subsequent motions. Plaintiffs will be filing an Amended and Consolidated Complaint. On April 19, 1999, the Amended Consolidated Class Action Complaint was served upon the Company. The Company intends to respond to this Amended Complaint. The Company does maintain Directors and Officer's Liability Insurance, however, there can be no assurances that such insurance coverage will be adequate to fund the costs of an award, if any, or attorneys' fees. In addition, as an officer and director of the Company, Mr. Aronowitz is indemnified by the Company to the fullest extent permitted under the Florida Business Corporation Act. Defamation on the Internet. On March 17, 1999, the Company filed a multi-count defamation lawsuit in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida against 10 unknown "John Doe" individuals that have posted statements on the on-line message board maintained by the Internet service known as "Yahoo!" pursuant to statements which allegedly defamed the Company, its Chief Executive Officer and its Vice President of Investor Relations. The Company's investigation related to this matter is ongoing. ITEM 5. OTHER INFORMATION Subsequent Events On May 7, 1999, the Company retained Janssen/Meyers Associates, L.P. for investment banking and financial consulting services. Janssen/Meyers will act as TCPI's investment banker and financial consultant, providing advice on matters relating to the financial markets in general as well as corporate finance, including possible equity or debt offerings and potential mergers, acquisitions and other strategic transactions. Under the terms of this three-year agreement, JMA will be compensated under an all-inclusive fee of $5,000 per month and grant of 400,000 common stock purchase warrants. Each warrant equals one share of the Company's common stock, par value $.001 per share. The exercise price of the warrants shall be (a) 200,000 warrants at an exercise price equal to the closing price of the Company's common stock on May 7, 1999, (b) 100,000 warrants at an exercise price of $2.00 per share, and (c) 100,000 warrants at an exercise price of $3.00 per share. Such warrants have an expiration date of five years from the date of grant. PART II OTHER INFORMATION (Continued) ITEM 5. OTHER INFORMATION (Continued) Subsequent Events (Continued) On May 11, 1999, Elliott Block, Ph.D. was appointed as the Company's new Chief Executive Officer. Dr. Block will be responsible for the Company's strategic direction and day-to-day business operations while Jack L. Aronowitz will remain President and Chairman of the Board of Directors. Mr. Aronowitz will also continue as the Company's Chief Technical Officer and focus his full-time efforts on the development and commercialization of TCPI's non-invasive TD Glucose(TM) Monitoring System, the Company's new Total and HDL Cholesterol monitoring products, and new product development. Dr. Block has more than 28 years of senior level industry-related experience in the research, manufacturing and international marketing of over-the-counter and clinical diagnostic testing products, as well as the operation of licensed clinical laboratories. PART II OTHER INFORMATION (Continued) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit Number Exhibit Description - ------------------------------------------------------------------------------------ 3.1 ***** Amended and Restated Articles of Incorporation of the Company. 3.2 ***** Amended and Restated Bylaws of the Company. 3.3 **** Articles of Amendment to the Articles of Incorporation of the Company. 4.1 ***** See Exhibits 3.3 above for provisions of the Amended and Restated Articles of Incorporation of the Company and the Amended and Restated Bylaws of the Company defining the rights of holders of Common Stock of the Company. 4.2 *** Form of Common Stock Certificate of the Company. 10.2 ***** Amended and Restated 1992 Incentive Stock Option Plan. 10.3 ***** Cancellation and Exclusive License Agreement between Jack Aronowitz and the Company dated January 31, 1996. 10.4 ***** Stock Option Agreement between the Company and Martin Gurkin, Stuart R. Streger, Colin Morris, Kathryn Harrigan, Clayton Rautbord and Stephen Dresnick. 10.6 ** Lease - Pompano Beach, Florida. 10.6.1 ******* Business Lease Extension - Pompano Beach, Florida. 10.6.2 ***** Main Lease - Menlo Park, California; Sublease - Menlo Park. 10.6.3 ***** Assignment and Assumption of Sublease and Landlord's Consent Thereto between Menlo Business Park, Patrician Associates, Inc., Flora, Inc. Pharma Patch PLC and Technical Chemicals and Products, Inc. 10.8 *** Warrant Agreement between the Company and Jack L. Aronowitz. 10.8.1 * Amended Employment Agreement dated October 9, 1998 between the Company and Jack L. Aronowitz. 10.9 * Employment Agreement dated October 9, 1998 between the Company and Jay E. Eckhaus. 10.10 * Employment Agreement dated October 9, 1998 between the Company and Stuart R. Streger. 10.14 ***** Letter Agreement between the Company and Redstone Securities, Inc. dated January 15, 1996. 10.15 ****** Stock Option Agreement with Martin Gurkin dated November 1996. 10.16 ***** Letter Agreement with Flora, Inc. dated February 5, 1996. Filed 27 Herewith Financial Data Schedule. * Incorporated by reference to exhibits 10.2, 10.3 and 10.4 of the Company's Form 10-Q filed on November 12, 1998. ** Incorporated by reference to the exhibit of the same number in the Company's Registration Statement on Form SB-2 filed on October 28, 1994 (No. 33-85756). *** Incorporated by reference to the exhibit of the same number in Amendment No. 4 to the Company's Registration Statement on Form S-1 filed on April 23, 1996 (No. 333-1272). **** Incorporated by reference to exhibit 3.1 of Form 8-K filed on May 21, 1998. ***** Incorporated by reference to the exhibit of the same number in the Company's Registration Statement on Form S-1 filed on February 12, 1996 (No. 333-1272). ****** Incorporated by reference to the exhibit of the same number in Amendment No. 2 to the Company's Registration Statement on Form S-1 filed on March 20, 1996. ******* Incorporated by reference to the Company's Form 10-K filed for the year ended December 31, 1998
(b) Reports On Form 8-K No reports on Form 8-K were filed during the quarter for which this report is being filed. 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. TECHNICAL CHEMICALS AND PRODUCTS, INC. Date: May 14, 1999 By: /s/ ----------------------------------- Stuart R. Streger Vice President and Chief Financial Officer (Duly authorized officer and principal accounting officer) EX-27 2 FDS -
5 (The Company's Quarterly Report on Form 10-Q for the Period Ending March 31, 1999) 0000924921 STU STREGER 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,702 7,110 1,202 89 2,399 13,518 4,329 1,987 34,007 846 168 0 12,595 11 20,387 34,007 1,386 1,541 814 814 0 0 3 (2,476) 0 (2,476) 0 0 0 (2,476) (0.28) (0.28)
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