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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A (AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO ___________
COMMISSION FILE NUMBER 0-25406
TECHNICAL CHEMICALS AND PRODUCTS, INC.
(Name of small business issuer in its charter)
FLORIDA 65-0308922
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3341 S.W. 15TH STREET, POMPANO BEACH, FLORIDA 33069
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (954) 979-0400
Securities Registered Pursuant to Section 12(b) of the Act:
Name of exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to 12(g) of the Act:
Common Stock, $.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve months (or for 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
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $4,711,994.
The aggregate market value of Common Stock held by nonaffiliates as of
March 26, 1996 was approximately $62,340,000 (based upon the closing sale price
of $16.37 per share on the Nasdaq SmallCap Market on March 26, 1996).
As of March 26, 1996 8,117,880 shares of the Registrant's $.001 par
value Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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EXPLANATORY NOTE
This Report on Form 10-KSB/A amends and restates in their entirety the
following Items of the Annual Report on Form 10-K of Technical Chemicals and
Products, Inc. for the fiscal year ended December 31, 1995 to conform it to the
requirements of Form 10-KSB.
PART I
ITEM 1. BUSINESS
TCPI is principally engaged in the design, development, manufacture
and marketing of a wide range of medical diagnostic products for use in
physician offices, at home and at other point-of-care locations. The Company's
medical diagnostic products employ its patented and proprietary membrane-based
technology. In addition to its ongoing diagnostics business, the Company,
through its recently acquired Pharmetrix Division, is involved in the research,
development and commercialization of transdermal and mucosal drug delivery
systems and skin permeation enhancers. The Company currently owns 16 U.S.
patents and 28 foreign patents, and has seven pending U.S. patent applications
and 38 pending foreign patent applications. The Company was incorporated in
Florida on January 30, 1992.
TCPI manufactures and markets over 25 membrane-based diagnostic tests
in the United States and internationally, 13 of which have received 510(k)
approval from the FDA. The Company's products include tests for pregnancy,
ovulation timing, cholesterol levels, blood glucose levels, infectious diseases
and drugs of abuse. In addition, the Company manufactures over 20 other
diagnostic products. Overall, the Company or its founder has developed over
300 FDA approved medical diagnostic products. In 1995, the Company sold
approximately six million pregnancy tests, representing approximately 12% of
the 49 million tests sold worldwide. Most of these tests were sold through the
Company's alliance with Boehringer Mannheim. This alliance also extends to the
marketing and distribution of certain of the Company's other products,
including its Serum Dilution Reagent (hCG Test) and its OneStep(TM) LH
Ovulation Tests. The Company also markets its products under its proprietary
brand name, PDQ(TM), and under private label arrangements to drug, discount and
supermarket chains such as CVS, Duane Reade, Thrifty Payless, Thrift Drug,
Woolworth, Fedco, Long's and Smith's Food & Drug. In addition, pursuant to an
agreement recently entered into with Amway Corporation, a retail catalog
distributor, the Company's OneStep hCG Pregnancy(R) Midstream Wand, OneStep hCG
Pregnancy(R) Test Slide and OneStep(TM) LH Ovulation Test Strip will be
featured for sale in Amway Corporation's 1996 personal shoppers' catalogue.
The Company's most significant products under development include its
TD Glucose System, its OneStep(TM) CholestoChek System, certain additional
medical diagnostic testing products and several transdermal and mucosal drug
delivery systems. See "Business - Non-Invasive Transdermal Glucose
Monitoring," "Business - Cholesterol Monitoring," "Business - Other Medical
Diagnostic and Related Products" and "Business - Transdermal Drug Delivery
Systems."
STRATEGY
The Company's objective is to build a fully integrated research and
development, manufacturing, marketing and distribution organization capable of
providing the medical diagnostic and drug delivery markets with products that
offer accuracy, efficacy, ease of use and reduced costs. In order to
accomplish this objective, the Company has developed the following strategy:
Provide Accurate, Easy to Use and Cost-Effective Products. The
Company has developed and is continuing to develop accurate, easy to use and
cost-effective medical diagnostic products that provide disease-specific
information to health care providers and patients. In addition, the Company is
developing transdermal and mucosal drug delivery products which are intended to
offer a high degree of efficacy, convenience and economy. The Company believes
that by providing high quality, value-added health care products which offer an
improved benefit to cost ratio over existing competitive products its business
approach is consistent with current trends to reduce the overall cost of health
care.
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Provide a Broad Range of Products. The Company has developed and is
continuing to develop a broad range of medical diagnostic and drug delivery
products. The Company believes that a diversified product base can increase
potential business opportunities, provide a stream of new product introductions
over time and reduce the risks associated with reliance on a single product or
technology.
Focus on Large Market Opportunities. The Company concentrates its
development efforts on large existing markets in which the Company believes
there could be significant demand for its products. Industry estimates of the
Company's target markets in 1994 were: glucose monitoring, over $1.5 billion
worldwide; cholesterol monitoring, over 1.3 billion tests performed annually
worldwide; family planning products, over $0.6 billion worldwide; and
transdermal patch products, over $1.5 billion worldwide.
Enter into Strategic Alliances. Although the Company intends to
expand direct distribution of certain of its medical diagnostic products, the
Company intends to enter into strategic alliances with large international
medical diagnostic and pharmaceutical companies for the marketing of many of
its medical diagnostic products. Because these companies have significantly
greater financial, marketing and other resources than the Company, they are
able to market the Company's products through a broad range of distribution
channels. The Company's strategy with respect to the development and
commercialization of its transdermal, mucosal and, skin permeation products is
to enter into strategic alliances with third parties that can, in some cases,
fund a portion of product development costs, participate in clinical testing,
obtain regulatory approvals and market the product. In an effort to exercise
control over the quality of its products and capture a larger portion of the
revenues therefrom, the Company will seek to retain manufacturing rights to
products developed under such strategic alliances.
Expand Direct Distribution. To date, the Company's medical diagnostic
products have been primarily distributed through strategic alliances. The
Company does, however, directly distribute its OneStep hCG Pregnancy(R)
Midstream Wand and will soon introduce its OneStep(TM) LH Ovulation Test Strip
to over 20 drug, discount and supermarket chains. The Company intends to
expand direct distribution of its medical diagnostic products in order to
retain a greater percentage of revenues generated from sales of these products.
For example, the Company intends to market certain of its over-the- counter
medical diagnostic testing devices to drug, discount and supermarket chains
under its HealthCheck(R) brand name, utilizing colorful point-of-sale displays
that contain both the Company's products and health information journals. See
"Business - HealthCheck(R) Home Health Screens - Health Test Center(R)."
NON-INVASIVE TRANSDERMAL GLUCOSE MONITORING
The Product. The Company is developing a non-invasive transdermal
glucose monitoring system, a prototype version of a glucose monitoring system
for diabetics which uses disposable transdermal patches and a monitoring
reflectance meter to test blood glucose levels. The TD Glucose System is
intended to overcome the discomfort and inconvenience associated with available
finger stick blood glucose monitoring systems.
TCPI's TD Glucose System employs proprietary transdermal interstitial
fluid ("ISF") sampling technologies developed by the Company. ISF is an
extracellular fluid that is prevalent throughout the body, including the skin.
Research indicates that ISF glucose levels correlate closely with blood glucose
levels. The TD Glucose Patch can be used almost anywhere on the body. After
five minutes on the skin surface, a tab is removed from the TD Glucose Patch
and the blood glucose measurement is obtained by placing the TD Glucose Meter
on the area of the patch where the tab was removed.
The Company has conducted early stage clinical trials of its TD
Glucose System, the results of which correlate with finger stick blood glucose
monitoring tests currently on the market, thereby
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reinforcing the technical feasibility of the Company's product. Subject to
completion of production quality TD Glucose Patches, the Company expects to
begin full clinical trials of its TD Glucose System during the second half of
1996. Although preliminary discussions with the FDA indicate that this product
should be eligible for the expedited 510(k) approval process, there can be no
assurance that the FDA will consider the TD Glucose System for 510(k) approval
or, if considered, that the TD Glucose System will receive 510(k) approval upon
submission of the 510(k) notification application.
The Company expects that the battery operated TD Glucose Meter will
sell on the retail market for approximately $100. The single-use, disposable
TD Glucose Patch is designed to be easily handled by the patient with little
manipulation during the measurement and sampling process. The TD Glucose Patch
will be approximately the size of a 25c. coin and will be packaged in a
sterile pouch that can serve as a means for disposal of the used patch. The
Company expects to market a box of 50 glucose test patches at a retail price of
$40 to $50. These expected sale prices are competitive with conventional blood
glucose monitoring systems currently on the market.
Marketing. Several large international medical diagnostic and
pharmaceutical companies have expressed preliminary interest in a possible
collaboration in the distribution and marketing of the TD Glucose System.
There can be no assurance, however, that a definitive arrangement will be
reached with any such companies.
Blood Glucose Monitoring Market. Diabetes is a chronic,
life-threatening disease for which there is no known cure. It is the fourth
leading cause of death by disease in the United States. Over 14 million people
in the United States (1 in 20) have diabetes and more than 625,000 new cases
are diagnosed each year. It is estimated that there are at least 110 million
people with diabetes worldwide. Type I (or juvenile) diabetes, the most severe
form of the disease, comprises approximately 10% of diabetes cases in the
United States and requires daily treatment with insulin to sustain life. Type
II (or adult onset) diabetes comprises the other 90% of diabetes cases in the
United States and is usually managed by diet and exercise but may require
treatment with insulin or other medication.
According to the American Diabetes Association (the "ADA"), people
with Type I diabetes must have daily treatment with insulin to control blood
glucose levels. A person's blood glucose level will vary depending upon food
intake, insulin availability, exercise, stress and illness. Blood glucose
testing several times a day enables people with diabetes to better manage their
disease by keeping their blood glucose levels in a narrow range. This may be
accomplished through diet, physical activity and insulin dosage. Prior to the
availability of self-administered blood glucose monitoring systems, people with
diabetes relied on urine glucose testing to monitor their status and make
appropriate adjustments to their treatment. Because glucose appears in the
urine only after a significant period of elevated blood glucose, urine tests
are inadequate for tight control of blood glucose. Patients were also able to
obtain an occasional blood glucose test after referral by a health care
provider to a clinical laboratory. These tests were ordered infrequently,
usually as part of a physician office visit, and results were typically not
available for immediate discussion and intervention.
Beginning in the late 1970's, the availability of finger stick blood
glucose monitoring systems that provided fast and accurate blood glucose
measurements gave people with diabetes a tool to manage the disease more
effectively and to improve the quality of care. Since that time, worldwide
sales of self-administered blood glucose monitoring systems have increased
dramatically. According to industry sources, the worldwide market for blood
glucose monitoring products in 1995 was over $1.5 billion. In the United
States, the market for blood glucose monitoring products grew from
approximately $570 million in 1991 to approximately $1.1 billion in 1995.
In July 1993, The New England Journal of Medicine published the
results of the Diabetes Control and Complications Trial (the "DCCT"), a major
nine-year clinical trial sponsored by the National
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Institutes of Health (the "NIH"). Participants in the DCCT were assigned to
either intensive or conventional therapy groups. Conventional therapy involved
testing four times a day, with at least three injections of insulin and making
appropriate modifications to diet and exercise while injecting insulin in
accordance with blood glucose levels. Each therapy group contained people with
no significant complications as well as people with mild complications. The
study demonstrated that maintaining blood glucose levels as close as possible
to normal reduces by approximately 60% the risk for development and progression
of certain diabetes complications. Although the DCCT included only people with
Type I diabetes, the ADA has stated that there is no reason to believe the
effects of better control of blood glucose levels would not apply to people
with Type II diabetes. The results of the study were so compelling that the
study was terminated, earlier than planned, because those conducting the study
felt that to continue conventional treatment for the control group would
deprive its participants of the benefits of the study's findings. Because the
intensive therapy that the DCCT study recommends involves testing at least four
times a day, the Company believes that DCCT will increase awareness among
people with diabetes of the benefits of frequent testing and will be a key
factor in changing diabetes management in the coming decade. Moreover, various
publications related to diabetes have recommended testing six to eight times a
day. Based on various studies, including a survey by the NIH, the Company
believes that people with diabetes, on average, test their blood glucose levels
less than once per day. The Company believes that such patient non-compliance
is due, in part, to the pain and inconvenience associated with the use of
conventional finger stick blood glucose monitoring systems. The TD Glucose
System has been designed by the Company to address the need for a convenient,
blood-free, pain-free blood glucose monitoring system.
The Company believes that growth in demand for self-administered blood
glucose monitoring products will also be driven by the trend toward greater
patient involvement in personal health management. Many chronic conditions may
be managed more cost effectively in the home. The Company believes that these
benefits are consistent with recent initiatives, particularly in the United
States, to control overall health care expenditures. It is estimated that
expenditures in the United States for costs associated with diabetes are
approximately $132 billion annually. The Company believes that a compelling
case can be made that increased expenditures for preventive care, which would
include more frequent testing, can lead to reduced expenditures for care
relating to complications.
Existing Self-Administered Blood Glucose Monitoring Systems. At
present, blood glucose levels are generally measured by first obtaining a blood
sample using the finger stick method. This method requires the user to prick a
finger with a lancet, draw a drop of blood and place the blood on a
chemically-treated disposable test strip. After a specified amount of time has
elapsed, the blood, in most cases, must be blotted or wiped off and then, after
an additional amount of time has elapsed, the blood glucose level is read by
visually comparing the color of the test strip to that of a color chart.
An alternative method requires the use of a blood glucose monitoring
meter. This system also requires the user to prick a finger, draw a drop of
blood and place the blood on a test strip similar to the strip described above.
In this case, the test strip is then placed in a meter containing a light
source and a digital read-out device. This reflectance meter measures the
color of the test strip at two or more wavelengths, thereby determining and
displaying the blood glucose level. A variation of the conventional
reflectance meter approach uses test strips which, rather than producing a
color change, produce a small electric current. The amount of current produced
is a function of the blood glucose level.
With either method, adequate control of blood glucose levels requires
a finger stick each time a sample is taken. This is often an unpleasant
experience for the user, especially for children. Depending upon the relative
dexterity of the user, the meter process generally takes at least two to four
minutes. Moreover, the ongoing costs of repeated finger stick testing,
including the cost of test strips, lancets, swabs, antiseptics, test solutions
and other related materials, are significant to the average user. Another
significant problem associated with these invasive finger stick methods is the
requirement to safely
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dispose of lancets and bloody test strips and swabs. Finally, any type of
invasive procedure entails some risk of infection.
CHOLESTEROL MONITORING
The Product. TCPI has developed a point-of-care cholesterol
monitoring system which can be used by physicians, laboratories and patients at
home. The OneStep(TM) CholestoChek System is comprised of: (i) visual and
meter-read OneStep Total Cholesterol(TM) Test Strips used for measuring total
cholesterol levels; (ii) visual and meter-read OneStep HDL Cholesterol(TM) Test
Strips used for measuring HDL cholesterol; and (iii) the hand-held CholestoChek
Meter used for reading the meter-read versions of these test strips with
greater accuracy. The OneStep(TM) Cholesterol Test Strips utilize the
Company's patented and proprietary membrane-based technology and produce a
color reaction in response to total or HDL cholesterol, using a small
unmeasured drop of blood.
The OneStep(TM) CholestoChek System is a point-of-care finger stick
cholesterol monitoring system. Typically a blood sample is taken using a small
finger lancet and placed on the OneStep Cholesterol(TM) Test Strip. The
OneStep Cholesterol(TM) Test Strip then rapidly provides a visually measurable
color change in response to either the total or HDL cholesterol present in the
blood. With the meter-read versions of the OneStep(TM) Cholesterol Test
Strips, the CholestoChek Meter provides a digital readout of the cholesterol
level.
The OneStep(TM) CholestoChek System will offer the following
advantages over the leading finger stick cholesterol monitoring system: (i) at
25 microliters, it will require significantly less blood, thereby permitting
the use of a smaller lancet which the Company believes makes the test less
painful; (ii) it will produce results in less than three minutes, instead of
approximately 20 minutes; and (iii) at a wholesale cost of about $2.00 per
test, it will be much less expensive. In addition to providing all of these
advantages, TCPI's OneStep(TM) CholestoChek System will be as accurate as the
leading product.
The Company's OneStep(TM) CholestoChek System overcomes the
disadvantages of laboratory testing by offering the health care provider and
patient a quick and easy-to-use method of testing for cholesterol in the
physician's office, clinic or other location. The Company's test eliminates
the costs and delays associated with utilizing laboratories, including those
associated with specimen collection, preservation, transportation, processing
and reporting results. In addition, the Company has conducted clinical trials
comparing the OneStep(TM) CholestoChek System to conventional laboratory
testing. The results demonstrate a reproduceability with a coefficient of
variation of less than 5%. This means that tests done on the same blood at
different times and/or at different laboratories correlate within 95% of each
other. This coefficient is within the range recommended by the NIH, the
National Committee on Clinical Laboratory Standards and the College of American
Pathologists. The Company views physician offices, clinics, patient bedsides,
emergency rooms and other point-of-care sites, as well as the consumer retail
market for at-home self-tests, as the primary markets for this product.
The Company has obtained 510(k) approval from the FDA for the visually
read version of its OneStep Total Cholesterol(TM) Test Strip. This test strip
has also received a waiver under CLIA. The Company is currently conducting
clinical trials of its OneStep HDL Cholesterol(TM) Test Strips and its
CholestoChek Meter prior to submitting its 510(k) application for these
products. The Company expects to submit a 510(k) application for its
OneStep(TM) CholestoChek System during the second half of 1996.
Marketing. The Company has received a written proposal from a major
international medical diagnostic and pharmaceutical company, and has been
approached by several other such companies, regarding a possible collaboration
in the marketing and distribution of its OneStep(TM) CholestoChek
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System. There can be no assurance, however, that a definitive arrangement will
be reached with any such companies.
Cholesterol Monitoring Market. In response to evidence linking high
total cholesterol levels to heart disease, the NIH launched the National
Cholesterol Education Program (the "NCEP"), a nationwide effort to reduce the
prevalence of high blood cholesterol. In 1988, the NCEP issued guidelines for
the testing of all adults over 20 years of age for high blood cholesterol, and
more extensive lipid monitoring and treatment for those found to be in high
risk categories. In 1991, testing guidelines were expanded to include children
over the age of two with a family history of high blood cholesterol or coronary
heart disease.
In 1987, an NIH expert panel in a draft statement recommended that the
HDL measurement be added to the total cholesterol measurement when evaluating
coronary heart disease risk in healthy individuals and that a lipid profile,
consisting of total cholesterol, HDL cholesterol and triglycerides, be
conducted under certain circumstances, including the diagnosis of individuals
who have increased total cholesterol levels, or individuals with desirable
total cholesterol levels who have two or more other coronary heart disease risk
factors. Three lipid profiles, each to be conducted one week apart, were also
recommended prior to initiating drug or dietary therapy in patients with lipid
disorders. Following the NCEP and the NIH guidelines, individuals with
desirable total cholesterol levels should have their cholesterol tested every
five years, individuals with borderline high total cholesterol should have a
lipid screening repeated annually and, as noted above, those with high total
cholesterol should have at least three lipid profiles conducted to confirm
their values and to help their physician decide what therapy, if any, should be
instituted. Individuals receiving diet or drug therapy would be expected to be
tested at least every three months to track the effectiveness of the therapy.
Since the inception of the NCEP, the market for cholesterol and other lipid
tests has experienced significant growth, particularly in point-of-care
settings.
Diagnostic testing of blood disorders has traditionally been
performed in a centralized clinical laboratory where large numbers of blood
samples are processed in batches and test results are seldom returned to
physicians in less than 24 hours. Physicians, patients and reimbursement
policies of third party payors have created demand for bringing laboratory
testing closer to the point-of-care. Point-of-care testing is desired because
it permits the medical practitioner to provide immediate feedback to the
patient. The Company believes that a valid argument can be made that increased
expenditures for preventive care, which would include more frequent testing,
can lead to reduced expenditures for care relating to complications. The NCEP
data indicates that more than 50% of the adult population in the United States
has high or borderline high total cholesterol. Based on industry sources, over
1.3 billion cholesterol tests were performed in 1995.
Existing Cholesterol Monitoring Systems. Cholesterol and lipoprotein
tests are generally performed in the laboratory using blood samples taken from
patients in a hospital on an outpatient basis or in a doctor's office. Most
testing is done using highly automated equipment and enzymatic chemistry. The
typical price for such a test when performed by a laboratory is $25 or more,
although Medicare reimbursement normally pays only about $12. There currently
exists one point-of-care cholesterol monitoring system that: (i) requires
approximately 200 microliters of blood; (ii) produces results in approximately
20 minutes; and (iii) costs approximately $10 to $12 per test.
OTHER MEDICAL DIAGNOSTIC AND RELATED PRODUCTS
Overview. The type of medical diagnostic tests developed by the
Company are referred to as in vitro tests which measure clinically significant
substances using bodily fluids, usually blood, urine or saliva. These medical
diagnostic tests are termed in vitro because they are performed outside the
human
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body (usually in a test-tube in a laboratory), in contrast to in vivo tests,
which are performed directly on or within the human body. The Company's
patented and proprietary membrane-based technology is particularly well-suited
for the development of accurate economical and rapid in vitro diagnostic tests.
For example, using this technology allows a test to automatically eliminate
interfering substances, concentrate components, sequentially perform selected
chemical steps and accurately determine sample sizes, all without user
involvement.
The market for in vitro diagnostic testing has experienced rapid
growth due to growing public awareness of health and safety issues; recognition
by physicians that regular diagnostic testing can result in earlier detection,
diagnosis and effective treatment; increased alcohol and drug related screening
by employers; and the introduction of cost-effective and accurate products.
Point-of-care diagnostic testing provides a fast, cost-effective and accurate
alternative to conventional clinical laboratory testing. Currently, the
majority of diagnostic testing is done in centralized laboratories and it is
estimated that as many as 15 billion samples are processed through centralized
laboratories versus only two billion samples that are channeled through
decentralized testing methods. Laboratory testing involves skilled technicians
who must measure and process a specimen, add reagents and use sophisticated
instruments to read and calculate the results (which are typically not
available for 24 to 72 hours). By contrast, point-of-care testing in clinics,
physician offices, homes, patient bedsides and emergency rooms permits the user
to obtain quantitative results, usually within minutes, thus allowing for
immediate interpretation of test results. Point-of-care testing also
eliminates the time and cost associated with utilizing remotely located
laboratories. Because of its advantages, the Company expects the point-of-care
diagnostic testing industry to continue to grow, creating new market
opportunities for the Company.
According to industry sources, the total worldwide market for in vitro
diagnostic testing products grew from $3.5 billion in 1980 to $16.0 billion in
1995.
Products. The Company's existing medical diagnostic products and
those currently under development generally fall within the following
categories:
Other Glucose Monitoring Products. The Company has received 510(k)
approval of its OneStep(TM) Blood Glucose Test Strip for visual monitoring.
This product is a conventional finger stick test, the results of which are
available to be read visually against the Company's patented color chart within
one minute of administering the test. The Company believes that there are many
applications for this device in underdeveloped and third world countries where
government insurance or reimbursement is non-existent. This system is also
available for use with the Company's OneStep Blood Glucose Meter. In addition,
the Company has submitted a 510(k) application for its OneStep(TM) Urine
Glucose Test Strip. The Company is in ongoing discussions regarding private
label marketing arrangements for both professional and over-the-counter sale of
these products. See "Business - Non-Invasive Transdermal Glucose Monitoring --
Blood Glucose Monitoring Market" for information regarding the potential market
for blood glucose monitoring products.
Family Planning. The Company currently distributes several OneStep
hCG Pregnancy(R) and OneStep(TM) LH Ovulation Tests. These products are sold
in component parts for assembly by customers, and as finished shelf packages
under the Company's PDQ(TM) label, HealthCheck(R) label and under more than 20
private labels.
The Company's OneStep hCG Pregnancy(R) and OneStep(TM) LH Ovulation
Tests are characterized by their ease of use and accuracy. The strip format of
these tests, which provide the same sensitivity as a radioimmunoassay ("RIA")
test, are immersed in urine for up to five minutes providing a distinct visual
reaction. The slide format of these tests are for large volume clinics and
require the addition of four drops of urine to the device. The OneStep hCG
Pregnancy(R) Midstream Wand requires only a momentary dip into urine or may be
conveniently held under the urine stream. All tests have built-in controls to
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insure functionality and may be easily disposed of, or allowed to dry to
provide a permanent record of results.
The Company has a non-exclusive worldwide marketing and distribution
agreement with Boehringer Mannheim for its family planning diagnostic products.
During 1995, the Company's majority-owned subsidiary, Health-Mark, began to
market and distribute the Company's family planning products in the United
States and Canada to drug, discount and supermarket chains.
According to industry sources, worldwide sales of pregnancy and
ovulation tests in 1995 were approximately $550 million and $40 million,
respectively.
Drugs of Abuse Screening. The Company is developing medical diagnostic
tests for the screening of various drugs of abuse. The products are initial
drug screens that use a strip immunoassay format designed to detect the
presence of a particular drug or a metabolite of a particular drug being tested
for in either human urine or in saliva using the Company's Sani-Sal(TM) Saliva
Collector. The results of these tests are available within minutes of
administering the test and eliminate the need for the taking of a urine or
blood sample and delivering the sample to a laboratory for analysis.
The Company's drug screening tests meet the criteria specified by the
National Institute on Drug Abuse (the "NIDA") for initial screening of drugs of
abuse: cocaine, opiates, barbiturates, amphetamines, canabinoids and
phencyclidine ("PCP"). They are designed to indicate the presence or absence
of the substance being screened at or above the NIDA prescribed minimum
quantity for positive responses to initial drug screening. If conclusive
quantitative verification of the presence and precise quantity of the drug is
required, as would be the case in certain medical uses of the tests, standard
industry procedure requires the performance of additional tests by a
quantitative method such as gas chromatography/mass spectroscopy analysis. The
Company is also developing a single strip that can be used to screen for
multiple drugs from one sample.
To date, two of the Company's drugs of abuse tests (cocaine and
opiates) have received 510(k) approval utilizing urine samples. Four other
tests (amphetamine, methamphetamine, canabinoids and benzodiazepine) have been
submitted for 510(k) approval utilizing urine samples. Clinical trials have
been completed on one test (barbiturates) and two tests (PCP and methadone) are
in the final stages of clinical trials. Obtaining 510(k) approval will allow
the Company's tests to be used in clinical laboratories and by medical
professionals.
No special training is required to perform the Company's drug
screening tests. These tests operate automatically requiring no reagents,
other substances or additional equipment. The tests provide on-site results
within five minutes and the used products can be disposed of without special
handling. The Company believes that the use of its drug screening tests may be
helpful in narrowing the scope of situations in which significantly more
expensive laboratory tests are used by quickly eliminating negative test
results, thereby further reducing costs for the testing entity.
The Company is currently negotiating with a major U.S. drug screening
program management company regarding the marketing of certain of the Company's
drug screening tests for professional U.S. distribution. There can be no
assurance, however, that a definitive arrangement will be reached with this
company.
Currently, drug screening tests, including those to be sold by the
Company, are used for employment screening and by: law enforcement and
correctional institutions; security companies and safety conscious industries,
including transportation and public utilities; insurance companies; educational
systems; government agencies, including the United States Departments of
Defense, Energy and Justice; the equine industry; and athletic and drug
rehabilitation programs. According to industry sources, U.S.
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<PAGE> 10
companies lose an estimated $100 billion per year due to problems such as
inefficiency, theft, absenteeism and higher insurance rates associated with
drug abuse.
Infectious Disease Screening. The Company has developed and is
developing the following products for the screening of infectious diseases:
Human Immunodeficiency Virus. The Company has developed a screening
test for the Human Immunodeficiency Virus ("HIV"), the causative agent of
Acquired Immunodeficiency Disease Syndrome ("AIDS").
Although point-of-care testing could possibly promote AIDS prevention
and save lives, the FDA to date has not approved any tests for screening or
on-site testing. As such, the Company intends to market this product outside
of the United States.
The Company's RAPIDTEST(TM) HIV Screen is a membrane-based solid phase
assay which uses only three reagents and can provide a permanent on-site result
in five to 10 minutes with serum, plasma, or saliva using the Company's Sani-
Sal(TM) Saliva Collector. A positive sample produces a distinct red spot on
the membrane while a negative sample does not.
The results of a clinical trial evaluation using human serum and
comparing the Company's RAPIDTEST(TM) HIV Screen to enzyme immunoassay and
western blot were recently published in the proceedings of the American Society
for Microbiology. The results of this study indicated that the RAPIDTEST(TM)
HIV Screen provided 100% sensitivity, 98.07% specificity, 95.13% positive
predicative value and 100% negative predicative value in a total of 499 serum
samples. The RAPIDTEST(TM) HIV Screen was also evaluated and met the criteria
of efficacy required by the Program for Appropriate Technology in Health of the
World Health Organization (the "WHO"). Using plasma, this evaluation provided
a 99.5% sensitivity rating and a 99.3% specificity rating on a total of 457
specimens. The Company expects to market the components of its RAPIDTEST(TM)
HIV Screen outside of the United States, and is in ongoing discussions
regarding private label marketing arrangements for both professional and
over-the-counter sales of its RAPIDTEST(TM) HIV Screen. There can be no
assurance, however, that definitive arrangements will be reached as a result of
these discussions. According to industry sources, over 33 million HIV tests
are performed annually worldwide.
Hepatitis. The Company has developed a qualitative screening strip
test for Hepatitis B surface antigen ("HBsAg") that can be used with either a
serum sample or a saliva sample collected with the Company's Sani-Sal(TM)
Saliva Collector. About 48 million hepatitis tests are done each year, with
the greatest number being for HBsAg. A correlation study was conducted against
a reference RIA test which indicated that the Company's RAPIDTEST(TM) HBsAg
Screen had a sensitivity of 100%, specificity of 99.4% and a correlation of
99.6% to the reference RIA assay. The Company's RAPIDTEST(TM) HBsAg was also
evaluated and met the criteria of efficacy required by the WHO. The Company
expects to market the components of its RAPIDTEST(TM) HBsAg Screen outside of
the United States, and is in ongoing discussions regarding private label
marketing arrangements for both professional and over-the-counter sales of its
RAPIDTEST(TM) HBsAg Screen. There can be no assurance, however, that
definitive arrangements will be reached as a result of these discussions.
According to industry sources, the U.S. hepatitis testing market in 1995 was
approximately $210 million.
Strep A. The Company's OneStep(TM) Strep A Screen is an immunoassay
detection system that screens for the presence of A beta-hemolytic
Streptococcus ("Strep A"). Using a swab sample, the test can accurately detect
the presence of Strep A within five to 15 minutes. It is a presumptive test,
which allows for immediate counseling and treatment of infected patients, and
is intended for use in physician offices, hospital laboratories and clinics.
The test system incorporates immunoassay reagents that contain highly specific
and sensitive antibodies reactive to the Streptococcal antigen.
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<PAGE> 11
Strep A is typically associated with infections of the upper
respiratory tract and skin of humans, with children usually suffering the
highest level of occurrence. Illnesses such as tonsillitis, pharyngitis,
impetigo and scarlet fever are associated with the presence of Strep A.
Because serious complications such as rheumatic fever may develop, it is
necessary to set up a rapid detection protocol for early identification and
implementation of treatment. Traditional methods of detecting Strep A require
24 to 48 hour culturing of swab specimens.
Chlamydia. The Company's OneStep Chlamydia Screen is an immunoassay
detection system that screens for the presence of Chlamydia trachomatous
directly from endocervical or endourethral swab specimens. It is a presumptive
test, which allows for immediate counseling and treatment of infected patients,
but which may also be confirmed through more extensive microbiological testing,
and is intended for use in physician offices, hospital laboratories and
clinics. Chlamydia is the most common sexually transmitted disease caused by a
bacteria. Between 60 to 70 million new cases occur annually worldwide,
including about four million new infections annually in the United States.
Among sexually active young adolescents, approximately 14% of girls and 8% of
boys are affected by Chlamydia. Resistance is not achieved by infection, so
repeat cases are not uncommon. Up to 70% of the women and as many as 30% of
the men infected with Chlamydia are asymptomatic. Because these individuals
are not aware that they are infected, they transmit the infection to their
sexual partners. A high percentage of asymptomatic women have tubal
pregnancies, infertility and pelvic inflammatory disease ("PID"). An estimated
40% to 75% of women who have three episodes of PID become infertile. Industry
sources estimate that approximately 15 million Chlamydia tests are performed
each year.
Helicobacter pylori. The Company has developed a membrane-based strip
test for Helicobacter pylori ("H. pylori") that utilizes a rapid
immunochromatographic assay to qualitatively determine antibodies to H. pylori
in human serum, plasma or whole blood. H. pylori is a stomach bacterium which
is believed to cause, among other things, peptic ulcers and gastric disorders.
It is believed that between 20% and 40% of the adult population in the United
States harbors H. pylori. Infection is also associated with increasing age and
H. pylori is thought to be present in over 60% of Americans over the age of 65.
The OneStep H. pylori Screen has been developed by the Company in conjunction
with Cortecs, Ltd., an international biotechnology company ("Cortecs").
Cortecs has a right-of-first refusal to market and distribute the Company's
OneStep H. pylori Screen. The Company has requested that Cortecs advise the
Company as to whether it intends to exercise its right-of-first refusal.
Saliva Sample Collector. The Company's Sani-Sal(TM) Saliva Collector
provides a saliva sample which contains low molecular-weight compounds,
hormones, enzymes and proteins in levels that are representative of levels at
which they are present in serum or plasma.
The Sani-Sal(TM) Saliva Collector is intended to be used with certain
of the Company's drugs of abuse and infectious disease screening tests.
Clinical trials have been completed for use of the Sani-Sal(TM) Saliva
Collector with the Company's drugs of abuse screens and clinical trials are
ongoing for use of the Sani-Sal(TM) Saliva Collector with the Company's
infectious disease screens. The target market for the Sani-Sal(TM) Saliva
Collector will be physician offices, life insurance companies, community
outreach programs, immigration centers, the military, customs, foreign
governments and correctional institutions. See "Business - Litigation" for a
description of a lawsuit brought against the Company regarding its saliva
collection technology.
Cancer Screening. The Company is developing the following products
for cancer screening:
Prostate-Specific Antigen ("PSA"). The Company has developed a
OneStep(TM) PSA Test and is currently undergoing clinical trials in preparation
for submission of this product to the FDA for Pre-Market Approval ("PMA"). The
OneStep(TM) PSA Test consists of a chromatographic absorbent device and a
unique combination of monoclonal antibodies used to selectively detect PSA in
test samples with a high
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<PAGE> 12
degree of sensitivity. The test uses a small finger stick drop of blood,
provides results in five minutes and detects levels of PSA as low as 5 ng/ml.
Alphafetoprotein ("AFP"). The Company's OneStep(TM) Alphafetoprotein
Test offers a rapid method of screening, diagnosing and monitoring primary
hepatocellular (liver) carcinoma and non-seminomatous testicular cancer. AFP
is normally produced during fetal and neonatal development by the liver, yolk
sac and gastrointestinal tract. After birth, serum AFP concentration decreases
rapidly. Elevation of serum AFP to an abnormally high level occurs in
connection with several malignant diseases, including primary hepatocellular
carcinoma and non-seminomatous testicular cancer. Serum AFP elevation is also
reported in some patients with cirrhosis and hepatitis.
Fecal Occult Blood. The Company's OneStep Fecal Occult Blood Test is
a rapid, convenient, touch free and odorless qualitative sandwich dye conjugate
immunoassay for the determination of human hemoglobin in feces. The Company's
OneStep Fecal Occult Blood Test detects lower levels of fecal occult blood than
the standard guaiac tests by employing an immunospecific, double-sandwich
capture method. Positive results appear to be more specific to human
hemoglobin and are easier to interpret than the results of guaiac methods.
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<PAGE> 13
The following table sets forth information relating to the Company's
existing diagnostic products and those currently under development. The data
included in this table is qualified in its entirety to the more detailed
information relating thereto included elsewhere in this report.
DIAGNOSTIC PRODUCT PORTFOLIO
<TABLE>
<CAPTION>
PRODUCT STATUS (1) MARKETING STRATEGY
- ---------------------------------------- -------------------------- -----------------------------------
<S> <C> <C>
GLUCOSE MONITORING:
- ------------------
TD Glucose System Preclinicals; clinical Ongoing discussions(2)
trials anticipated second
half of 1996
OneStep(TM) Blood Glucose Test Strip 510(k) approved(3) Ongoing discussions(4)
OneStep Blood Glucose Meter Clinical prototype(3) Ongoing discussions(4)
OneStep(TM) Urine Glucose Test Strip 510(k) application filed Ongoing discussions(4)
CHOLESTEROL MONITORING:
- ----------------------
OneStep(TM) Total Cholesterol Test Strip 510(k) approved(5) Ongoing discussions(2)
OneStep(TM) HDL Cholesterol Test Strip Clinical trials(5) Ongoing discussions(2)
CholestoChek Meter Clinical prototype(5) Ongoing discussions(2)
FAMILY PLANNING:
- ---------------
OneStep hCG Pregnancy(R) Test Strip 510(k) approved Boehringer Mannheim; Health-Mark(6)
OneStep hCG Pregnancy(R) Midstream Wand 510(k) approved Boehringer Mannheim; Health-Mark(6)
OneStep hCG Pregnancy(R) Test Slide 510(k) approved Health-Mark
OneStep(TM) LH Ovulation Test Strip 510(k) approved Boehringer Mannheim; Health-Mark(6)
Serum Dilution Reagent (hCG Test) 510(k) approved Boehringer Mannheim; Health-Mark(6)
DRUGS OF ABUSE SCREENING:
- ------------------------
OneStep(TM) Cocaine Screen 510(k) approved Ongoing discussions(7)
OneStep(TM) Opiates Screen 510(k) approved Ongoing discussions(7)
OneStep(TM) Amphetamine Screen 510(k) application filed Ongoing discussions(7)
OneStep(TM) Methamphetamine Screen 510(k) application filed Ongoing discussions(7)
OneStep(TM) Phencyclidine (PCP) Screen Clinical trials Ongoing discussions(7)
OneStep(TM) Benzodiazepine Screen 510(k) application filed Ongoing discussions(7)
OneStep(TM) Canabinoids (THC) Screen 510(k) application filed Ongoing discussions(7)
OneStep(TM) Methadone Screen Clinical trials Ongoing discussions(7)
OneStep(TM) Barbiturates Screen Clinical trials completed Ongoing discussions(7)
INFECTIOUS DISEASE SCREENING:
- ----------------------------
RAPIDTEST(TM) HIV Screen WHO criteria met(8) Ongoing discussions(4)(8)
RAPIDTEST(TM) HBsAg Screen WHO criteria met(8) Ongoing discussions(4)(8)
OneStep(TM) Strep A Screen Clinical trials Will seek marketing partner
OneStep Chlamydia Screen Clinical trials Will seek marketing partner
OneStep H. pylori Screen Preclinicals completed Agreement with Cortecs
SALIVA SAMPLE COLLECTOR:
- -----------------------
Sani-Sal(TM) Saliva Collector Clinical trials completed(9) To be offered with drugs of abuse and
infectious disease screens
CANCER SCREENS:
- --------------
OneStep(TM) PSA Test Clinical trials (PMA)(10) Ongoing discussions(4)(10)
OneStep(TM) Alphafetoprotein Test Clinical trials (PMA)(10) Ongoing discussions(4)(10)
OneStep Fecal Occult Blood Test Clinical trials Ongoing discussions(4)
</TABLE>
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<PAGE> 14
__________________________
(1) Except where noted, preclinicals and clinical trials refer to the
FDA's expedited 510(k) approval process.
(2) The Company has been approached by, and is in ongoing discussions
with, several major international diagnostic and pharmaceutical
companies regarding a possible collaboration for the marketing and
distribution of this product.
(3) The OneStep(TM) Blood Glucose Test Strip has received 510(k) approval
for visual monitoring. Pending completion of clinical trials for the
OneStep Blood Glucose Meter, the Company will submit a 510(k)
application for its OneStep(TM) Blood Glucose Monitoring System.
(4) The Company is in ongoing discussions regarding private label
marketing arrangements for both professional and over-the-counter
sales of this product.
(5) The OneStep(TM) Total Cholesterol Test Strip has received 510(k)
approval for visual monitoring. Pending completion of clinical trials
for the CholestoChek Meter and the OneStep(TM) HDL Cholesterol Test
Strip, the Company will submit a 510(k) application for its
OneStep(TM) CholestoChek System.
(6) Boehringer Mannheim is the non-exclusive worldwide marketing
distributor of this product and Health-Mark is the exclusive U.S.
over-the-counter marketing distributor of this product.
(7) The Company is in negotiations with a major U.S. drug screening
program management company regarding the marketing of this test for
professional U.S. distribution. The Company is also in discussions
with a major international medical diagnostic and pharmaceutical
company for over-the-counter distribution of this product.
(8) Components of this test are intended for sale outside of the United
States and meet relevant WHO criteria. At this time, the Company
cannot market this test in the United States.
(9) Clinical trials have been completed for use of this product with
certain of the Company's drugs of abuse screens; clinical trials are
ongoing for use of this product with the Company's infectious disease
screens.
(10) The Company intends to sell this test only outside of the United
States until such time as it is able to obtain FDA approval. See
"Business - Governmental Regulation" for a description of PMA.
HealthCheck(R) Home Health Screens - Health Test Center(R).
In order to capitalize on the growth in the market for
over-the-counter medical diagnostic products, the Company intends to market
certain of its over-the-counter medical diagnostic testing devices to drug,
discount and supermarket chains under the Company's HealthCheck(R) name.
HealthCheck(R) will include both diagnostic tests and companion products. The
Company plans to distinguish HealthCheck(R) from other similar products by its
packaging and labeling and by selling its products primarily through colorful
"Health Test Center(R)" point-of-sale displays. Each Health Test Center(R)
display will hold a variety of medical diagnostic test products, as well as
health information journals. FDA permission is required to market most medical
diagnostic products in the HealthCheck(R) line for over- the-counter sales.
The Company believes that simple-to-use products with the ability to
perform accurate, quantitative tests without an instrument will create new
market opportunities for home health screening and monitoring. One of the
Company's approaches for competing in this market is to produce improvements to
existing products for at-home and other point-of-care testing, where possible.
Growth in the medical diagnostic test market is being experienced as
health care providers and third party payors recognize that regular diagnostic
testing can result in earlier detection of disease, more accurate diagnoses and
more effective treatment as individuals become more involved with their own
health.
TRANSDERMAL DRUG DELIVERY SYSTEMS
Acquisition. In November 1995, by acquiring certain assets of Pharma
Patch and PP Holdings, TCPI established its Pharmetrix Division. Through its
Pharmetrix Division, the Company is engaged in the research, development and
commercialization of transdermal and mucosal drug delivery systems and skin
permeation enhancers. Transdermal drug delivery systems allow for the
controlled release of certain drugs directly into the bloodstream through
intact skin. Mucosal drug delivery is the controlled release of drug compounds
through mucus membranes using sprays, lozenges or other forms of delivery.
Skin permeation enhancers modify the permeability of the skin to allow for a
significant increase in the transport of drugs through the skin.
The Company's transdermal patch technology is based on patented and
proprietary multi-laminate adhesive matrix and skin permeation technology. The
Company is using this technology to
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<PAGE> 15
develop transdermal drug delivery products which offer one or more of the
following advantages: increased efficacy and efficiency of the therapeutic
agents involved; increased bioavailability profiles; reduced costs; and
delivery of larger molecules through the skin thereby increasing the types of
drugs that can be transdermally delivered. All of the Company's transdermal,
mucosal and skin permeation products are in the early stages of development.
While results of certain preliminary clinical and/or laboratory studies have
indicated the efficacy of the Company's transdermal, mucosal and skin
permeation technologies, before any products developed by the Company can be
commercially marketed, significant additional testing will be necessary
(including laboratory tests on animals and humans) and results must be filed
with the FDA and/or similar regulatory agencies in other countries where such
products may be sold. The process of developing individual products and
obtaining FDA or foreign government approval could take up to several years for
each product. However, there can be no assurance that development of any such
products will be completed or that FDA approval will be secured.
Transdermal drug delivery can be compared to continuous, controlled
intravenous delivery of a drug using the skin as a port of entry instead of an
intravenous needle. Although the skin is only a few millimeters thick, its
outer layer, the stratum corneum, serves as a highly protective barrier against
physical, chemical and bacterial penetration. This barrier primarily consists
of dead skin cells bound together by certain fatty (lipid) materials. Only a
small number of drugs that are effective in the body in very low concentrations
and/or have particular physical properties have been successfully delivered
through the skin in therapeutic quantities. Drugs which cannot be successfully
delivered through the skin include high molecular weight drugs and drugs which
are either charged or highly polar. The development of transdermal systems
that can deliver a variety of drugs through the skin in therapeutic quantities
may have one or more important medical benefits including: controlled drug
release at a steady rate over a long period of time; elimination of the costs
associated with frequent physician visits (usually related to testing of the
blood levels of the administered drug); administration of lower doses of
certain drugs (because the drugs do not initially pass through the liver, where
extensive metabolic breakdown of certain drugs may occur); and ease of use for
the patient.
Several major international pharmaceutical companies have entered into
agreements with the Company for the development and/or commercialization of
certain of its transdermal and mucosal technologies: Pharmacia AB (smoking
addiction); Revlon Research Center, Inc. (skin permeation); and Taiho
Pharmaceutical Co., Ltd. (urinary incontinence). The Company is also in
discussions with a major generic drug company concerning the development and
commercialization of its estradiol, nicotine and nitroglycerin transdermal
products. There can be no assurance, however, that definitive arrangements
will be reached with any of these companies.
Planned Product Development. The Company presently intends to
concentrate on the development of transdermal products for the treatment of the
following conditions or diseases:
Hormone Replacement for Menopausal Symptoms/Osteoporosis. The Company
is developing two hormone replacement transdermal drug delivery systems, one
for delivery of estradiol and the other for delivery of a combination of
estradiol and progesterone. With the aging of the population over the next
several decades, conditions and diseases such as menopause and osteoporosis,
which may benefit from hormone replacement therapy, will become significantly
more prevalent. It has been estimated that there are approximately 90 million
post-menopausal women worldwide and that this group is one of the fastest
growing demographic segments. Estimates indicate that osteoporosis, a
progressive thinning and weakening of the bones, accounts for 1.8 million bone
fractures in the United States each year. According to the National
Osteoporosis Foundation, approximately 75 million people worldwide, and 25 to
30 million in the United States, have osteoporosis. It is estimated that the
direct and indirect costs of osteoporosis-related bone fractures in the United
States are between $10 and $20 billion annually. The incidence of osteoporosis
is expected to double in the next 25 to 35 years due to the continued aging of
the population.
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<PAGE> 16
Industry sources estimate that the 1994 worldwide market for estrogen and
combination transdermal drug delivery systems was approximately $280 million.
Cardiovascular Disease. Angina pectoris is a condition caused by the
temporary inability of the coronary arteries to supply a sufficient quantity of
oxygenated blood to the heart muscle. An angina attack is accompanied by
steady, severe pain and intense pressure in the region of the heart. Angina
attacks may be relieved by the administration of nitroglycerin or isosorbide
dinitrate ("ISDN"), known coronary vasodilators, which increase the flow of
oxygenated blood to the heart. The American Heart Association estimates that
angina affects over three million people in the United States.
Nitroglycerin and ISDN are available in several conventional dosage
forms including sublingual tablets and other oral and topical formulations.
Many of these dosage forms have certain limitations. For example, orally
administered nitroglycerin or ISDN involve extensive first-pass liver
metabolism to inactive metabolites. Sublingually administered nitroglycerin,
often used for acute angina attacks, goes directly into the bloodstream, but
due to its short serum half-life, dosing must be repeated every five minutes
until symptoms subside. Lastly, topical ointments are available which deliver
nitroglycerin or ISDN through the skin and directly into the bloodstream, but
these ointments are messy and difficult to dose accurately. Transdermal drug
delivery systems have become a widely used form of nitroglycerin and ISDN
delivery because they avoid these limitations and help prevent angina attacks
by reliably providing continuous therapeutic levels of these drugs in the
bloodstream. Transdermal nitroglycerin delivery systems, which were first
introduced commercially in 1982, are currently marketed by several companies.
Industry sources estimate that the worldwide transdermal nitroglycerin market
in 1994 was approximately $335 million.
Smoking Addiction. Industry sources estimate that in 1991 26% of
adults in the United States smoked, and it is well recognized that cigarette
smoking is the leading cause of preventable disease and death. In 1990, there
were over 400,000 smoking related deaths in the United States. The health
risks of smoking and non-smokers' growing intolerance of being exposed to
secondary smoke are all increasing the demand for effective methods to aid
smokers to give up their habit.
Studies have shown that 80% to 90% of smokers want to stop smoking and
have tried at least once to do so. Of those, 70% relapsed during the first
three months. The main focus of treatment in recent years has been transdermal
nicotine patches. In 1991 and 1992, the FDA approved four nicotine patches for
sale by other companies. Those four products are now available in most
developed countries throughout the world. Industry sources estimate that the
worldwide market for transdermal smoking cessation products was approximately
$245 million in 1994.
The Company has entered into an agreement with Pharmacia AB for the
commercialization of certain nicotine transdermal drug delivery technology
developed by the Company, pursuant to which the Company is entitled to ongoing
royalties based on sales of a second generation nicotine transdermal drug
delivery system.
Urinary Incontinence. With the aging of the general population over
the next several years, the urinary incontinence treatment market is expected
to grow substantially. Industry sources estimate that the number of people
over the age of 65 in the United States is expected to rise from 31.6 million
in 1990 to 35 million in 2000. Current treatment for urinary incontinence
requires two to four daily doses of incontinence drugs, a regimen particularly
difficult for the elderly. A transdermal drug delivery system under
development by the Company has the potential to simplify the dosage regimen and
provide a visual indication that the patient has taken the medication.
The Company has entered into an agreement with Taiho Pharmaceutical
Co., Ltd. for the development and commercialization of a transdermal drug
delivery system for the treatment of urinary
16
<PAGE> 17
incontinence. Under the terms of the agreement the Company will receive a
license fee, development fees, milestone payments and royalty fees on final
product sales.
The following table sets forth information relating to the Company's
transdermal drug delivery products under development. The data included in
this table is qualified in its entirety to the more detailed information
relating thereto included elsewhere in this report.
DRUG DELIVERY PRODUCT PORTFOLIO
<TABLE>
<CAPTION>
PRODUCT INDICATIONS STATUS MARKETING STRATEGY
- ---------------------------------- ------------------------- ----------------- -------------------------
<S> <C> <C> <C>
TRANSDERMAL DRUG DELIVERY SYSTEMS:
- ---------------------------------
HORMONE REPLACEMENT/OSTEOPOROSIS
Estradiol Estrogen replacement Phase I clinicals Ongoing discussions(2)
completed(1)
Estradiol/Progestin Hormone replacement and Preclinicals Seeking marketing partner
contraception
Testosterone Hormone replacement Preclinicals Seeking marketing partner
Calcitonin Calcium therapy Preclinicals Seeking marketing partner
(osteoporosis)
CARDIOVASCULAR DISEASE
Nitroglycerin Angina Preclinicals Ongoing discussions(2)
Isosorbide Dinitrate (ISDN) Angina Phase I clinicals Seeking marketing partner
completed
SMOKING ADDICTION
Nicotine Smoking cessation Phase I clinicals Ongoing discussions(2)
completed(1)
OTHER
Bup-4 Incontinence Urinary Incontinence Preclinicals Agreement with Taiho
Ketorolac Analgesia Preclinicals Seeking marketing partner
Papaverine Male impotence Preclinicals Seeking marketing partner
Methadone Narcotic withdrawal Preclinicals Seeking marketing partner
SKIN PERMEATION ENHANCER:
- ------------------------
SR-38 Skin permeation Preclinicals Agreement with Revlon
enhancer Research Center, Inc.;
ongoing discussions(3)
ELECTRICALLY ASSISTED DRUG DELIVERY SYSTEMS:
- -------------------------------------------
Leuprolide Prostatic cancer; large Preclinicals(4)
molecule prototype
</TABLE>
___________________________
(1) The Company initially intended to file a New Drug Application ("NDA")
for a product in this category and has completed Phase I clinical
studies on that product. The Company now plans to file an Abbreviated
New Drug Application ("ANDA") for a product in this category and is
reviewing its Phase I clinical data with regard to the design of
bioequivalence studies for the purpose of an ANDA filing.
(2) The Company is in discussions with a major generic drug company
concerning the development and commercialization of this product in
the United States and Canada.
(3) The Company is in discussions with major international cosmetic and
pharmaceutical concerns for the development and commercialization of
this product, each discussion with regard to a separate specific
application of this product.
(4) In conjunction with Genetronics, Inc., the Company has established a
joint venture in order to develop and commercialize electrically
assisted drug delivery technology.
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<PAGE> 18
BIOCHEMICAL MANUFACTURING
The Company currently manufactures the specialty chemical Tris, a
biological buffer having numerous applications in the manufacturing of
pharmaceutical, cosmetic, diagnostic and other products. Although the Company
is capable of manufacturing other biochemical products, it does not intend to
broaden its product line at this time. The Company does, however, intend to
continue manufacturing and selling Tris. Sales of Tris constituted 9.0% of the
Company's net sales for 1994 and 10.4% of net sales in 1995.
PRODUCT RESEARCH AND DEVELOPMENT
Most of the Company's products are in various stages of development
and have not yet been commercialized. The Company conducts an active research
and development program to strengthen and broaden its existing products and to
develop new products and systems. The Company's development strategy is to
identify products and systems which are, or are expected to be, needed by a
significant number of potential customers in the Company's markets and to
allocate a greater share of its research and development resources to areas
with the highest potential for future benefits to the Company. In addition,
the Company seeks to develop specific applications related to its present
technology.
In fiscal years ended December 31, 1995, 1994 and 1993 the Company's
research and development expenses were approximately $434,981 (approximately
$1.8 million pro forma to reflect the acquisition of the Pharmetrix Division),
$73,402 and $2,775 respectively.
MANUFACTURING AND MATERIALS
Third party contractors manufacture a majority of the Company's
products. The Company does not presently have sufficient in-house
manufacturing capabilities to supply its customer's demands, although the
Company is presently reviewing the possibility of expanding its manufacturing
capabilities. Although the Company has identified alternate manufacturing
sources, a change in manufacturers without appropriate lead time could result
in a material delay in the delivery of the Company's products and subject the
Company to less favorable price terms.
The Company purchases, pursuant to written agreements with its key
suppliers, the materials used to manufacture its products from single suppliers
to obtain the most favorable price and delivery terms. Although the Company
has identified an alternate supply source with respect to each of such
materials, a change in the supplier of these materials without the appropriate
lead time could result in a material delay in the delivery of products to the
Company's customers. There can be no assurance that the Company would not be
subject to less favorable price and delivery terms as a result of changing
suppliers.
PATENTS, TRADEMARKS AND TECHNOLOGIES
The Company currently owns 16 U.S. patents and 28 foreign patents, and
has seven pending U.S. patent applications and 38 pending foreign patent
applications.
Mr. Aronowitz is the legal owner and a co-inventor of certain key
patents utilized by the Company, and he has licensed to the Company the right
to utilize the patents. The license agreement between Mr. Aronowitz and the
Company provides that any patents, products, inventions, devices or other items
developed by Mr. Aronowitz during the term of the license agreement (other than
those based upon the patents licensed pursuant to the license agreement) in the
field of medical diagnostics, pharmaceuticals, transdermal testing, transdermal
drug delivery, medical chemistry or medical
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<PAGE> 19
biochemistry, medical devices or health care products are the property of the
Company. See "Certain Relationships and Related Transactions."
The Company is in the process of challenging the validity and/or scope
of a patent in Europe. In the event that the validity and scope of such patent
is upheld and the Company's products are found to have infringed such patent,
the Company may be required, in certain European countries, to modify or
discontinue distribution of one of its pregnancy products, which accounted for
approximately 8% to 10% of the Company's gross sales in 1995. A finding that
the Company's products infringe this patent could have a material adverse
effect on the Company's operating results. The Company believes that the
validity and scope of such patent will not be upheld and, accordingly, has
taken no action to modify its products.
Although the Company has obtained patents in the United States with
regard to aspects of its membrane-based technology and specific applications
thereof, the Company does not have European patents which correspond to certain
of such U.S. patents. To the best of the Company's knowledge, however, its
membrane-based technology does not infringe the patent of any third party in
the United States or Europe. The Company is seeking, and intends to continue
to seek, patent protection where appropriate for improvements to its
membrane-based technology.
The Company has brought an action against Home Diagnostics, Inc.
("HDI") for infringement of certain patents relating to its membrane-based
technology. The matter has been tried and the parties are currently awaiting
the court's decision. Prior to the trial, HDI raised the defenses of
invalidity and non-infringement of these patents. The Company has been advised
by its counsel, however, that HDI did not pursue the defense of invalidity at
trial. In the event that the court finds that HDI has not infringed the
Company's patents, HDI would be permitted to continue to sell its products.
The Company believes that this result would not have a material adverse effect
on it.
The Company requires each of its employees, consultants and advisors
to execute a confidentiality and assignment of proprietary rights agreement
upon the commencement of an employment or a consulting relationship with the
Company. These agreements generally provide that all inventions, ideas and
improvements made or conceived by the individual arising out of the employment
or consulting relationship shall be the exclusive property of the Company and
that all information related thereto shall be kept confidential and not
disclosed to third parties except by consent of the Company or in other
specified circumstances. There can be no assurance, however, that these
agreements will provide effective protection for the Company's proprietary
information in the event of unauthorized use or disclosure of such information.
The Company's success will depend, in part, on its ability to protect,
obtain or license patents, protect trade secrets and operate without infringing
the proprietary rights of others. See "Business - Litigation." There can be
no assurance, however, that existing patent applications will mature into
issued patents, that the Company will be able to obtain additional licenses to
patents of others, or that the Company will be able to develop its own
patentable technologies. Further, there can be no assurance that any patents
issued to the Company will provide it with competitive advantages or will not
be challenged by others, or if challenged, will be held valid, or that the
patents of others will not have an adverse effect on the ability of the
Company to conduct its business. In addition, there is no assurance that the
Company's current patents or any patents issued in the future will prevent
other companies from independently developing similar or functionally
equivalent products.
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COMPETITION
Competition in the development and marketing of medical diagnostic
tests and transdermal drug delivery products is intense and expected to
increase. The Company's competitors include companies that have developed
products similar in design and capability to those of the Company as well as
suppliers of such products, including hospitals and laboratories. Many of the
Company's current and potential competitors have significantly greater
technical, financial and marketing resources than the Company. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. There can be no assurance that the Company's
products will be competitive with existing or future products of competitors.
The Company believes that competition in the sale of medical
diagnostic tests is based primarily upon the following factors: accuracy and
precision, speed of response, ease of use and cost. Although the Company
believes that it competes favorably in each of these categories, many of the
Company's competitors in this market have significantly greater resources and
experience than the Company and there can be no assurance that the Company will
be able to compete favorably.
The Company believes that its transdermal drug delivery products will
have to compete on the basis of safety, efficacy, patient compliance, reduced
side effects, product appearance and comfort, price, and, in certain cases,
scope of patent rights. There can be no assurance that the Company will
successfully develop technologies and products that are more effective or
affordable than those being developed by its competitors. In addition, one or
more of the Company's competitors may achieve patent protection, regulatory
approval or commercialization earlier than the Company. The first transdermal
drug delivery product introduced in a particular area may gain a competitive
advantage relative to other entrants to the market.
MARKETING AND SALES
To date, the Company's medical diagnostic products have been primarily
distributed through strategic alliances. To a lesser extent, the Company's
medical diagnostic products have been distributed by the Company directly under
the Company's proprietary brand name and under private label arrangements with
drug, discount and supermarket chains such as CVS, Duane Reade, Thrifty
Payless, Thrift Drug, Woolworth, Fedco, Long's and Smith's Food & Drug.
Although the Company intends to expand direct distribution of its diagnostic
products as evidenced by the creation of the HealthCheck(R) line of products
and the Health Test Center(R), the Company intends to enter into strategic
alliances with major international medical diagnostic and pharmaceutical
companies for the marketing of many of its diagnostic products. These
companies have significantly greater financial, marketing and other resources
than the Company, and will therefore be able to market the Company's products
more effectively through a wider range of distribution channels to a larger
market.
The Company's strategy with respect to development and
commercialization of its transdermal and mucosal drug delivery and skin
permeation enhancer products is to enter into strategic alliances with third
parties that can fund a portion of product development costs, market the
product and, in some cases, participate in clinical testing and obtain
regulatory approvals. In an effort to exercise control over the quality of its
products and capture a larger portion of the revenues therefrom, the Company
will seek to retain manufacturing rights to its products developed under such
strategic alliances. The Company has established strategic alliances with
certain major international pharmaceutical companies for the development and
commercialization of certain of its transdermal products: Pharmacia AB (smoking
addiction); Revlon Research Center, Inc. (skin permeation); and Taiho
Pharmaceutical Co., Ltd. (urinary incontinence).
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Approximately 70% of the Company's total revenues for the year ended
December 31, 1995 and approximately 90% of the Company's total revenues for the
fiscal years ended December 31, 1993 and 1994 were generated by sales of the
Company's One Step hCG Pregnancy(R) Tests to a single customer, Boehringer
Mannheim. The principal products purchased by Boehringer Mannheim were the
Company's OneStep hCG Pregnancy(R) Test Slide, its OneStep hCG Pregnancy(R)
Test Strip, its OneStep hCG Midstream Wand and its OneStep(TM) LH Ovulation
Test Strip.
EMPLOYEES
As of December 31, 1995, the Company employed 39 full-time employees,
including 16 involved in research and development, 10 involved in
administration, eight in production and maintenance and five in marketing and
sales. To temporarily expand its capabilities for larger assembly and
packaging projects, the Company also hires part time employees who work on a
contract basis. The Company has no collective bargaining or similar agreement
with its employees, but does have employment agreements with certain executive
officers. See "Directors and Executive Officers of the Registrant - Employment
Contracts." Although management does not anticipate any difficulty in locating
and engaging employees to meet the Company's expansion plans, there can be no
assurance that the Company will be successful in doing so.
GOVERNMENTAL REGULATION
Overview. The development, manufacture and marketing of drug delivery
systems and medical diagnostic products are subject to regulation by the FDA
and other federal, state and local entities. These entities regulate, among
other things, research and development activities and the testing,
manufacturing, packaging, labeling, distribution, storage and marketing of the
Company's products. Sales of the Company's products outside the United States
are subject to comparable regulatory requirements. These requirements vary
widely from country to country.
Medical Diagnostic Products. FDA permission to market and distribute
a new medical diagnostic product can be obtained in one of two ways. If a new
or significantly modified product is "substantially equivalent" to an existing
legally marketed product, the new product can be commercially introduced after
submission of a 510(k) notification to the FDA, and after the subsequent
clearance or approval by the FDA. Less significant modifications to existing
products that do not significantly affect the product's safety or effectiveness
can be made by the Company without a 510(k) notification, provided that the
rationale supporting the decision not to file a 510(k) is documented in
internal files.
The second, more stringent approval process applies to a new product
that is not substantially equivalent to an existing product. A premarket
approval application ("PMA") will be required for this type of product. The
steps required in the PMA process generally include: (i) preclinical studies;
(ii) clinical trials in compliance with testing protocols approved by an
Institutional Review Board ("IRB") for the participating research institution;
(iii) data from clinical trials sufficient to establish safety and
effectiveness of the device for its intended use; (iv) submission to the FDA of
an application that contains, among other things, the results of clinical
trials, a full description of the product and its components, a full
description of the methods, facilities and controls used for manufacturing and
proposed labeling; and (v) review and approval of the PMA by the FDA before the
device may be shipped or sold commercially. Finally, the manufacturing site
for the product subject to the PMA must operate using device good manufacturing
practices ("GMP") and pass an FDA Pre-Approval Inspection ("PAI") before
product commercialization. A company that manufactures devices subject to
510(k) clearance must also comply with device GMP and will be subject to
periodic inspections by the FDA to confirm compliance.
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<PAGE> 22
A device requiring a PMA that has not been approved for marketing in
the United States, or one that is not substantially equivalent to a currently
marketed device, may be exported to a foreign country for sale only after FDA
export authorization has been obtained (i.e., the FDA has determined that the
exportation of the device is not contrary to public health and safety and that
the company has received approval of the country to which the device is
intended for export). Certain reform proposals, if adopted, could modify the
procedures required to export unapproved devices from the United States. In
addition, a medical device company may be required to conduct post-market
surveillance and/or to provide periodic reports to the FDA containing safety
and efficacy information. The FDA also requires that medical device companies
undertake post-market reporting of certain events associated with their
products.
Drug Delivery Products. The process required by the FDA before a drug
delivery system may be marketed in the United States depends on whether the
pharmaceutical compound has existing approval for use in other dosage forms
(e.g., oral solution, tablet). If the drug is a new chemical entity that has
not been approved, then the process includes: (i) preclinical laboratory and
animal tests; (ii) the filing of an Investigational New Drug Application
("IND") with the FDA requesting authorization to conduct clinical trials; (iii)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the drug for its intended use; (iv) submission to the FDA of a New
Drug Application ("NDA"); and (v) FDA review and approval of the NDA. If the
drug has been previously approved, then the sponsor of a generic form of the
same drug may obtain approval by submitting an Abbreviated New Drug Application
("ANDA") that demonstrates that the two products are bioequivalent. In
addition to the foregoing, the FDA requires proof that the drug delivery system
delivers sufficient quantities of the drug to the bloodstream to produce the
desired therapeutic result.
Pursuant to the Prescription Drug User Fee Act of 1992, drug
manufacturers are required to pay three types of user fees: a one time
application fee for approval of an NDA; an annual product fee imposed on
prescription drug products after FDA approval; and an annual establishment fee
imposed on facilities used to manufacture prescription drugs. The fee rates
for 1996 are: $204,000 one time fee for an application requiring clinical
data; $135,300 annual establishment fee; and $12,600 annual product fee. These
fee amounts are likely to increase in the future.
Under the Drug Price Competition and Patent Term Restoration Act of
1984, an NDA sponsor may be granted market exclusivity for a period of time
following FDA approval, regardless of the patent status of the product, for
certain drug products (e.g., new chemical entities). This marketing
exclusivity would prevent a third party from obtaining FDA approval for a
similar or identical drug through the ANDA process. There can be no
assurances, however, that any of the Company's products will be afforded market
exclusivity.
In addition to obtaining FDA approval for each drug product, each
manufacturing establishment of new drugs must receive approval by the FDA.
Among the conditions for such approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures conform to the
FDA's current drug GMP regulations. Drug manufacturers are also subject to
periodic GMP inspections by the FDA to confirm compliance. Finally, in order
to export unapproved drug products from the United States for commercial or
clinical use, prior FDA export approval is required.
The process of completing clinical testing and obtaining FDA approval
or clearance for device or drug products is likely to take a number of years
and require the expenditure of substantial resources. The FDA may deny a
clearance or approval if applicable regulatory criteria are not satisfied or
may require additional clinical testing. Even if such data are submitted, the
FDA may ultimately decide that the submission does not satisfy the criteria for
clearance or approval. Product clearances or approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
after the product reaches the market. The FDA may require testing and
surveillance programs to monitor the
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<PAGE> 23
effect of products that have been commercialized, and it has the power to
prevent or limit further marketing of the product based on the results of these
post-marketing programs.
Additional requirements could be imposed by new legislation or
regulation that could significantly affect product development, product
approval and/or marketing activities. For example, the payment of user fees to
the FDA for medical device product application review is currently being
considered by the U.S. Congress, and, if such legislation is enacted, this
could significantly increase the costs associated with product development and
marketing.
There can be no assurance that problems will not arise that could
delay or prevent the commercialization of the Company's products, or that the
FDA, state and foreign regulatory agencies will be satisfied with the results
of the clinical trials and approve the marketing of any products.
The Company is registered with and its premises have been approved by
the United States Environmental Protection Agency and has all necessary state,
city and county environmental approvals. The Company believes that it is in
compliance with all such applicable governmental regulations.
PRODUCT LIABILITY INSURANCE
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing, marketing and sale of medical
diagnostic and drug delivery products. Although the Company carries product
liability insurance, there can be no assurance that claims exceeding the policy
limit may not be made, potentially causing a material adverse effect on the
Company.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company has leased approximately 13,800 square feet of space,
including office, manufacturing, and warehouse space, in a building located at
3341 S.W. 15th Street, Pompano Beach, Florida 33069. The Company exercised an
option, effective March 1, 1996, to acquire an additional 2,000 square feet of
space and to extend the lease expiration date to October 1999. The Company
currently pays approximately $11,220 per month in rent, including sales tax and
maintenance fees. The rent is adjusted annually based upon changes in the U.S.
Consumer Price Index. The lease also requires the Company to pay real estate
taxes, insurance and certain costs for maintaining the premises. The Company
has a right of first refusal to lease approximately 26,000 additional square
feet of space at this location. Management believes that suitable premises are
readily available on acceptable terms should the present premises become
unavailable for any reason.
The Company also leases a 25,000 square foot custom-designed facility
in Menlo Park, California which includes office space, fully-equipped
laboratories for transdermal drug delivery research and production
capabilities. This lease expires in June 1999 and the Company currently pays
approximately $26,000 per month in rent under the lease.
ITEM 3. LEGAL PROCEEDINGS
On August 11, 1995, Joseph D'Angelo et al. ("D'Angelo") filed a
complaint in the Circuit Court of Broward County, Florida against the Company,
Jack L. Aronowitz and certain other parties (the "Lawsuit"). With respect to
the Company and Mr. Aronowitz, the Lawsuit alleges, among other things,
misappropriation of trade secrets, confidential information and intellectual
property related to an HIV saliva test kit and misappropriation of D'Angelo's
"transdermal technology" and "non-invasive testing technology." The Lawsuit
seeks injunctive relief and monetary damages of in excess of $2.0 million.
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<PAGE> 24
The Company and Mr. Aronowitz met D'Angelo in June 1994. By this time
the Company had developed and patented certain membrane technology capable of
detecting the presence and concentration of a variety of analytes such as
glucose, urea, cholesterol, drugs of abuse and HIV in a fluid sample (the
"Membrane"). The Company was seeking a joint venture partner with technology
capable of extracting fluid through the skin to work with the Membrane in a
"transdermal patch" or similar structure. The Company believed D'Angelo had or
was in the process of developing penetration enhancement technology which might
be suitable for use with the Membrane.
The Lawsuit alleges that the Company misappropriated trade secrets,
confidential information and intellectual property relating to the D'Angelo HIV
saliva test kit. As with other allegations in the Lawsuit, no documents or
other exhibits are relied upon by D'Angelo in support of these allegations.
The Company had tested the D'Angelo HIV saliva test kit and determined that it
could not be made to work with the Company's existing membrane-based, serum HIV
test system.
The Lawsuit also alleges that the Company misappropriated D'Angelo's
"transdermal technology" and "non-invasive testing technology." The Lawsuit
neither explains what is meant by these terms nor attaches any documents or
exhibits in support of this allegation. The Company's patent counsel has
confirmed that the skin penetration enhancer system currently being developed
by the Company's Pharmetrix Division is markedly different from that disclosed
in two U.S. patents recently issued to D'Angelo relating to devices and/or
methods for the non-invasive collection of interstitial fluid samples from the
skin (the "D'Angelo Patents"). There can be no assurance, however, that the
D'Angelo Patents encompass all trade secrets and/or confidential information
that D'Angelo may claim relate to his transdermal technology.
Although the Lawsuit is in its preliminary stages and no discovery has
yet been taken, the Company, after consultation with its counsel, believes that
each of the allegations made against it in the Lawsuit are without merit. See
"Business - Patents, Trademarks and Technologies" for information relating to
legal proceedings regarding the Company's patents.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holder, through the submission of
proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market
under the symbol TCPI and is included for quotation on the Nasdaq SmallCap
Market. The following table sets forth the range of high and low sale prices
for the Common Stock for the periods indicated, as reported by the Nasdaq
SmallCap Market.
<TABLE>
<CAPTION>
Sale Prices (1)
---------------
High Low
------ ------
<S> <C> <C>
FISCAL YEAR 1995
Period from February 2, 1995 to March 31, 1995 (2) . . . . . . . . . . . . . $ 2.69 $ 2.00
Quarter Ended June 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . . 6.63 2.38
Quarter Ended September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . 15.50 6.31
Quarter Ended December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 19.75 11.38
FISCAL YEAR 1996
Quarter Ended March 31, 1996 (to March 14, 1996) . . . . . . . . . . . . . . $22.38 $17.63
</TABLE>
___________________________
(1) The prices set forth in this table have been retroactively adjusted to
give effect to a two-for-one stock split effected by the Company as of
July 31, 1995.
(2) In connection with the Company's initial public offering, the Common
Stock initially was included for quotation on the Nasdaq SmallCap
Market on February 2, 1995. Prior to February 2, 1995, there was no
established public trading market for the Common Stock.
There were approximately 93 holders of record of Common Stock as of
March 26, 1996. The Company has applied for listing of the Common Stock on the
Nasdaq National Market. There can be no assurance, however, that such
application will be approved.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is principally engaged in the design, development,
manufacture and marketing of a wide range of medical diagnostic products for
use in physician offices, at home and at other point-of-care locations. In
addition to its ongoing medical diagnostics business, the Company recently
became involved in the research, development and commercialization of
transdermal and mucosal drug delivery systems and skin permeation enhancers.
At December 31, 1995, the Company had an accumulated deficit and total
shareholders' equity of $1,437,675 and $16,153,547 respectively.
The Company entered the transdermal and mucosal drug delivery and skin
permeation enhancer business through its acquisition (the "Acquisition"), in
November 1995, of certain assets of Pharma Patch Public Limited Company
("Pharma Patch") and substantially all of the assets of its wholly-owned
subsidiary, PP Holdings, Inc. ("PP Holdings"). The assets purchased included,
without limitation, 11 U.S. patents relating to transdermal drug delivery and
skin permeation technology, proprietary information and trade secrets related
thereto, property and equipment and certain licensing and product feasibility
agreements entered into by Pharma Patch and PP Holdings (the "Purchased
Assets"). The intellectual property acquired in the Acquisition, valued at
approximately $14,876,000, will be amortized over its useful life of
approximately 15 years. The Company also assumed the sublease of a 25,000
square foot custom designed research facility in Menlo Park, California. In
consideration for the Purchased Assets, the Company: (i) issued, after certain
closing adjustments, an aggregate of 786,214 shares of Common Stock, valued at
$11,919,000; (ii) issued two promissory notes in the aggregate principal amount
of $5,000,000 to Flora, Inc. in exchange for the cancellation of a $5,000,000
promissory note issued to Flora, Inc. by Pharma Patch; (iii) issued a third
promissory note to Flora, Inc. in the principal amount of $188,887.66
(collectively, the "Flora Notes"); and (iv) paid $10,000 in cash. At the
closing of the Acquisition, the Company was obligated to issue an additional
100,000 shares of Common Stock valued at $1,516,000 to an advisor who assisted
the Company in connection with this transaction. The discussion of the
comparison of the results of operations for the year ended December 31, 1995,
to the year ended December 31, 1994, includes where appropriate, reference to
combined pro forma information giving effect to the Acquisition as if it had
occurred as of January 1, 1995.
Historically, the Company's product development efforts have been
self-funded. The Company expects to continue developing its medical diagnostic
products internally, although it intends to enter into strategic alliances with
major international diagnostic and pharmaceutical companies for the marketing
and distribution of these products. With respect to the development and
commercialization of its transdermal and mucosal drug delivery systems and skin
permeation enhancers, the Company intends to enter into strategic alliances
with third parties that may, in some cases fund a portion of the product
development costs, participate in clinical testing, obtain regulatory approvals
and market the product.
In order to support anticipated growth and new product development,
the Company expects to incur significantly increased operating expenses and
capital expenditures in the future and, as such, the Company believes that its
results of operations in prior periods may not be indicative of results in
future periods. Primarily as a result of increased research and development
and other operating expenses associated with the Purchased Assets, the Company
anticipates incurring net losses in 1996 and may continue to incur net losses
thereafter until such time, if any, as the Company generates sufficient
revenues from product sales to offset operating expenses. The Company expects
to incur significant expenses in 1996 primarily as a result of: (i) the
increased research and development associated with the TD Glucose System and
various transdermal and mucosal drug delivery products and skin permeation
enhancers; (ii) the expansion of direct distribution of medical diagnostic
products; (iii) the introduction
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<PAGE> 27
of the Company's OneStep(TM) CholestoChek System; and (iv) the hiring of
additional personnel and other costs associated with expansion of the Company's
manufacturing facilities. Additionally, the Company anticipates significant
expenditures in 1996 as a result of the purchase of production equipment.
The Company is challenging the validity and/or scope of a patent in
Europe. In the event that the validity and scope of such patent is upheld and
the Company's current products are found to have infringed such patent, the
Company may be required, in certain European countries, to modify or
discontinue distribution of one of its pregnancy products, which accounted for
approximately 8% to 10% of the Company's gross sales in 1995. Although a
finding that the Company's products infringe this patent could cause results of
operations in prior periods not to be indicative of future results, the Company
believes that the validity and scope of such patent will not be upheld and,
accordingly, has taken no action to modify its products. See "Business -
Patents, Trademarks and Technologies."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales. The Company's gross sales increased 56.4% to $4,711,994 in
1995 from $3,012,967 in 1994. This increase resulted principally from the
introduction of the over-the-counter OneStep hCG Pregnancy(R) Midstream Wand,
resumed production of the specialty chemical Tris (hydroxy methyl) aminomethane
("Tris") and successful establishment of the Company's direct distribution of
over-the-counter products. During 1993 and 1994, the Company had engaged in
only limited production of Tris and other chemical products because it was in
the process of rebuilding and relocating its chemical manufacturing facilities.
These facilities were substantially completed during the fourth quarter of 1994
at which time the production of Tris resumed. Notwithstanding the 56.4%
increase in gross sales, the Company's net sales increased only 39.0% in 1995
as compared to 1994. The significantly lower increase in net sales as compared
to gross sales was due principally to a charge of $523,533 related to the
return of products for repackaging to meet new customer specifications.
Substantially all of these returned products were repackaged and reshipped to
the customer during the fourth quarter of 1995. On a pro forma basis, giving
effect to the Acquisition, the Company's gross sales for 1995 would have been
$5,101,049.
Gross Profit. The Company's gross profit decreased $101,250 to
$935,711 in 1995 from $1,036,961 in 1994. The Company's gross profit as a
percentage of net sales decreased to 22.3% in 1995 from 34.4% in 1994 as a
result of start-up costs related to the resumption of manufacturing of Tris
and expenses associated with increased in-house manufacturing of the Company's
products. In addition, due to the reshipment, during 1995, of a significant
amount of returned products, the Company recorded a disproportionately large
number of sales of component products on which it realizes lower gross margins
than on sales of finished products. On a pro forma basis, giving effect to the
Acquisition, the Company's gross profit for 1995 would have been $1,324,766.
Selling, General and Administrative. The Company's selling, general
and administrative expenses increased 194.4% to $2,025,847 in 1995 from
$688,036 in 1994. As a percentage of net sales, selling, general and
administrative expenses increased to 48.4% in 1995 from 22.8% in 1994. This
increase was principally attributable to costs associated with additional
marketing, regulatory, quality control, laboratory, production and
administrative personnel, approximately $275,000 relating to legal fees
associated with claims for patent infringement and interference actions
initiated by the Company against several third parties and indirect costs
associated with the acquisition of the Pharmetrix Division. On a pro forma
basis, giving effect to the Acquisition, the Company's selling, general and
administrative expenses for 1995 would have been $4,991,580.
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<PAGE> 28
Research and Development. The Company's research and development
expenses increased 492.6% to $434,981 in 1995 from $73,402 in 1994. As a
percentage of net sales, research and development expenses increased to 10.4%
in 1995 from 2.4% 1994. This increase was primarily the result of costs
related to the operation of the Company's Pharmetrix Division and costs
associated with the development of the Company's OneStep(TM) Helicobacter
pylori Screen, its CholestoChek Meter, its TD Glucose System and certain of its
drugs of abuse screens. On a pro forma, basis giving effect to the
Acquisition, the Company's research and development expenses for 1995 would
have been $1,803,800.
Net Income (loss). The Company's net income decreased $1,738,249 to a
net loss of $1,493,628 in 1995 from net income of $244,621 in 1994. The net
loss for 1995 resulted primarily from the factors described above. In
addition, the Company incurred an extraordinary loss of $60,950 in 1995 as a
result of the write-off of unamortized deferred issuance costs relating to the
early repayment of debentures issued by the Company in a private placement
consummated in August 1994. As required pursuant to their terms, such
debentures were paid as of February 2, 1995, the effective date of the
Company's initial public offering. On a pro forma basis, giving effect to the
Acquisition, the Company's net loss for 1995 would have been $5,860,125.
For the years ended 1993 and 1994, the Company was operated as an S
corporation under the applicable provisions of the Internal Revenue Code, and,
accordingly, the Company's taxable income was taxed at the shareholder level.
Net income (loss) for 1993, 1994 and 1995, on a pro forma basis assuming that
the Company had been subject to federal and state income taxes and taxed as a C
corporation during each of these three years, would have been $58,866, $156,154
and $(1,273,469), respectively.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Sales. The Company's gross sales increased 68.9% to $3,012,967 in
1994 from $1,784,098 in 1993. This increase in gross sales was due to: (i)
increased demand for pregnancy testing products as a result of the Company's
principal customer having broadened its product line; (ii) resumption of the
sale of Tris and associated chemical products during the fourth quarter of
1994; (iii) introduction of the OneStep(TM) LH Ovulation Test; and (iv) the
introduction, during the last quarter of 1994, of the OneStep hCG Pregnancy(R)
Midstream Wand. For the years ended 1993 and 1994 there were no returns and
allowances and, as such, gross sales were equal to net sales in each of these
years.
Gross Profit. The Company's gross profit increased 37.1% to
$1,036,961 in 1994 from $756,579 in 1993. The Company's gross profit as a
percentage of net sales decreased to 34.4% in 1994 from 42.4% in 1993,
primarily as a result of direct costs associated with the resumption of
production of Tris and the introduction of the OneStep hCG Pregnancy(R)
Midstream Wand and OneStep(TM) LH Ovulation Test.
Selling, General and Administrative. The Company's selling, general
and administrative expenses remained relatively constant, increasing 0.9% to
$688,036 in 1994 from $681,918 in 1993. As a percentage of net sales, selling,
general and administrative expenses decreased to 22.8% for 1994 from 38.2% for
1993. This decrease resulted from economies of scale associated with
significantly increased sales to essentially the same number of major
customers.
Research and Development. The Company's research and development
expenses increased $70,627 to $73,402 in 1994 from $2,775 in 1993. As a
percentage of net sales, research and development expenses increased to 2.4% in
1994 from 0.2% in 1993. This increase was primarily the result of process
development costs associated with the Company's various pregnancy and ovulation
tests, including quality control and clinical trials leading to regulatory
filings, as well as the development of Tris derivatives.
28
<PAGE> 29
Net Income. The Company's net income increased 217.7% to $244,621 in
1994 from $76,992 in 1993. On a pro forma basis, assuming the Company was
subject to federal and state income taxes and taxed as a C corporation, the
Company's net income would have increased 165.3% to $156,154 in 1994 from
$58,866 in 1993.
LIQUIDITY AND CAPITAL RESOURCES
In February 1995, the Company completed a $4,400,000 initial public
offering, the net proceeds of which were $3,834,126. Of those proceeds,
approximately $1,321,112 was utilized to redeem certain notes payable, to
reduce accounts payable, to expand the Company's plant and to introduce and
market new products. The balance of the proceeds of the Company's initial
public offering are included in cash, cash equivalents and investments held for
sale pending use thereof. In August 1994, the Company completed a $560,000
private placement of Common Stock and debentures, the net proceeds of which
were $439,113. Prior to these offerings, the Company financed its operations
primarily through loans provided by its principal shareholder.
As of December 31, 1995, the Company had cash and investments held for
sale of $666,486 and $1,110,932, respectively. During 1995, the Company used
net cash of $1,271,520 for operating activities, as compared to $71,141 net
cash provided by operating activities during 1994. This increased use of cash
for operating activities is primarily the result of expansion and start-up
costs incurred in 1995. During 1995, the Company used cash for its investing
activities of $1,566,307, as compared to $203,713 in 1994. This increased use
of cash for investing activities resulted from the use of certain proceeds from
the Company's initial public offering to purchase property and equipment, and
from short-term investment of certain of the offering proceeds pending their
final application. During 1995, the Company generated net cash of $3,285,134
from financing activities, as compared to $298,583 during 1994, reflecting the
completion in February 1995 of its initial public offering.
The Company has filed a registration statement covering a proposed
public offering of 1,500,000 shares of its Common Stock (the "Offering").
Assuming an offering of $19.75 per share, the net proceeds to be received by
the Company from the Offering are estimated to be $26,862,083 or $28,423,321 if
the underwriters' over-allotment option is exercised in full. Upon
consummation of the Offering, the Company will be required to repay the entire
principal and accrued interest under the Flora Notes. The Flora Notes accrue
interest at a rate of 10.0% and, as of January 31, 1996, the total outstanding
principal plus accrued interest due on the Flora Notes was approximately
$5,041,667. The Company estimates that the balance of such net proceeds be
used as follows: approximately $7,000,000 will be used to purchase production
equipment for the Company's transdermal delivery operations; approximately
$5,000,000 will be used for research and development relating to transdermal
drug delivery; approximately $2,500,000 will be used to purchase production
equipment, conduct clinical trials and for other expenses associated with
developing the TD Glucose System; approximately $1,000,000 will be used to
purchase instrument production equipment; and the balance will be used for
working capital and other general corporate purposes. However, such allocation
is subject to reapportionment in response to, among other things, changes in
the Company's plans, industry conditions and future revenues and expenses.
The Company's future prospects are dependent on the completion and
commercialization of products currently under development, including its TD
Glucose System, its OneStep(TM) CholestoChek System and various transdermal and
mucosal drug delivery and skin permeation enhancer products. The Company
anticipates that it will be required to expend an aggregate of approximately
$15,500,000 on new production equipment, research and development, and
marketing and distribution in connection with the development and
commercialization of its products. The Company's future long-term capital
expenditure requirements will depend on the following factors: (i) the time
required to obtain regulatory approvals;
29
<PAGE> 30
(ii) the progress of the Company's research and development program; and (iii)
the ability of the Company to develop additional marketing and distribution
alliances. The Company anticipates that it will continue to incur net losses
after the Offering is completed until such time, if any, as the Company is able
to generate sufficient revenues from product sales to offset operating
expenses.
The Company's future working capital and capital expenditure
requirements may vary materially from those planned depending on numerous
factors, including additional manufacturing scale-up costs for the Company's
current and future products, the focus and direction of the Company's research
and development programs, competitive and technological advances, future
relationships with strategic partners, the FDA regulatory process and the
Company's marketing and distribution strategy. If the Company's growth exceeds
its plans, additional working capital may be needed.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements and supplementary data
for the Company are attached and incorporated into Item 7.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
TECHNICAL CHEMICAL AND PRODUCTS, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Shareholder's Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
PHARMA PATCH Plc
[Expressed in U.S. Dollars]
February 28, 1995
Report to Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22
Consolidated Statements of Loss and Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-23
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-24
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Introductory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-41
Unaudited Pro Forma Condensed Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . F-42
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information . . . . . . . . . . . . . . . . F-43
</TABLE>
30
<PAGE> 31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Technical Chemicals and Products, Inc.
We have audited the accompanying consolidated balance sheets of
Technical Chemicals and Products, Inc. and subsidiaries (the "Company") as of
December 31, 1994 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Technical Chemicals and Products, Inc. and subsidiaries at December
31, 1994 and 1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles.
ERNST & YOUNG, LLP
West Palm Beach, Florida
February 9, 1996
F-1
<PAGE> 32
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 219,179 $ 666,486
Accounts receivable, net of allowances for doubtful
accounts of $10,000 in 1994 and $18,165 in 1995 559,292 939,263
Investments available for sale -- 1,110,932
Inventory 453,446 548,555
Prepaid expenses and deposits 25,000 207,996
-----------------------------
Total current assets 1,256,917 3,473,232
Property and equipment, net 214,945 1,925,789
Patents and trademarks, net of accumulated amortization
of $120,244 -- 14,878,507
Goodwill, net of accumulated amortization of $6,221 -- 2,195,695
Other assets 282,388 136,521
-----------------------------
Total assets $1,754,250 $22,609,744
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 786,723 $ 1,002,582
Accrued expenses 54,986 185,420
Notes payable -- 5,188,888
Notes payable to related parties -- 75,336
Note payable to majority shareholder 100,000 --
Notes payable to shareholders 280,000 --
-----------------------------
Total current liabilities 1,221,709 6,452,226
Minority interest in subsidiary -- 3,971
Commitments and contingencies
Shareholders' equity:
Common stock, par value--$.001 per share, 25,000,000
shares authorized, 4,611,666 and 8,117,880 shares
issued and outstanding in 1994 and 1995, respectively 4,612 8,118
Additional paid-in capital 217,484 17,583,104
(Accumulated deficit) retained earnings 310,445 (1,437,675)
-----------------------------
Total shareholders' equity 532,541 16,153,547
-----------------------------
Total liabilities and shareholders' equity $1,754,250 $22,609,744
=============================
</TABLE>
See accompanying notes.
F-2
<PAGE> 33
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------------------------------------------------
<S> <C> <C> <C>
Gross sales $1,784,098 $3,012,967 $ 4,711,994
Returns and allowances -- -- 523,533
------------------------------------------------
Net sales 1,784,098 3,012,967 4,188,461
Cost of sales 1,027,519 1,976,006 3,252,750
------------------------------------------------
Gross profit 756,579 1,036,961 935,711
Operating expenses:
Selling, general and administrative 681,918 688,036 2,025,847
Research and development 2,775 73,402 434,981
------------------------------------------------
684,693 761,438 2,460,828
------------------------------------------------
(Loss) income from operations 71,886 275,523 (1,525,117)
Other income (expense):
Interest income 5,106 1,708 164,012
Interest expense -- (32,610) (71,573)
------------------------------------------------
(Loss) income before extraordinary item 76,992 244,621 (1,432,678)
================================================
Extraordinary item--loss on early
extinguishment of debt -- -- 60,950
------------------------------------------------
Net (loss) income $ 76,992 $ 244,621 $(1,493,628)
================================================
Loss per common share:
Before extraordinary item $ (.20)
Extraordinary loss (.01)
------------------------------------------------
Net loss per common share $ (.21)
================================================
Weighted average number of common
shares outstanding 7,069,507
================================================
UNAUDITED PRO FORMA INFORMATION
(Loss) income before income taxes and
extraordinary item $ 76,992 $ 244,621 $(1,432,678)
(Credit) provision for income taxes:
Current 7,027 86,961 (213,856)
Deferred 11,099 1,506 (6,303)
------------------------------------------------
18,126 88,467 (220,159)
------------------------------------------------
(Loss) income before extraordinary item 58,866 156,154 (1,212,519)
Extraordinary item--loss on early
extinguishment of debt -- -- 60,950
------------------------------------------------
Net (loss) income $ 58,866 $ 156,154 $(1,273,469)
================================================
(Loss) income per common share:
Before extraordinary item $ .01 $ .04 $ (.17)
Extraordinary loss -- -- (.01)
------------------------------------------------
Net (loss) income per common share $ .01 $ .04 $ (.18)
================================================
Weighted average number of common shares
outstanding 4,066,066 4,295,116 7,069,507
================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 34
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ (ACCUMULATED
NUMBER ADDITIONAL DEFICIT)
OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 4,066,666 $4,066 $ (2,033) $ 346,749 $ 348,782
Net income -- -- -- 76,992 76,992
Distributions paid -- -- -- (339,717) (339,717)
-----------------------------------------------------------------------------
Balance at December 31, 1993 4,066,666 4,066 (2,033) 84,024 86,057
Shares issued, net of costs
of $60,000 545,000 546 219,517 -- 220,063
Net income -- -- -- 244,621 244,621
Distributions paid -- -- -- (18,200) (18,200)
-----------------------------------------------------------------------------
Balance at December 31, 1994 4,611,666 4,612 217,484 310,445 532,541
Shares issued, net of
costs of $1,005,874 2,570,000 2,570 3,831,556 -- 3,834,126
Distributions paid -- -- -- (268,992) (268,992)
Shares issued for acquisition
of certain assets of
Pharma Patch Public
Limited Company 886,214 886 13,434,114 -- 13,435,000
Shares issued upon exercise
of options 50,000 50 99,950 -- 100,000
Net loss -- -- -- (1,493,628) (1,493,628)
Adjustment for unrealized
gains on available for
sale securities -- -- -- 14,500 14,500
-----------------------------------------------------------------------------
Balance at December 31, 1995 8,117,880 $8,118 $17,583,104 $(1,437,675) $16,153,547
=============================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 35
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1993 1994 1995
-----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ 76,992 $ 244,621 $(1,493,628)
Adjustments to reconcile net (loss)
income to net cash (used) provided
by operating activities:
Depreciation 7,671 21,854 92,472
Amortization -- -- 126,465
Loss on extinguishment of debt -- -- 60,950
Minority interest in subsidiary -- -- 3,971
Changes in operating assets and
liabilities, net of acquisition:
Accounts receivable 147,045 (380,398) (172,054)
Prepaid expenses and deposits -- -- (103,502)
Inventory (117,504) (264,016) (162,487)
Accounts payable (113,691) 438,190 245,859
Accrued expenses (3,163) 10,890 130,434
-----------------------------------------------
Net cash (used) provided by operating
activities (2,650) 71,141 (1,271,520)
INVESTING ACTIVITIES
Purchases of property and equipment (54,849) (177,048) (111,608)
Deposit on equipment -- -- (79,494)
Increase in other assets (5,503) (26,665) 57,576
Cash paid for acquisition of certain
assets of Pharma Patch Public Limited
Company -- -- (285,945)
Purchase of investments available for sale -- -- (2,101,245)
Proceeds from sale of investments held
for sale -- -- 1,004,813
Investment in patents and intangible
assets -- -- (20,404)
Payments to affiliates -- -- (30,000)
-----------------------------------------------
Net cash used in investing activities (60,352) (203,713) (1,566,307)
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 220,063 3,834,126
Proceeds from issuance of notes payable
to shareholders -- 219,050 --
Proceeds from stock options exercised -- -- 100,000
Payments on notes payable to shareholders -- -- (280,000)
Payments on note payable to majority
shareholder -- (50,000) (100,000)
Costs related to initial public offering -- (72,330) --
Shareholder distributions (339,717) (18,200) (268,992)
-----------------------------------------------
Net cash provided (used) by financing
activities (339,717) 298,583 3,285,134
-----------------------------------------------
</TABLE>
(Continued on next page)
F-5
<PAGE> 36
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Net increase (decrease) in cash and
cash equivalents (402,719) 166,011 447,307
Cash and cash equivalents at beginning
of year 455,887 53,168 219,179
-----------------------------------------------
Cash and cash equivalents at end of year $ 53,168 $ 219,179 $ 666,486
===============================================
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES
Cash paid during the year for interest $ -- $ 22,110 $ 7,965
===============================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
The consolidated statements of cash flows exclude the effects of
certain noncash activities. The following is a summary of the noncash effects
of these transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
-----------------------------------------
<S> <C> <C> <C>
Noncash activities in connection with
the acquisition of certain
assets of Pharma Patch Public
Limited Company:
Property and equipment acquired $-- $-- $ 1,624,330
Intangible assets acquired -- -- 16,801,641
Notes payable assumed -- -- 5,188,888
Accounts receivable assumed -- -- 207,917
Common stock issued -- -- 13,435,000
Intangible assets acquired in connection
with the acquisition of an additional
300,000 shares of Health-Mark
Diagnostic, L.L.C. -- -- 73,967
Unrealized gains on available for
sale securities -- -- 14,500
Inventory transferred to property
and equipment -- -- 67,378
Intangible assets transferred from
other assets -- -- 27,341
</TABLE>
See accompanying notes.
F-6
<PAGE> 37
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Technical Chemicals and Products, Inc. and subsidiaries (the
"Company") was incorporated in the State of Florida on January 30, 1992 and is
principally engaged in the design, development, manufacture and marketing of a
wide range of medical diagnostic products for use in physician offices, at home
and at other point of care locations.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include Health
Test, Inc., a wholly-owned inactive entity; and Health-Mark Diagnostics, L.L.C.
("Health-Mark"), an active entity owned 80% (50% prior to October 1, 1995) (see
Note 3).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and liquid investments with
a maturity of 90 days or less when acquired.
INVESTMENTS AVAILABLE FOR SALE
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Company adopted the
provisions of the new standard for investments held as of or acquired after
January 1, 1995. The effect of the change did not have a significant impact on
the Company's financial statements.
Investments available for sale consist of a U.S. Government agency
bond and a corporate bond. These investments are considered to be available
for sale and they are recorded at fair market value which approximates
amortized cost. Management determines the appropriate classification of debt
securities at the time of purchase date and re-evaluates such designation as of
each balance sheet date. Unrealized holding gains and losses on securities
classified as available for sale are carried as a separate component of
shareholders' equity.
Realized investment gains and losses are determined on the specific
identification method.
F-7
<PAGE> 38
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory, consisting of raw materials, supplies and finished goods,
is 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,
which range from five to seven years. The cost of maintenance and repairs is
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 realizability of patents, trademarks and goodwill is
evaluated periodically based on undiscounted future cash flows. At this time,
the Company believes that no significant impairment of these intangible assets
has occurred and that no reduction of the estimated useful lives is warranted.
LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. The Company will adopt Statement No. 121 in the first
quarter of 1996. Based on presently available estimates, the new impairment
rules are not expected to result in any significant change in asset values from
December 31, 1995.
F-8
<PAGE> 39
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets include equipment held for future use, security deposits
and deferred public offering fees.
REVENUE RECOGNITION
Revenues are recognized when a product is shipped. Product returns
are permitted only in limited circumstances and are estimated and reflected as
adjustments to current period sales and cost of sales.
RESEARCH AND DEVELOPMENT
Research and development is expensed as incurred.
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.
Prior to February 2, 1995, the Company had elected to be taxed as an S
corporation pursuant to the provisions of the Internal Revenue Code. Under
this election, the operating results of the Company were reported in the income
tax returns of the shareholders. Upon the completion of the initial public
offering effective February 2, 1995, the Company became subject to corporate
income taxes.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share, including that which is presented on a
pro forma basis, is calculated using the weighted average number of common
shares outstanding during the respective periods. Common stock equivalents are
not included in the computation of net loss and pro forma net loss per share in
1995 as their effect is antidilutive due to the Company's net loss.
F-9
<PAGE> 40
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amount reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1994 consolidated financial statements
have been reclassified to conform to the presentation of the 1995 consolidated
financial statements.
2. STOCK SPLIT
On August 1, 1995, the Board of Directors authorized a two-for-one
stock split which was distributed to shareholders of record on July 31, 1995.
All references in the consolidated financial statements to number of shares,
per share amounts and market prices of the Company's common stock have been
retroactively restated to reflect the effect of the stock split.
3. ACQUISITIONS
In 1994, the Company issued 125,000 shares of its common stock to the
majority shareholder for a 50% interest in Health-Mark. Health-Mark is a
wholesale representative company used in marketing one of the Company's major
products. In accordance with terms of an agreement between the Company and
Health-Mark, the Company obtained an additional 300,000 shares of Health-Mark's
common stock in return for providing financing to Health-Mark of approximately
$53,000. The Company now owns 800,000 shares of Health-Mark's 1,000,000 issued
and outstanding shares. This acquisition increased the Company's ownership
from 50% to a majority ownership of 80%. Accordingly, the Company changed its
method of accounting for this investment from the equity method to
consolidation of Health-Mark's financial statements. The effects on operations
are not material and, therefore, pro forma information is not presented.
On November 15, 1995, the Company purchased certain assets of Pharma
Patch Public Limited Company ("Pharma Patch"), an Ireland corporation,
including substantially all of the assets of its wholly-owned subsidiary, PP
Holdings, Inc. ("PPH"), a California corporation (collectively referred to as
the "Purchased Assets"). In consideration for the Purchased Assets, consisting
of accounts receivable of $207,917, property and equipment of $1,624,330 and
intangible assets of $16,801,641, the Company
F-10
<PAGE> 41
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
(i) issued an aggregate of 886,214 shares of the Company's common stock valued
at $13,435,000 of which 491,384 shares were issued to Pharma Patch, 294,830
shares were issued to PPH and 100,000 shares were issued to an advisor who
assisted the Company in this transaction; (ii) issued two promissory notes with
an aggregate principal amount of $5,000,000 to Flora, Inc. ("Flora") (see Note
7) in exchange for the cancelation of a $5,000,000 promissory note issued to
Flora by Pharma Patch; (iii) issued a third promissory note to Flora in the
principal amount of $188,888 and; (iv) paid $5,000 to each Pharma Patch and
PPH. In addition, the Company incurred acquisition costs totaling $275,945 in
connection with this acquisition, which are included in intangible assets.
The acquisition of the Purchased Assets, described above, was recorded
pursuant to the purchase method of accounting and, therefore, the operating
results related to the Purchased Assets are included in the Company's operating
results beginning November 15, 1995. The Purchased Assets are presently
utilized exclusively in research and development activities.
The following summarized unaudited pro forma results of operations for
the years ended December 31, 1994 and 1995 assume the acquisition of the
Purchased Assets occurred as of the beginning of the respective years. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which actually would have
resulted had the combination been in effect on the dates indicated, or which
may result in the future.
<TABLE>
<CAPTION>
PRO FORMA
---------
1994 1995
-----------------------------
(UNAUDITED)
<S> <C> <C>
Net sales $ 3,012,967 $ 4,577,516
Loss before extraordinary item $(5,534,771) $(5,799,175)
Extraordinary loss -- 60,950
-----------------------------
Net loss $(5,534,771) $(5,860,125)
=========== ===========
Loss per common share:
Before extraordinary item $ (1.07) $ (.73)
Extraordinary loss -- (.01)
-----------------------------
Net loss per common share $ (1.07) $ (.74)
=========== ===========
</TABLE>
F-11
<PAGE> 42
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVENTORY
Inventory at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
--------------------------
<S> <C> <C>
Raw materials and supplies $368,945 $377,610
Finished goods 84,501 170,945
--------------------------
$453,446 $548,555
==========================
</TABLE>
5. INVESTMENTS HELD FOR SALE
Investments held for sale at December 31, 1995 consist of the
following:
<TABLE>
<CAPTION>
GROSS ESTIMATED
UNREALIZED FAIR
COST GAINS VALUE
--------------------------------------------
<S> <C> <C> <C>
U.S. Corporate bond $ 96,432 $ 4,580 $ 101,012
U.S. Government agency bond 1,000,000 9,920 1,009,920
--------------------------------------------
$1,096,432 $14,500 $1,110,932
============================================
</TABLE>
The gross realized gains on sales of available-for-sale securities
totaled $2,734 for the year ended December 31, 1995. In accordance with SFAS
No. 115, unrealized holding gains on available-for-sale securities of $14,500
is included as a separate component of shareholders' equity at December 31,
1995.
Contractual maturities for investments as of December 31, 1995 are due
after one year through five years for the U.S. Government agency bond and are
due after five years for the U.S. Corporate bond.
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 consists of the
following:
<TABLE>
<CAPTION>
1994 1995
---------------------------
<S> <C> <C>
Furniture, fixtures and equipment $198,001 $1,261,533
Leasehold improvements 47,518 787,302
-------- ----------
245,519 2,048,835
Accumulated depreciation (30,574) (123,046)
-------- ----------
$214,945 $1,925,789
===========================
</TABLE>
F-12
<PAGE> 43
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. NOTES PAYABLE
At December 31, 1995, notes payable consist of three promissory notes
with an aggregate principal amount of $5,188,888 payable to Flora (see Note 3),
bearing interest at 10% per annum, with interest due in semiannual installments
of $250,000 commencing December 31, 1995, with principal due in full on
November 1, 1996, of which $3,000,000 is convertible, in whole or in part, into
shares of the Company's common stock at a conversion rate of $14.375.
The notes are collateralized by all assets necessary for the conduct
of the Company's transdermal pharmaceutical division that has been formed for
the purpose of researching, developing and selling transdermal drug delivery
systems, including but not limited to all of the division's cash, accounts
receivable, inventory, real property, trademarks, trademark applications,
service marks, trade names, copyrights, trade secrets, inventions and product
designs.
8. RELATED PARTY TRANSACTIONS
In November 1992, the Company entered into an Exclusive License
Agreement with the president and majority shareholder (the "First License
Agreement") under which the Company agreed to pay him or his assignees 3% of
the collected net sales revenue received by the Company from sales or
sublicensing with respect to products relating to certain strip technology
patents with a minimum payment of $10,000 per year. The president waived all
licensing fees due him for the years ended December 31, 1993, 1994 and 1995.
The First License Agreement was superseded by a Cancelation and
Exclusive License Agreement, dated January 31, 1996 (the "Second License
Agreement"). The Second License Agreement is for an initial term of 20 years
and automatically renews for successive 20-year terms thereafter. The Second
License Agreement provides for an annual fee equal to the greater of (i) 3% of
net collected sales revenues on sales of products developed using certain
patented technology owned by the president and majority shareholder of the
Company or any sublicensee of the Company or (ii) $10,000 subject to a maximum
limit on aggregate payments made throughout the term of the Second License
Agreement of $10,000,000.
In consideration for the cancelation of the First License Agreement
and modification of the president and majority shareholder's employment
agreement, the Company issued a warrant to the president and majority
shareholder to purchase 500,000 shares of common stock at an exercise price
equal to the per share offering price.
The Company entered into an Employment Agreement with the president
and majority shareholder of the Company that was effective January 1, 1993.
Under the terms of this Employment Agreement, he is entitled to receive a
salary of $125,000 per year for the first five years beginning
F-13
<PAGE> 44
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
January 1, 1993 (with 5% per year raises) as annual base compensation, plus an
annual bonus equal to at least 5% of the consolidated pretax profit of the
Company. During 1994, the president received $36,000 of salary and waived any
additional compensation due him through December 31, 1994. During 1995, the
president received $137,813 of salary.
The president and majority shareholder's employment agreement was
modified in January 1996. As part of the modification, the president and
majority shareholder gave up all present and future rights to all patents,
technologies and other intellectual properties developed by the president and
majority shareholder subsequent to the modification of the employment
agreement.
At December 31, 1994, the Company owed the majority shareholder a
$100,000 note payable on demand plus interest accrued at the prime rate (8.5%
at December 31, 1994). This amount was repaid during the year ended December
31, 1995.
9. SIGNIFICANT CUSTOMER
A material part of the Company's business is dependent upon one
customer. The loss of this customer would have a materially adverse effect on
the Company. During the years ended December 31, 1993, 1994 and 1995, this
customer accounted for $1,690,421, $2,621,370 and $2,971,274 of sales (or 95%,
87% and 70% of net sales), respectively.
During the year ended December 31, 1995, the Company had returns and
allowances from this customer of $523,533 due to the return of a shipment of
products for repackaging to meet new customer specifications.
As of December 31, 1994 and 1995, accounts receivable from this
customer were $471,715 and $411,000, respectively. There are no formal
continuing contracts with this customer. Management anticipates that the
Company will be successful in continuing sales to this customer for at least
the next year.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities under operating leases
expiring in June and October 1999. Rent expense for the years ended December
31, 1993, 1994 and 1995 was $57,017, $87,409 and $179,901, respectively.
At December 31, 1995, future minimum rentals, subject to
cost-of-living adjustments, are approximately as follows:
<TABLE>
<S> <C>
1996 $ 450,979
1997 576,843
1998 480,942
1999 273,550
----------
$1,782,314
==========
</TABLE>
F-14
<PAGE> 45
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On October 5, 1995, the Company entered into an agreement to purchase
certain production equipment for approximately $265,000 in 1996. At December
31, 1995, other assets include a deposit of $79,494 related to this agreement.
The Company has been named in a lawsuit which alleges misappropriation
of trade secrets, confidential information and intellectual property related to
an HIV saliva test kit, and certain transdermal and noninvasive testing
technologies. The plaintiffs seek injunctive relief and monetary damages in
excess of $2,000,000. Management believes, after consultation with counsel,
that each of the allegations included in the lawsuit is without merit, and
plans to contest each of the allegations vigorously. This lawsuit is in its
preliminary stages and no discovery has yet been taken. At this time, it is
not possible to estimate the ultimate loss, if any, related to this lawsuit
and, therefore, no liability has been recorded in the accompanying consolidated
financial statements.
In addition to the above, the Company is subject to claims and suits
arising in the ordinary course of business. In the opinion of management, the
ultimate resolution of such pending legal proceedings, including those
described above, will not have a material adverse effect on the Company's
results of operations, financial position or cash flows.
11. PRODUCT LIABILITY INSURANCE
The Company did not maintain product liability insurance through
December 31, 1994. Management did not believe that the Company was subject to
significant risk of product liability claims because it did not sell its
product to the consumer and its customers subjected all products to acceptance
testing to determine that the product met the required specifications. During
1995, the Company obtained $5,000,000 general liability insurance coverage
which it considers sufficient to protect itself from product liability actions.
12. SHAREHOLDERS' EQUITY
On February 2, 1995, the Company completed an initial public offering
of 2,570,000 shares of the Company's common stock at a price to the public of
$2 per share, which includes 150,000 shares issued to a public relations firm.
In conjunction with the initial public offering, the Company issued
220,000 warrants with an exercise price of $2.60 to the representative of the
underwriters. The warrants are outstanding as of December 31, 1995 and expire
February 1999.
F-15
<PAGE> 46
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (CONTINUED)
The Company's Board of Directors approved a distribution of $268,992
to shareholders, of which $256,920 was paid to the majority shareholder as of
December 31, 1995.
In August 1994, the Company consummated a private placement of
securities with a sale price of $560,000. The Company issued 420,000 shares of
its common stock for $280,000 and notes totaling $280,000 at 9% annual
interest. The notes became payable in full with accrued and unpaid interest on
the date the Company became qualified for listing on the National Association
of Securities Dealers Automated Quotation System, February 2, 1995, and were
paid during the year ended December 31, 1995. Remaining deferred loan costs of
approximately $60,000 were written off as an extraordinary loss on early
extinguishment of debt.
During 1992, the Company adopted an Incentive Stock Option Plan (the
"Plan") under which 800,000 shares of common stock are reserved for issuance to
employees of the Company. The exercise price of any stock option granted under
the Plan to an eligible employee must be equal to the fair market value of the
shares on the date of grant. With respect to persons owning more than 10% of
the outstanding common stock, the exercise price may not be less than 110% of
the fair market value of the shares underlying such option on the date of
grant. No options have been granted under the Plan as of December 31, 1995.
The Company has granted options (not under the Plan) as incentives to
new employees and independent contractors who have performed services for the
Company.
The following table summarizes information relative to the Company's
options:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
--------------------------------
<S> <C> <C>
Outstanding at January 1, 1994 -- --
Granted 116,000 $1.25 -- $ 4.00
-------
Outstanding at December 31, 1994 116,000
Granted 40,000 $1.25 -- $14.44
Exercised (50,000) $2.00
-------
Outstanding at December 31, 1995 106,000 $1.25 -- $14.44
=======
</TABLE>
F-16
<PAGE> 47
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (CONTINUED)
Shares of common stock reserved for future issuance at December 31,
1995 are as follows:
<TABLE>
<S> <C>
Options 906,000
Warrants 220,000
---------
1,126,000
=========
</TABLE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," the adoption of which is required for fiscal years
beginning after December 15, 1995. The new standard encourages companies to
use the fair value method of accounting for issuance of stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. Pursuant to SFAS No.
123, companies are also permitted to continue to account for such transactions
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note to the
financial statements pro forma net income and per share amounts as if the
Company had applied the new method of accounting. Additionally, SFAS No. 123
requires increased disclosure for stock-based compensation arrangements
regardless of the method chosen to measure and recognize compensation for
employee stock-based arrangements.
The Company currently accounts for such transactions under APB Opinion
No. 25 and has not yet determined if it will elect to change its method of
accounting for the issuance of stock options and other equity instruments to
the fair value method, nor has it determined the effect the new standard will
have on its operating results and per share results should it elect to make
such a change.
In January 1996, the Company's Board of Directors and majority
shareholder approved the adoption of Amended and Restated articles of
Incorporation and approved the adoption of Amended and Restated Bylaws which
include certain anti-takeover provisions. Certain regulatory filing
requirements must be complied with before the anti-takeover provisions can
become effective. In addition, the Company's Board of Directors and majority
shareholder authorized the adoption of a Shareholder Protection Rights
Agreement (the "Rights Agreement"). Pursuant to the terms of the Rights
Agreement, preferred stock purchase rights ("Rights") will be distributed, as a
dividend, to shareholders of record as of the date the Company enters into the
Rights Agreement, at a rate of one Right for each share of the Company's common
stock held on the record date.
F-17
<PAGE> 48
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SHAREHOLDERS' EQUITY (CONTINUED)
The Company intends to enter into the Rights Agreement after the
anti-takeover provisions, described above, are effective. The Company's
capital stock will consist of 100,000,000 shares of common stock, par value
$.001 per share and 25,000,000 shares of preferred stock, par value $.001 per
share after the anti-takeover provisions are effective.
In January 1996, the Company entered into an agreement with Pharma
Patch whereby Pharma Patch agreed to, among other things, certain restrictions
on the sale of the shares it owns of the Company's common stock, in exchange
for a two-year warrant to purchase 100,000 shares of common stock at an
exercise price equal to the per share offering price.
13. INCOME TAXES
HISTORICAL
Concurrent with the February 2, 1995 public offering, the Company's S
corporation election was revoked, making it subject to corporate income taxes.
However, the consolidated financial statements reflect a zero income tax
expense for the year ended December 31, 1995, which is comprised of the
following two significant components:
- Current period income tax benefit of approximately $6,303
pertaining to the Company's income subject to taxation for the
period from revocation of S corporation status to December 31,
1995.
- A one-time net tax expense of $6,303 which represents the net
deferred tax liability recognized for the cumulative temporary
differences between the carrying amounts of assets and
liabilities for financial reporting and tax reporting at the
time of the Company's conversion from S corporation to C
corporation status.
F-18
<PAGE> 49
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1995 are as follows:
<TABLE>
<S> <C>
Allowance for doubtful accounts and sales returns $ 3,888
Net operating losses 641,663
Amortization (43,899)
Depreciation (28,411)
Other (440)
---------
Net deferred tax assets 572,801
Valuation allowance (572,801)
---------
Net deferred taxes $ 0
=========
</TABLE>
The reconciliation of the expected income tax expense for the year
ended December 31, 1995 computed on loss before income taxes at federal
statutory rates is as follows:
<TABLE>
<S> <C>
Tax at federal statutory rate (34.00)%
State and local income taxes, net of federal tax benefit (5.83)
Change in valuation allowance 38.35
Other 1.48
------
Total .00%
======
</TABLE>
For the years ended December 31, 1993 and 1994, the Company elected S
corporation status and was not subject to income taxes.
At December 31, 1995, the Company had net operating loss carryforwards
of $1,650,196 which expires in the year 2010. A full valuation allowance has
been established at December 31, 1995 with respect to these net operating loss
carryforwards.
PRO FORMA
The pro forma tax provision for the year ended December 31, 1995
reflects the benefit for a portion of the net operating loss that could have
been carried back to prior years based on pro forma provisions in those years.
F-19
<PAGE> 50
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
The unaudited pro forma income tax provision (credit) differed from
the amounts computed by applying the federal statutory rate of 34% to income
(loss) before income taxes are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate 34.00% 34.00% (34.00)%
State and local income taxes, net of
federal tax benefit 3.68 3.71 (5.83)
Change in valuation allowance .00 .00 24.03
Other (14.14) (1.54) 1.06
---------------------------------------
23.54% 36.17% (14.74)%
=======================================
</TABLE>
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade accounts
receivable and short-term borrowings reflected in the consolidated financial
statements approximate market value. Management believes that these financial
instruments approximate market value because they were entered into during the
current year and there have been no significant changes in their status that
would affect their market value.
F-20
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Pharma Patch Plc
We have audited the accompanying consolidated balance sheets of Pharma
Patch Plc as of February 28, 1995 and 1994, and the related consolidated
statements of loss and deficit and cash flows for each of the years in the
three year period ended February 28, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Pharma Patch Plc as of February 28, 1995 and 1994, and the results of its
operations and the changes in its financial position for each of the years in
the three year period ended February 28, 1995, in conformity with accounting
principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 1 to the consolidated financial statements, Pharma Patch Plc has suffered
recurring losses from operations and has a net working capital deficiency and
shareholders' deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in note 1. The accompanying consolidated financial statements
do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Dublin, Ireland, Ernst & Young
May 25, 1995 Chartered Accountants
F-21
<PAGE> 52
PHARMA PATCH PLC
CONSOLIDATED BALANCE SHEETS
[EXPRESSED IN U.S. DOLLARS]
<TABLE>
<CAPTION>
AS AT
------------------------------------------------
AUGUST 31, FEBRUARY 28,
1995 1995 1994
$ $ $
- ------------------------------------------------------------------------------------------------------------
[UNAUDITED] [RESTATED-
NOTE 2]
<S> <C> <C> <C>
ASSETS
Current
Cash and cash equivalents 500,518 638,745 1,252,465
Accounts receivable 381,057 41,600 68,905
Investment tax credits receivable
[note 7] -- -- 136,937
Prepaid expenses and deposits 67,788 47,298 41,060
Prepaid share issue costs -- -- 888,390
------------------------------------------------
Total current assets 949,363 727,643 2,387,757
------------------------------------------------
Fixed assets [note 3] 749,489 900,378 685,366
Technology [net of $282,503 accumulated
amortization] [note 2] -- -- 2,164,170
Promissory notes [note 5(a)] 741,250 -- --
------------------------------------------------
2,440,102 1,628,021 5,237,293
================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current
Accounts payable 647,295 688,544 248,781
Accrued share issue costs -- -- 378,453
Accrued capital duties 71,000 71,000 148,148
Accrued consulting and other liabilities 194,174 232,116 124,555
Accrued interest on long-term debt 83,333 83,333 --
Accrued salaries 211,208 261,250 --
Accrued commission 66,000 -- --
------------------------------------------------
Total current liabilities 1,273,010 1,336,243 899,937
------------------------------------------------
Note payable [notes 1 (c) and 4] 5,000,000 5,000,000 --
------------------------------------------------
Shareholders' equity (deficiency)
Capital stock [note 5]
Authorized 52,046,576 Ordinary Shares
Issued and outstanding 8,724,772
[1995--5,740,253; 1994--
4,371,932] Ordinary Shares,
at par value 2,229,631 2,183,643 2,162,932
Premium in excess of par value 14,015,164 11,448,439 7,123,610
Cumulative translation adjustment
[note 2(b)] -- -- -- (346,326)
Deficit (20,077,703) (18,340,304) (4,602,860)
----------- ----------- ----------
Total shareholders' equity (deficiency) (3,832,908) (4,708,222) 4,337,356
----------- ----------- ----------
2,440,102 1,628,021 5,237,293
================================================
</TABLE>
Commitments [note 8]
See accompanying notes
F-22
<PAGE> 53
PHARMA PATCH PLC
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
[EXPRESSED IN U.S. DOLLARS]
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH FOR THE
PERIODS ENDED YEARS ENDED
AUGUST 31, FEBRUARY 28,
---------------------------- -------------------------------------------
1995 1994 1995 1994 1993
$ $ $ $ $
------------------------------------------------------------------------------
[UNAUDITED] [RESTATED-NOTE 2]
<S> <C> <C> <C> <C> <C>
REVENUES
Product development fees
[note 11] 453,377 -- -- 129,421 130,763
------------------------------------------------------------------------------
EXPENSES
Administration 937,504 1,163,426 2,982,153 961,425 280,690
Research and development
[note 7] 815,816 1,401,836 2,355,515 1,341,852 495,664
Stock compensation -- -- -- 867,381 100,657
Depreciation and amortization 181,201 379,329 813,740 365,936 24,575
Foreign exchange gain (loss) 15,607 (36,679) (52,661) (132,079) --
Interest income (9,352) (36,158) (48,563) (47,670)
(52,075)
Interest on long-term debt 250,000 333,333 333,333 -- --
Unusual items:
Acquired technology
[note 1(c)] -- 4,025,000 2,775,336 -- --
Write-off of capitalized
technology [note 2] -- -- 1,685,516 -- --
Medipro restructuring costs
[note 1(d)] -- 1,371,747 1,492,070 -- --
Write-off of Cangene
acquisition costs
[note 6] -- 418,116 514,791 -- --
Loss on disposal of Cangene
investment [note 6] -- -- 478,052 -- --
Write-off of cumulative
translation adjustment
attributable to Medipro
[note 2(b)] -- -- 408,162 -- --
------------------------------------------------------------------------------
2,190,776 9,019,950 13,737,444 3,356,845 849,511
------------------------------------------------------------------------------
Net loss for the period (1,737,399) (9,019,950) (13,737,444) (3,227,424) (718,748)
Deficit, beginning
of period (18,340,304) (4,602,860) (4,602,860) (1,375,436) (656,688)
----------- ----------- ----------- ---------- ----------
Deficit, end of period (20,077,703) (13,622,810) (18,340,304) (4,602,860) (1,375,436)
=========== =========== =========== ========== ==========
Loss per Ordinary Share
[note 5(e)] (0.23) (1.71) (2.56) (0.93) (0.29)
=========== =========== =========== ========== =========
Weighted average number
of Ordinary Shares
outstanding 7,692,099 5,273,298 5,368,298 3,453,874 2,414,748
==============================================================================
</TABLE>
See accompanying notes
F-23
<PAGE> 54
PHARMA PATCH PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
[EXPRESSED IN U.S. DOLLARS]
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH FOR THE
PERIODS ENDED YEARS ENDED
AUGUST 31, FEBRUARY 28,
----------------------------------------------------------------------------
1995 1994 1995 1994 1993
$ $ $ $ $
----------------------------------------------------------------------------
[UNAUDITED] [RESTATED-NOTE 2]
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period (1,737,399) (9,019,950) (13,737,444) (3,227,424) (718,748)
Add non-cash items
Depreciation and
amortization 181,201 379,329 813,740 365,936 24,575
Stock compensation -- -- -- 867,381 100,657
Write-down of fixed assets -- 836,752 892,271 --
Write-off of Cangene
acquisition costs -- -- 514,791 --
Loss on disposal of
Cangene investment -- -- 478,052 -- --
Write-off of capitalized
technology -- 4,025,000 4,460,852 -- --
Write-off of cumulative
translation adjustment -- -- 408,162 -- --
Net change in non-cash
working, capital
items [note 9] 79,809 1,899,375 1,528,131 473,129 (20,967)
----------------------------------------------------------------------------
(1,476,389) (1,879,494) (4,641,445) (1,520,978) (614,483)
---------- ---------- ---------- ---------- ---------
INVESTING ACTIVITIES
Purchase of fixed assets (30,312) (455,413) (467,369) (665,450) (71,626)
Purchase of technology
[note 1(a)] -- -- -- (447,775) --
Proceeds of sale of technology
[note 1(c)] -- -- 1,250,000 -- --
Proceeds on sale of
Cangene shares -- -- 657,422 -- --
----------------------------------------------------------------------------
(30,312) (455,413) 1,440,053 (1,113,225) (71,626)
========== ========== ============================ =========
FINANCING ACTIVITIES
Issue of shares, net [note 5] 1,368,474 2,081,010 2,590,947 3,651,676 --
----------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES
ON CASH AND
CASH EQUIVALENTS -- -- (3,275) (75,305) (70,527)
--------------------------------------------- ---------- ---------
Net increase (decrease)
in cash and cash
equivalents for the period (138,227) (253,897) (613,720) 942,168 (756,636)
Cash and cash equivalents,
beginning of period 638,745 1,252,465 1,252,465 310,297 1,066,933
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period 500,518 998,568 638,745 1,252,465 310,297
============================================================================
</TABLE>
See accompanying notes
F-24
<PAGE> 55
PHARMA PATCH PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
INFORMATION WITH RESPECT TO THE PERIODS ENDED AUGUST 31, 1994 AND 1995
AND SUBSEQUENT PERIODS IS UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION
Pharma Patch Plc ["Pharma Patch"] or [the "Company"] was incorporated
under the laws of the Republic of Ireland in January 1992. Prior to July 1993,
Pharma Patch had no significant assets or operations.
[a] In July 1993, Pharma Patch acquired an exclusive, perpetual,
royalty-free license on all skin penetration enhancement technology held by
Therapeutic Patch Research N.V. ["TPR"], a Netherlands Antilles company.
Pharma Patch paid cash of $300,000 and issued 600,000 Units [a "Unit" comprises
one Ordinary Share, one-half Class A Warrant and one quarter Class B Warrant],
2,400,000 Class C Warrants and 500,000 Class D Warrants as consideration for
the license. Concurrently, Pharma Patch issued 1,250,000 Units for cash
proceeds of $4,387,500.
[b] On July 30, 1993, Pharma Patch entered into a share exchange with
the shareholders of Medipro Sciences Limited ["Medipro"], whereby 2,309,432
Ordinary Shares of Pharma Patch were exchanged for all of the issued and
outstanding common and Class A shares of Medipro. The exchange of shares were
accounted for as a reverse acquisition of Pharma Patch by Medipro as the former
shareholders of Medipro held a majority of the voting shares of Pharma Patch
following the exchange. All the assets of Pharma Patch at the time of the
exchange, consisting primarily of the technology acquired from TPR and the cash
from the issue of the 1,250,000 Units described in note 1[a], were recorded at
their estimated fair market value. There was no excess of the purchase price
over the carrying value of the assets.
[c] On June 30, 1994, the Company acquired substantially all of the
assets and assumed certain specified liabilities arising after June 30, 1994 of
Pharmetrix Corporation ["Pharmetrix"]. The assets related to patents and the
research and development of [i] passive transdermal systems, [ii] a periodontal
delivery system and [iii] a buccal system, each for the systemic delivery to
humans of therapeutic drugs and compounds. In exchange for the Pharmetrix
assets, the Company issued a convertible promissory note in the amount of
$5,000,000 [note 4]. These assets are held by and operations are continued
under PP Holdings Inc., a wholly-owned subsidiary of Pharma Patch incorporated
in the State of California. PP Holdings Inc.'s results of operations are
included in the Company's consolidated results from July 1, 1994.
This acquisition was accounted for under the purchase method of
accounting whereby the purchase price for the Pharmetrix assets was allocated
to fixed assets at fair market value assumed by the Company. The difference
between the purchase price and fair market value of fixed assets was assigned
to acquired pharmaceutical technology in the amount of $4,025,000. A portion
of this technology was resold to a third party for $1,250,000 and the remaining
balance of approximately $2,775,000 [acquired research and development with no
alternative non-pharmaceutical uses] was charged to the Company's consolidated
statement of loss and deficit.
A summary of the unaudited pro forma consolidated statements of loss
and deficit are set out below to give the pro forma effect to the Pharmetrix
acquisition as if Pharmetrix had been included in the consolidated statements
of loss and deficit throughout the years ended February 28, 1995 and 1994.
F-25
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1995 1994
[UNAUDITED] [UNAUDITED]
$ $
-----------------------------
<S> <C> <C>
Revenues -- 129,421
Expenses 14,642,977 7,227,337
-----------------------------
Net loss for the year (14,642,977) (7,097,916)
Deficit, beginning of year (8,473,352) (1,375,436)
----------- ----------
Deficit, end of year (23,116,329) (8,473,352)
Loss per Ordinary Share [note 5] (2.73) (2.06)
=========== ==========
Weighted average number of Ordinary Shares outstanding 5,368,298 3,453,874
=============================
</TABLE>
[d] The acquisition of the Pharmetrix assets and leased facilities
initially increased the Company's annual cash requirements. The acquisition
created a duplication of research staff, facilities and equipment. Pharma
Patch restructured its operations resulting in the centralization of all
research and development activities at the Pharmetrix facility in Menlo Park,
California, a reduction of 22 staff positions and termination of lease
commitments entered into by the Company for prototype patch manufacturing
equipment. In January 1995, the Company ceased operations of its Canadian
subsidiary, Medipro Sciences Limited. A charge of $1,492,070 was incurred in
fiscal 1995 in connection with this restructuring, primarily consisting of a
write-off of production equipment, capital lease equipment, employee
termination and lease costs. Employee termination costs of approximately
$105,000 were paid and expensed during the year. Of the total $1,492,070
expense, approximately $83,000 was accrued at year end in connection with lease
costs.
In 1995, the Company had acquired a 50% interest in the issued and
outstanding shares of Drug Delivery Research Inc. ["DDRI"] for a nominal amount
with the intention of using DDRI to perform the research and development work
previously being done by Medipro. As a result of the Pharmetrix acquisition
and the relocation of research and development activities, DDRI has remained
inactive during 1995.
F-26
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
[e] As shown in the consolidated financial statements, the Company
has incurred losses from operations of $1,737,399 and $9,019,950 for the
six-month periods ended August 31, 1995 and 1994, respectively [$13,737,444,
$3,227,424 and $718,748 in its fiscal years ended 1995, 1994 and 1993
respectively]. The Company has an accumulated deficit of $20,077,703
[$18,340,304--February 28, 1995] and a working capital deficit of approximately
$324,000 [$609,000--February 28, 1995] as of August 31, 1995. Management
recognizes the need to raise additional cash in fiscal 1996 in order to
continue the development of its technologies and products. Management is
pursuing various sources of financing and is focusing its immediate efforts on
securing additional equity financing including private placement financing of
approximately $2,000,000. Of this amount, approximately $1,368,000 of net
proceeds had been received by August 31, [note 5(a)]. The Company is also
actively pursuing strategic alliances to financially assist with the
development of its technology. The Company is presently involved in
discussions with both potential private investors and strategic partners to
secure additional financing and anticipates completing one or more
transactions. Pharma Patch will be dependent upon the proceeds to be raised
from these sources to continue its business operations. However, management
can give no assurances as to its ability to raise the funds necessary to enable
it to conduct its business. If the Company is unable to obtain the necessary
cash, other more substantial restructuring actions may become necessary.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and, accordingly, do
not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles [GAAP] in the United
States. Prior years' consolidated financial statements have been restated to
comply with U.S. GAAP.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Pharma
Patch and its wholly-owned subsidiaries, Medipro Services Limited ["Medipro"]
in Canada and PP Holdings, Inc. in the United States. All significant
intercompany balances and transactions have been eliminated on consolidation.
F-27
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
FIXED ASSETS
Fixed assets are recorded at acquisition cost. The Company provides
depreciation and amortization at rates which are expected to charge operations
with the cost of the assets over their estimated useful lives using a rate of
20% declining balance. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Equipment 5 years
Furniture and office equipment 5 years
Leasehold improvements over the term of the lease
</TABLE>
REVENUE RECOGNITION
Product development fees represent a reimbursement of expenses for
wound management proprietary products produced for the licensee.
RESEARCH AND DEVELOPMENT EXPENDITURES
Research and development expenditures are charged to expense as
incurred. Any investment tax credits ["ITCs"] earned as a result of incurring
scientific research and experimental development expenditures in Canada
["SRED"] are recorded as a reduction of the related current period expense. No
ITC's were recognized in fiscal 1995 [1994--$141,433; 1993--$266,949] or in the
six month periods ended August 31, 1995 and 1994.
TECHNOLOGICAL ASSETS
Licenses purchased from third parties for non-pharmaceutical uses are
recorded at acquisition cost and are amortized over their expected useful lives
of five years. Non-pharmaceutical licenses are charged to expense when future
recovery becomes uncertain. Pharmaceutical patents acquired by the Company are
charged to expense in the related current period. Costs associated with the
investigation and processing of patents for technologies developed by the
Company are considered development costs and, accordingly, are charged to
expense as incurred.
During 1995, the Company wrote off its capitalized non-pharmaceutical
technology to reflect the uncertainty of cost recovery through future revenue.
The resources required to further develop this technology were otherwise
utilized in the Pharmetrix acquisition. Accordingly, the remaining net book
value of $1,685,516 was charged to consolidated statements of loss and deficit
in fiscal 1995.
STOCK COMPENSATION
Stock options issued by the Company which are exercisable at a value
below the market price of the common stock at the date the option is granted or
date option vest, if applicable, gives rise to compensation expense for the
excess of such market value over the option price. In addition, shares may be
issued at nominal value to certain directors and officers as remuneration, of
which certain shares are subject to achieving certain performance criteria.
From the time the options are granted and until the performance criteria are
satisfied, a compensation expense results from the difference between the
underlying share price at such time and the exercise price.
F-28
<PAGE> 59
FOREIGN CURRENCY TRANSLATION
[A] FUNCTIONAL CURRENCY
The acquisition of the Pharmetrix assets and termination of operations
of Medipro Sciences Limited has resulted in a change in functional currency
during 1995 from Canadian dollars to U.S. dollars.
Prior to fiscal 1995, the Company's functional currency was Canadian
dollars. As the Company's operating activities are now principally in the
United States, the Company also changed its reporting currency to U.S. dollars
in 1995. Prior year financial statements have been restated to reflect this
change in reporting currency.
Assets and liabilities stated in functional currencies other than the
U.S. dollar are translated at the year-end exchange rate and revenues and
expenses at the average rate of exchange for the year. Foreign exchange gains
and losses from transactions in currencies other than the applicable functional
currency are reflected in income during the year. Gains or losses arising on
the translation of financial statements give rise to a cumulative translation
adjustment which is included as a component of shareholders' deficiency. In
1995, the Company ceased carrying on business in Canada and accordingly charged
the cumulative translation adjustment to expense.
[B] CUMULATIVE TRANSLATION ADJUSTMENT
The following is a continuity schedule of the cumulative translation
adjustment included in shareholders' deficiency:
<TABLE>
<CAPTION>
FOR THE
AS AT YEARS ENDED
AUGUST 31, FEBRUARY 28,
--------------------------------------------------
1995 1995 1994 1993
$ $ $
--------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period -- 346,326 86,941 5,372
Translation adjustments arising
during the period -- 61,836 259,385 81,569
Write-off -- (408,162) -- --
--------------------------------------------------
Balance, end of period -- -- 346,326 86,941
==================================================
</TABLE>
F-29
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
AUGUST 31, 1995
---------------
ACCUMULATED NET
DEPRECIATION/ BOOK
COST AMORTIZATION VALUE
$ $ $
------------------------------------------
<S> <C> <C> <C>
Equipment 889,047 329,482 559,565
Furniture and office equipment 66,780 28,100 38,680
Leasehold improvements 232,650 81,406 151,244
Construction-in-progress -- -- --
------------------------------------------
1,188,477 438,988 749,489
==========================================
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, 1995 FEBRUARY 28, 1994
-------------------------------------------------------------------------------------
ACCUMULATED NET ACCUMULATED NET
DEPRECIATION/ BOOK DEPRECIATION/ BOOK
COST AMORTIZATION VALUE COST AMORTIZATION VALUE
$ $ $ $ $ $
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Equipment 858,735 195,861 662,874 414,796 98,857 315,939
Furniture and office
equipment 66,780 14,759 52,021 43,389 12,094 31,295
Leasehold improvements 232,650 47,167 185,483 34,896 6,979 27,917
Construction-in-progress -- -- -- 310,215 -- 310,215
-------------------------------------------------------------------------------------
1,158,165 257,787 900,378 803,296 117,930 685,366
=====================================================================================
</TABLE>
4. NOTE PAYABLE
During fiscal 1995, the Company issued a $5,000,000 senior secured
convertible promissory note [note 1(c)]. The promissory note bears interest at
the rate of 10% per annum, and interest only is payable semi-annually. The
principal amount of the note is due and payable in full on June 30, 1996.
As collateral for the promissory note, the Company has pledged
substantially all of the assets acquired from Pharmetrix being held in the
Company's subsidiary, PP Holdings Inc.
The note is convertible at the option of Pharmetrix at any time during
the term of the note. All or specified portions of the note may be converted
into a specified number of Ordinary Shares of Pharma Patch. The number of
shares are specified in the agreement and vary from 750,000 to 1,300,000
depending on the date of conversion. The Company may elect to make
prepayments, which are tenderable, in cash or shares, under the conversion
mechanism.
F-30
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
5. CAPITAL STOCK
[A] PHARMA PATCH CAPITAL STOCK
The authorized and issued Ordinary Shares of Pharma Patch at May 31,
1995 are as follows:
AUTHORIZED
The Company has authorized 52,046,576 Ordinary Shares of IR Pound 0.01
representing an aggregate par value of IR Pound 520,466.
ISSUED
<TABLE>
<CAPTION>
PREMIUM IN
EXCESS OF
NUMBER OF PAR VALUE PAR VALUE
SHARES $ $
---------------------------------------------
<S> <C> <C> <C>
Balance, July 30, 1993 prior to exchange [note 6(b)] -- 1,878,789 255,821
Issued for cash prior to July 31, 1993 212,500 2,763 --
Impact of the acquisition of Medipro including
the exchange of shares[i]
- --elimination of Medipro equity 255,821
(255,821)
- --creation of Pharma Patch equity 2,309,432 -- --
Issued in exchange for technology license,
July 30, 1993 [ii] 600,000 8,290 2,097,711
Issued for cash July 30, 1993 [iii] 1,250,000 17,269 4,370,231
Share issue expenses -- --
(211,713)
Stock compensation [iv] -- -- 867,381
---------------------------------------------
Balance, February 28, 1994 4,371,932 2,162,932 7,123,610
---------------------------------------------
Issued for cash, March 7, 1994 [v] 600,000 8,828 3,706,172
Share issue expenses [v] -- --
(1,633,990)
Issued in exchange for Cangene shares [vi] 439,999 6,720 1,764,276
Issued in payment of professional fees [vii] 328,322 5,163 488,371
---------------------------------------------
Balance, February 28, 1995 5,740,253 2,183,643 11,448,439
=============================================
Issued in payment of professional fees [viii] 300,389 4,712 324,110
Issued in payment of accrued salaries [ix] 174,167 2,525 171,642
Issued for cash through private placement [x] 1,583,400 24,111 1,540,689
Share issuance expenses [x] -- --
(196,326)
Officers and directors [xi] 926,563 14,640 726,610
---------------------------------------------
Balance, August 31, 1995 [unaudited] 8,724,772 2,229,631 14,015,164
=============================================
</TABLE>
F-31
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
[i] Issued in connection with the share exchange with the
shareholders of Medipro described in note 1[b].
[ii] Issued in connection with the Units issued for the royalty-free
licensing agreement described in note 1[a].
[iii] On July 30, 1993, the Company issued 1,250,000 Units for cash
of $4,387,500.
[iv] Accounted for as described in note 2.
[v] On March 7, 1994, the Company completed an initial public
offering for 600,000 American Depository Shares, 575,000 Class B Warrants and
575,000 Class C Warrants of the Company. The securities are traded on the
NASDAQ exchange. Gross proceeds from the offering were $3,715,000, issue costs
were $1,633,990 and net proceeds were $2,081,010.
[vi] Issued in connection of the private acquisition of 1,319,996
Common Shares of Cangene Corporation [note 6].
[vii] Issued to various professionals in lieu of cash payments
totaling $493,534 for services rendered.
[viii] As of August 31, 1995, 300,389 Ordinary Shares were issued in
lieu of cash payments totaling $328,822.
[ix] In May 1995, the Company declared bonuses totaling $261,250
pursuant to employment agreements for key executive employees. One third of
each bonus will be paid in cash and the balance of $174,167 was paid in
Ordinary Shares valued at $1.00 per share.
[x] As of August 31 1995, the Company completed a private placement
to issue 1,583,400 Ordinary Shares for proceeds of $1,368,474 net of issuance
costs of $196,326.
[xi] In June, 1995, the Company's Board of Directors authorized the
issuance of 926,563 Ordinary Shares to officers and directors or their
affiliates at a share price of $.80. Each person or entity executed a
promissory note which is secured by a pledge of the shares as payment for the
shares received. The promissory notes, totaling $741,250, have an interest
rate of 8% per annum with principal and interest due and payable upon maturity
on December 31, 1996.
[B] MEDIPRO CAPITAL STOCK
As more fully described in note 1[b], the capital structure was
reorganized upon the exchange of shares with Pharma Patch on July 30, 1993.
The basis for exchange was approximately 0.59 and 0.45 Pharma Patch Ordinary
Shares for each Medipro common share and Class A share, respectively. The
capital stock of Medipro for the periods ending July 30, 1993 is summarized
below.
F-32
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
<TABLE>
<CAPTION>
COMMON SHARES CLASS A SHARES
----------------------------------------------------------- TOTAL
STATED STATED STATED
NUMBER OF VALUE NUMBER OF VALUE VALUE
SHARES $ SHARES $ $
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1992 2,465,753 1,061,119 1,652,466 817,670 1,878,789
Issued pursuant to the
Medipro stock option plan 100,000 -- -- -- --
-------------------------------------------------------------------------
Balance, February 28, 1993 2,565,753 1,061,119 1,652,466 817,670 1,878,789
Issued pursuant to the Medipro
stock option plan 75,128 -- -- -- --
-------------------------------------------------------------------------
Balance, July 30, 1993 prior
to exchange 2,640,881 1,061,119 1,652,466 817,670 1,878,789
=========================================================================
</TABLE>
In addition to capital stock, Medipro had contributed surplus, which
for comparative purposes, has been classified as premium in excess of par
value, of $255,821 at July 30, 1993 and at February 28, 1993.
[C] WARRANTS
The details of outstanding warrants as at August 31, 1995 are as
follows:
CLASS A WARRANTS--922,000 OUTSTANDING [1995--925,000; 1994--925,000]
Each Class A Warrant entitles the holder to purchase one Ordinary
Share and one Class B Warrant at an exercise price of $3.33 commencing on May
29, 1994 until February 28, 1999. The warrants are redeemable by the Company
at a price of $0.10 if certain stock price conditions exist.
CLASS B WARRANTS--1,030,925 OUTSTANDING [1995--1,037,500; 1994--462,500]
Each Class B Warrant entitles the holder to purchase one Ordinary
Share at an exercise price of $4.00 commencing on May 29, 1994 until February
28, 1999. The warrants are redeemable by the Company at a price of $0.10 if
certain stock price conditions exist.
CLASS C WARRANTS--2,947,375 OUTSTANDING [1995--2,975,000; 1994--2,400,000]
The Class C Warrants are exercisable to purchase one Unit consisting
of one Ordinary Share, one- half of a Class A Warrant and one-quarter of a
Class B Warrant at an exercise price of $6.67 per Unit. The Class C Warrants
are not exercisable until [i] the Company generates revenues in excess of
$10,000,000 in any one fiscal year or the Units, or the sum of their components
[ii] trade at a price equal to 200% of the Initial Public Offering ["IPO"]
price of $6.00. The Class C Warrants are exchangeable at
F-33
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
the option of the warrant holders for Units of the Company on a formula basis,
reflecting the spread between the exercise price of the Warrants and the fair
market value price of the Units [or the sum of their component parts] at the
time when the exchange is requested by the warrant holders. These warrants
expire on February 28, 1999.
CLASS D WARRANTS--500,000 OUTSTANDING [1995--500,000; 1994--500,000]
The Class D Warrants are exercisable, commencing on May 29, 1994, to
purchase one Unit consisting of one Ordinary Share, one-half of a Class A
Warrant and one-quarter of a Class B Warrant. The exercise price per Class D
Warrant is $2.67 and the warrants expire on July 30, 1997.
The Class D Warrants are exchangeable at the option of the warrant
holders for Units of the Company on a formula basis, reflecting the spread
between the exercise price of the Warrants and the fair market price of the
Units [or the sum of their component parts] at the time when the exchange is
requested by the warrant holders.
The exercise prices of the Class A, B, C and D Warrants were initially
determined by the Board of Directors and were either equal to or exceeded the
fair market value of the Company's share price at the date the Warrants were
granted. Exercise prices are subsequently adjusted, in accordance with the
formula stipulated in the Warrant Agreement, if the Company issues or sells
shares for consideration less than the greater of the initial public offering
price or market price.
[D] STOCK OPTION PLAN
The Company has adopted stock option plans which allows an aggregate
maximum of 700,000 Ordinary Shares of the Company to be available for awards to
employees, officers and directors. The exercise price of these options is
determined by the Compensation Committee of the Board of Directors but will be
at least 100% of the fair market value of the options at the date the option is
granted. Some of these options vest upon receipt by the Company, prior to
February 29, 1996, of a written commitment from pharmaceutical companies to
participate in strategic alliances. As of February 28, 1995, 685,000 options
have been issued at an exercise price of $2.00.
Changes to issued options are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
-----------------
SIX MONTH
PERIOD ENDED YEAR ENDED
AUGUST 31, FEBRUARY 28,
1995 1995
------------------------------
<S> <C> <C>
Number of options exercisable, beginning of period 685,000 550,000
New options granted -- 265,000
Options expired -- (130,000)
---------------------------
Number of options exercisable, end of period 685,000 685,000
===========================
</TABLE>
F-34
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
[E] LOSS PER SHARE
The net loss per share calculations are based on the weighted average
number of shares outstanding during the respective periods. In addition, the
loss per share calculation have taken into account the shares, options and
warrants issued at prices below the Company's IPO price, in the twelve-month
period prior to the initial filing of the IPO. These have been treated as
outstanding during all the periods presented prior to March 7, 1994. The
Company has used the treasury stock method of determining the dilutive effect
of all options and warrants for the period after March 7, 1994. The weighted
average number of Ordinary Shares outstanding was 7,692,099 and 5,273,849 at
August 31, 1995 and 1994 respectively. [5,368,298--1995; 3,453,874--1994;
2,414,748--1993]. The loss per Ordinary Share has been restated, from amounts
previously reported for the years ending February 28, 1994 and 1993, to change
the weighted average number of shares outstanding during these periods.
6. CANGENE ACQUISITION AND DISPOSAL
On June 13, 1994, the Company completed a private acquisition of
1,319,996 Common Shares in the capital of Cangene Corporation ["Cangene"] from
ARCA Investments Inc. ["ARCA"]. In payment for these shares, the Company
issued a total of 439,999 of its Ordinary Shares, on the basis of one Ordinary
Share for each three shares of Cangene of ARCA. This acquisition was part of a
take over bid to acquire all of the outstanding Common Shares of Cangene. The
bid was subsequently withdrawn. The Company incurred acquisition costs of
approximately $515,000, substantially all of which were paid for with Cangene
shares.
Certain of the Cangene shares were sold resulting in net cash proceeds
of approximately $657,000 and the balance was used to settle outstanding
professional fees totaling approximately $630,000. The Company incurred a loss
on disposition of the Cangene shares of approximately $478,000.
7. RESEARCH AND DEVELOPMENT EXPENDITURES
Prior to July 30, 1993, Medipro was a Canadian Controlled Private
Corporation, as defined under the Income Tax Act (Canada), and, accordingly,
was entitled to receive a refund on a portion of its ITCs earned on eligible
SRED. These refundable ITCs, which are similar to government grants provided
for performing qualifying research activities, were recorded in income as
earned. As a result of the change in the ownership of Medipro in fiscal 1994,
the ITCs are earned subsequently at the rate of 20% of eligible SRED and will
no longer be refundable and will only be available to reduce income taxes
payable in Canada.
The Financial Accounting Standards Board has issued Financial
Accounting Standard No. 109 "Accounting for Income Taxes" ["FAS 109"] which
was effective for the Company's February 28, 1994 fiscal year. Pharma Patch
adopted FAS 109, effective March 1, 1993. At the date of adoption and as at
February 28, 1994 and 1995, Medipro had research and development expenses not
claimed for income tax purposes of approximately $1,715,000, $1,743,000 and
$2,831,000 respectively, available to reduce
F-35
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
taxable income of Medipro in future years. Due to the significant uncertainty
relating to the Company's ability to utilize these expenses to offset taxable
income, valuation allowances are recognized to offset all of the deferred tax
assets relating to these expenses. At August 31, 1995, the Company has
approximately $2,870,000 of unused research and development expenses. These
unclaimed research and development expenses may be carried forward indefinitely
for income tax purposes.
At August 31 1995, the Company also had unused operating loss
carryforwards amounting to approximately $15,845,000 available to reduce future
taxable income. A valuation allowance has been set up to offset the deferred
tax benefit of these loss carryforwards. These losses expire as follows:
<TABLE>
<CAPTION>
YEAR OF EXPIRY $
- ----------------------------------------------------------------------------------------------------------
<S> <C>
2001 1,448,000
2002 1,205,000
2010 4,421,000
2011 1,239,000
Unlimited carryforward 7,532,000
=========
</TABLE>
Deferred income taxes have been provided in timing differences as
follows:
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH FOR THE
PERIOD ENDED YEARS ENDED
AUGUST 31, FEBRUARY 28,
---------------------------------------------------------
1995 1995 1994 1993
$ $ $ $
---------------------------------------------------------
<S> <C> <C> <C> <C>
Tax benefit of loss
carryforward recovery 6,171,500 5,689,000 -- --
Tax benefit of unclaimed
research and development
expense 1,286,000 1,269,000 767,000 754,000
Valuation allowance (7,457,500) (6,958,000) (767,000) (754,000)
---------- ---------- -------- --------
-- -- -- --
=========================================================
</TABLE>
F-36
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
8. COMMITMENTS
As at August 31, 1995, the Company had commitments under operating
leases requiring future minimum annual payments approximately as follows:
<TABLE>
<CAPTION>
$
-
<S> <C>
1996 157,000
1997 323,000
1998 336,000
1999 350,000
2000 103,000
---------
1,269,000
=========
</TABLE>
Total rent expensed during the six month periods ended August 31, 1995
and 1994 amounted to approximately $159,100 and $84,350, respectively
[1995--379,000; 1994--$54,000; 1993--$33,000]. Of the fiscal 1995 amount,
$83,000 related to restructuring.
9. NET CHANGE IN NON-CASH WORKING CAPITAL
The net change in non-cash working capital balances for each of the
periods are noted below:
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH FOR THE
PERIODS ENDED YEARS ENDED
AUGUST 31, FEBRUARY 28,
-----------------------------------------------------------------------------
1995 1994 1995 1994 1993
$ $ $ $ $
-----------------------------------------------------------------------------
[UNAUDITED]
<S> <C> <C> <C> <C> <C>
Decrease (increase)
Accounts receivable (339,456) (69,010) 27,305 (37,736) (17,855)
Investment tax credits
receivable -- 91,606 136,937 141,109 (27,604)
Prepaid expenses and deposits (20,490) (69,296) (6,238) (38,719) (1,009)
Accounts payable 119,377 971,016 439,763 186,082 12,005
Accrued capital duties -- -- (77,148) 148,148 --
Accrued consulting and other
liabilities (182,611) 88,085 107,561 105,759 18,796
Accrued salaries -- -- 261,250 -- --
Accrued interest on
long-term debt -- -- 83,333 -- --
Prepaid share issue costs -- 888,390 -- -- --
Other 502,989 (1,416) 555,368 (31,514) (5,300)
------------------------- --------------------------- -------
79,809 1,899,375 1,528,131 473,129 (20,967)
=============================================================================
</TABLE>
F-37
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
10. CONSOLIDATED STATEMENTS OF CASH FLOWS
During the year ended February 28, 1995, the amount of cash interest
paid was $250,000 [1994--nil; 1993--nil]. Cash interest of $250,000 was paid
in the six month period ended August 31, 1995 and no cash interest was paid in
the six month period ended August 31, 1994. Capital taxes of approximately
$89,000 were paid in the six month period ended August 31, 1994,
[1995--$89,000; 1994--nil; 1993--nil] in connection with the issuance of
shares, primarily relating to the initial public offering. No income taxes
were paid during any of these periods.
All short-term, highly liquid investments with maturities of three
months or less at the date of purchase are considered to be cash equivalents.
In addition to the transactions described in the consolidated
statements of cash flows, the Company completed the following transactions
which did not result in an outflow of cash and are not reflected in the
consolidated statements of cash flows:
[a] In fiscal 1994, the Company purchased technology in the amount of
$2,406,001 of which $2,106,001 was satisfied through the issuance of the Units
referred to in note 5 and the balance in cash of $300,000; and
[b] In fiscal 1994, the acquisition of Medipro by Pharma Patch as
part of a share exchange referred to in note 5.
[c] In fiscal 1995, the Company purchased technology in the amount of
$4,025,000 and fixed assets of $975,000 which was satisfied through the
issuance of a $5,000,000 note payable referred to in note 1[c].
[d] In fiscal 1995, the Company acquired an investment of $1,770,996
in Cangene which was satisfied through the issuance of 439,999 Ordinary Shares.
In addition, a portion of these Cangene shares were used to settle outstanding
professional fees of approximately $630,000.
[e] In fiscal 1995, the Company issued 328,322 Ordinary Shares as
consideration for settling outstanding professional fees totaling approximately
$494,000.
[f] In the six month period ended August 31, 1995, 300,389 shares
were issued in lieu of payment to settle outstanding professional fees of
approximately $328,822 and 174,167 shares to settle salaries accrued in fiscal
1995 in the amount of $174,167.
[g] In the six month period ended August 31, 1995, 926,563 Ordinary
Shares were issued to officers and directors or affiliates in exchange for
promissory notes of $741,250.
11. RELATED PARTY TRANSACTIONS
In 1993, the Company had entered into an agreement, which expires on
December 31, 2011, with a shareholder whereby the Company has granted the
licensee:
F-38
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
[a] the exclusive right to produce and sell one of the Company's
wound management proprietary products within certain territories; and
[b] the non-exclusive world-wide rights to distribute the product.
Substantially all of the license and product development fees
recognized in 1993 and 1994 were received from this shareholder. Product
development fees recorded in the six month period ended August 31, 1995
occurred with outside third parties.
12. SEGMENT INFORMATION
Substantially all of the Company's operations are related to a single
industry segment, that being research and development of advanced transdermal
drug delivery systems and skin penetration enhancers. The following
information relates to geographic segments of the Company:
<TABLE>
<CAPTION>
FOR THE
SIX-MONTH FOR THE
PERIODS ENDED YEARS ENDED
AUGUST 31, FEBRUARY 28,
----------------------------------------------------------------------------
1995 1994 1995 1994 1993
$ $ $ $ $
----------------------------------------------------------------------------
[UNAUDITED]
<S> <C> <C> <C> <C> <C>
Revenues
Canada -- -- -- 129,421 130,763
United States 453,377 -- -- -- --
----------------------------------------------------------------------------
Consolidated revenue 453,377 -- -- 129,421 130,763
============================================================================
Expenses
Canada -- 4,593,938 9,316,380 3,356,845 849,511
United States 2,190,776 4,426,012 4,421,064 -- --
----------------------------------------------------------------------------
Consolidated expenses 2,190,776 9,019,950 13,737,444 3,356,845 849,511
============================================================================
Operating loss
Canada -- 4,593,938 9,316,380 3,227,424 718,748
United States 1,737,399 4,426,012 4,421,064 -- --
----------------------------------------------------------------------------
Consolidated operating loss 1,737,399 9,019,950 13,737,444 3,227,424 718,748
============================================================================
Identifiable assets
Canada -- 4,869,378 61,243 5,237,293 753,729
United States 2,440,102 950,193 1,566,778 -- --
----------------------------------------------------------------------------
Consolidated total assets 2,440,102 5,819,571 1,628,021 5,237,293 753,729
============================================================================
</TABLE>
F-39
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[EXPRESSED IN U.S. DOLLARS]
13. SUBSEQUENT EVENT
Subsequent to August 31, 1995, the Company sold substantially all of
its assets to Technical Chemicals and Products, Inc. ("TCPI") in exchange for
786,214 shares of TCPI common stock valued at approximately $12,000,000 and the
assumption by TCPI of the $5,000,000 promissory note previously issued by the
Company. As a result of this transaction, the Company owns approximately 10%
of TCPI's outstanding common shares. The Company intends to obtain shareholder
approval to dissolve the Company and distribute the TCPI shares received from
the sale to its shareholders.
F-40
<PAGE> 71
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
Introductory Note
On November 15, 1995, Technical Chemical and Products, Inc. and
subsidiaries ("the Company") purchased certain assets of Pharma Patch Public
Limited Company ("Pharma Patch"), an Ireland corporation, including
substantially all of the assets of its wholly-owned subsidiary, PP Holdings,
Inc. ("PPH"), a California corporation (collectively referred to as the
"Purchased Assets"). In consideration for the Purchased Assets, consisting of
accounts receivable of $207,917, property and equipment of $1,624,330 and
intangible assets of $16,801,641, the Company (i) issued an aggregate of
886,214 shares of the Company's common stock valued at $13,435,000 of which
491,384 shares were issued to Pharma Patch, 294,830 shares were issued to PPH
and 100,000 shares were issued to an advisor who assisted the Company in this
transaction; (ii) issued two promissory notes with an aggregate principal
amount of $5,000,000 to Flora, Inc. ("Flora") in exchange for the cancelation
of a $5,000,000 promissory note issued to Flora by Pharma Patch; (iii) issued a
third promissory note to Flora in the principal amount of $188,888; and (iv)
paid $5,000 to each Pharma Patch and PPH. In addition, the Company incurred
acquisition costs totaling $275,945 in connection with this acquisition, which
are included in intangible assets.
The acquisition of the Purchased Assets, described above, was recorded
pursuant to the purchase method of accounting and, therefore, the operating
results related to the Purchased Assets are included in the Company's operating
results beginning November 15, 1995. The Purchased Assets are presently
utilized exclusively in research and development activities.
The following tables set forth certain unaudited pro forma condensed
consolidated financial information for the Company, after giving effect to the
acquisition of the Purchased Assets, as if such purchase has been consummated,
with respect to the consolidated statement of operations, as of January 1,
1995. The following table is not necessarily indicative of the consolidated
results of operations, as they may be in the future or as they might have been
had the purchase been consummated on the respective dates assumed.
The unaudited pro forma condensed consolidated financial information
reflects various estimates and, accordingly, is subject to change based on
actual results. Historical financial information relating to the Purchased
Assets contained in the accompanying unaudited pro forma condensed consolidated
financial information has been obtained from Pharma Patch.
F-41
<PAGE> 72
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TECHNICAL PRO FORMA ADJUSTMENTS
CHEMICALS AND PHARMA PATCH
PRODUCTS, INC. PUBLIC LIMITED COMBINED
AND SUBSIDIARIES COMPANY PRO FORMA
---------------- -------------------------------------------------------
PERIOD FROM
JANUARY 1,
YEAR ENDED 1995 TO YEAR ENDED
DECEMBER 31, NOVEMBER 15, PRO FORMA DECEMBER 31,
1995 1995 ADJUSTMENTS 1995
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Gross sales $ 4,711,994 $ 389,055(b) $ -- $ 5,101,049
Returns and allowances (523,533) -- -- (523,533)
---------------------------------------------------------------------------
Net sales 4,188,461 389,055 -- 4,577,516
Cost of sales 3,252,750 -- -- 3,252,750
---------------------------------------------------------------------------
Gross profit 935,711 389,055 -- 1,324,766
Operating expenses:
Selling, general and
administrative 2,025,847 1,925,791(b) 1,039,942(c) 4,991,580
Research and development 434,981 1,368,819(b) 1,803,800
---------------------------------------------------------------------------
Loss from operations (1,525,117) (2,905,555) (1,039,942) (5,470,614)
Other income (expense):
Interest income 164,012 -- -- 164,012
Interest expense (71,573) (421,000) -- (492,573)
Gain on assets sold -- 16,397,245(b) (16,397,245)(d) --
---------------------------------------------------------------------------
(Loss) income before
extraordinary item (1,432,678) 13,070,690 (17,437,187) (5,799,175)
Extraordinary item-loss on
early extinguishment of debt 60,950 -- -- 60,950
---------------------------------------------------------------------------
Net (loss) income $(1,493,628) $13,070,690 $(17,437,187) $(5,860,125)
===========================================================================
Loss per common share:
Before extraordinary item $ (.20) $ (.73)
Extraordinary loss (.01) (.01)
----------- -----------
Net loss $ (.21) $ (.74)
=========== ===========
Weighted average common shares
outstanding 7,069,507 886,214(a) 7,955,721
=========== ============ ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed
consolidated financial information.
F-42
<PAGE> 73
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following pro forma adjustments have been made to the consolidated
statement of operations for the year ended December 31, 1995, as if the
acquisition had taken place on January 1, 1995.
(a) To record the effect on the weighted average common shares
outstanding of the issuance of 886,214 shares of common stock in connection
with the acquisition of the Purchased Assets.
(b) To record the historical results of operations related to the
Purchased Assets of Pharma Patch as recorded in the accounting records of
Pharma Patch for the period from January 1, 1995 through November 15, 1995.
(c) To record depreciation and amortization expense related to the
Purchased Assets for the period from January 1, 1995 through November 15,
1995, to reflect the new basis of certain of the assets acquired and the
amortization of the goodwill associated with the Purchased Assets over a period
of 15 years.
(d) To eliminate the gain on the disposition of the Purchased Assets
recognized by Pharma Patch.
F-43
<PAGE> 74
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of the Company are elected by the Board of
Directors to hold office until their successors have been chosen and qualified
or until earlier resignation or removal. Set forth below are the names,
positions and ages of the Company's executive officers and directors as of
December 31, 1995
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C>
Jack L. Aronowitz(1) . . . . . . . . . . . . 55 President, Chief Executive Officer and Chairman of the Board
of Directors
Martin Gurkin, Ph.D. . . . . . . . . . . . . 63 Senior Vice President, Chief Operating Officer and Director
Cleve W. Laird, Ph.D. . . . . . . . . . . . . 56 Executive Vice President and Director
John E. Pippert . . . . . . . . . . . . . . . 63 Senior Vice President, Marketing and Sales
Thomas S. Spencer, Ph.D. . . . . . . . . . . 50 Vice President, Pharmaceutical Development of the Pharmetrix
Division
Murray D. Watson(2) . . . . . . . . . . . . . 51 Director
Elias Amador, M.D., Ph.D.(1)(3) . . . . . . . 63 Director Nominee
Kathryn R. Harrigan M.B.A., D.B.A.(1)(3). . . 44 Director Nominee
</TABLE>
___________________________
(1) To serve as a member of the Company's Compensation Committee and Audit
Committee.
(2) Murray Watson resigned as a member of the Board of Directors in May 1996.
(3) To serve as a member of the Company's Stock Option Committee.
JACK L. ARONOWITZ, the founder of the Company, has been President and
Chairman of the Board of Directors since January 1992 and Chief Executive
Officer since January 1996. Prior to founding the Company, Mr. Aronowitz
served as Executive Vice President, Technical Director and Director of
Operations of TechniMed Corporation from May 1985 to October 1991 and as
President from January 1983 to April 1985. TechniMed was engaged in the
medical diagnostic and biochemical businesses. Mr. Aronowitz has been involved
in the development and commercialization of medical diagnostic products for
over 35 years. Mr. Aronowitz is the President of the Florida Institute of
Chemists.
31
<PAGE> 75
MARTIN GURKIN, PH.D. has been Senior Vice President, Chief Operating
Officer and a Director of the Company since January 1996. Prior to joining the
Company, Dr. Gurkin served as Vice President of ISCO, Inc., a company engaged
in the manufacture of scientific analytical instrumentation, from October 1989
to December 1995. Prior to joining ISCO, Inc., Dr. Gurkin was employed in
various capacities for over 17 years by E. M. Science (an affiliate of E. Merck
KGAA), a company engaged in the manufacturing of laboratory reagents and
chromatography supplies.
CLEVE W. LAIRD, PH.D. has been Executive Vice President of the Company
since February 1992 and a Director of the Company since January 1992. Since
1986, Dr. Laird has also served as President and Chief Executive Officer of
Drial Consultants, Inc., a consulting and advisory firm to the medical,
pharmaceutical and diagnostic device industries. Although still engaged in
some private consulting, Dr. Laird is employed full time by the Company. Dr.
Laird's health care industry experience also includes employment as Director of
Laboratory Services for International Remote Imaging Systems, a company engaged
in the development, production and sale of medical instrumentation for urine
analysis, from 1981 to 1986, as well as various assignments with the Clinical
Diagnostics and Medical Products Division of Union Carbide, from 1977 to 1980.
JOHN E. PIPPERT has been Senior Vice President, Marketing and Sales of
the Company since March 1995. Prior thereto, Mr. Pippert served as Director of
Marketing for Western Biomedical Enterprises, Inc., a company engaged in the
manufacture of medical diagnostic products, from January 1990 to February 1995.
During that period, Mr. Pippert also served as a senior consultant to Drial
Consultants, Inc. Mr. Pippert was Vice President and Chief Operating Officer
of Clovis Laboratory Software, Inc. and Director of Marketing and Sales for
Laboratory Consulting, Inc., companies engaged in the development of laboratory
computer software, from January 1987 to December 1990. Mr. Pippert also worked
in various capacities for the Medical Diagnostics Division of E.I. Dupont de
Nemours & Co., Inc. from 1972 to 1984.
THOMAS S. SPENCER, PH.D. has been Vice President, Pharmaceutical
Development of the Company's Pharmetrix Division since November 1995. Prior to
joining the Company, Dr. Spencer served as Executive Vice President and Chief
Technical Officer of Pharma Patch from August 1994 to November 1995. Prior to
joining Pharma Patch, Dr. Spencer was Vice President of Research and
Development at Cygnus from May 1988 until January 1994. While at Cygnus, he
was in charge of a research and development organization consisting of over 90
members, responsible for the commercialization of Cygnus' products.
MURRAY D. WATSON was a Director of the Company from January 1996
until May 1996. Since July 1993, Mr. Watson has served as Chairman of the
Board and Chief Executive Officer of Pharma Patch. Prior thereto, Mr. Watson
served as President and Chief Operating Officer of Medipro Sciences Limited, a
company engaged in the research and development of transdermal drug delivery
systems, from November 1987 to July 1993. Mr. Watson has over 25 years of
experience in the international health care industry including serving as Vice
President of Picker International Inc., President of Odyssey Inc. and General
Manager of American Hospital Supply Corp. of Canada. In addition, Mr. Watson
acted as President of the M.D.W. Group Inc., a privately owned merchant
banking company since 1985, where he managed a broad spectrum of business
ventures. Mr. Watson currently serves as a director of Vista Technologies,
Inc., a company engaged in the laser vision business.
ELIAS AMADOR, M.D., PH.D. has been nominated to become a Director of
the Company immediately following the closing of the Offering. Since 1980, Dr.
Amador has served as Chief Pathologist of the Los Angeles County Martin Luther
King, Jr./Drew Medical Center. Dr. Amador is also a Professor and Chairman of
the Pathology Department at the Charles R. Drew Medical School and Professor of
Pathology in Residence at the University of California, Los Angeles School of
Medicine.
32
<PAGE> 76
KATHRYN R. HARRIGAN, M.B.A., D.B.A., has been nominated to become a
Director of the Company immediately following the closing of the Offering. Ms.
Harrigan has been a professor at Columbia Business School since 1981 and was
named the Henry L. Kravis Professor of Business Leadership at Columbia Business
School in 1993. Since 1994, Professor Harrigan has served on the Board of
Directors of Cambrex Corporation, a company engaged in the international
specialty chemicals business. In 1995, Professor Harrigan joined the Board of
Directors of Schuller (formerly Manville Corporation), an international
building and filtration company.
The Company is currently in the process of interviewing candidates for
the position of full-time chief financial officer. The Company anticipates
hiring an individual for this position during the first half of 1996.
There is no family relationship between any executive officer or
director of the Company.
SECTION 16 FILING VIOLATIONS
Thomas S. Spencer inadvertently failed to file on a timely basis an
Initial Statement of Beneficial Ownership of Securities on Form 3 upon
becoming an officer of the Company in late 1995. Mr. Spencer subsequently
made his Form 3 filing. Otherwise, all Forms 3, 4 and 5 filings appear to
have been made when due.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, Jack L. Aronowitz, the Company's President, Chief
Executive Officer and Chairman of the Board, participated in deliberations of
the Company's Board of Directors concerning executive officer compensation.
COMPENSATION OF DIRECTORS
Each non-employee director of the company is paid a fee of $500 per
each meeting of the Board of Directors attended and is reimbursed for travel
expenses. No director who is an employee of the Company receives separate
compensation for services rendered as a director.
1992 INCENTIVE STOCK OPTION PLAN
The Company has adopted the 1992 Incentive Stock Option Plan (the
"Plan") under which 800,000 shares of Common Stock are reserved for issuance
upon the exercise of options granted thereunder. The primary purpose of the
Plan is to attract and retain capable executives and employees by offering them
a greater personal interest in the Company's business through stock ownership.
Until an appropriate Committee of the Company's Board of Directors is
appointed, the Plan will be administered by the Company's Board of Directors,
which will determine, among other things, the persons to be granted options,
the number of shares subject to each option and the option price. After the
consummation of the Offering, it is intended that the Stock Option Committee
will administer the Plan. The exercise price of any stock option granted under
the Plan to an eligible employee must be equal to the greater of the fair
market value of the shares on the date of grant or the initial public offering
price for a period of two years, and after such two year period, must equal the
fair market value of the shares. With respect to persons owning more than 10%
of the outstanding Common Stock, the exercise price may not be less than 110%
of the fair market value of the shares underlying such option on the date of
grant. The Board will determine the term of each option and the manner in
which it may be exercised, provided that no option may be exercisable more than
five years and one month after the date of grant, except that optionees who own
more than 10% of the Company's Common Stock may not be granted options
33
<PAGE> 77
exercisable more than five years from the date of grant. A director of the
Company will not be eligible to receive benefits under the Plan unless such
director is also an employee of the Company (this feature of the Plan may be
amended in the future). Options are exercisable at the rate of 20% per year
and are fully vested after five years. From the date of grant until three
months prior to the exercise, the optionee must be an employee of the Company
in order to exercise any options. Options are not transferable except upon the
death of the optionee. The Board of Directors has the power to impose
additional limitations, conditions and restrictions in connection with the
grant of any option. No options have been granted under the Plan as of the
date hereof.
OTHER OPTIONS
The Company has outstanding options and/or warrants (outside of the
Plan) to purchase shares of Common Stock granted to the following executive
officers of the Company: (i) John E. Pippert (20,000 shares at $1.25 per
share); (ii) Dr. Martin Gurkin (20,000 shares at $14.44 per share); and
(iii) Jack Aronowitz (500,000 shares at the per share Offering (as defined
below) price).
EMPLOYMENT CONTRACTS
The Company entered into an employment agreement with Jack L.
Aronowitz, as of December 31, 1992, as amended on January 16, 1996, pursuant to
which Mr. Aronowitz serves as President of the Company. The agreement provides
that Mr. Aronowitz receive: (i) a base salary of $125,000, increased annually
by 5%; and (ii) an annual bonus of 5% of the Company's consolidated pre-tax
profits. The agreement also provides that Mr. Aronowitz is entitled to health
insurance, a car allowance of $10,000 per year, other fringe benefits, and, at
the Board's discretion, further bonuses and reimbursement for various expenses.
In addition, the agreement prohibits Mr. Aronowitz (x) during and after the
term of the agreement, from disclosing confidential information relating to the
Company and (y) during the term of the agreement and for a period of two years
after termination thereof, from competing with the Company anywhere in the
United States where the Company is engaged in business or has evidenced an
intention to engage in business. Notwithstanding the foregoing, if Mr.
Aronowitz's employment is terminated by the Company for any reason other than
Mr. Aronowitz having engaged in any material act of dishonesty, disloyalty,
negligence and/or fraud which is, or may be, damaging to the Company's
business, the Company must pay Mr. Aronowitz two times his then base salary
plus an amount equal to two times the last bonus paid to or accrued by him
pursuant to the agreement, in order for the noncompetition provision described
in (y) above to be effective.
After creation of the Company's Compensation Committee, the Company
intends to propose certain modifications to the foregoing employment agreement.
The Company entered into an employment agreement with Cleve W. Laird,
Ph.D., as of January 31, 1996, pursuant to which Dr. Laird serves as Executive
Vice President of the Company. The agreement provides that Dr. Laird receive a
base salary of $80,000, adjusted annually during the term of the agreement for
increases in the U.S. Consumer Price Index, and a bonus at the Board of
Directors' discretion. The agreement also provides that Dr. Laird receive
health insurance, other fringe benefits, and, at the Board of Directors'
discretion, reimbursement for various expenses. In addition, the agreement
prohibits Dr. Laird: (i) during and after the term of the agreement, from
disclosing confidential information relating to the Company; and (ii) during
the term of the agreement and for a period of two years after the termination
thereof, from competing with the Company anywhere in the United States where
the Company is engaged in business or has taken steps to engage in business.
Notwithstanding the foregoing, if Dr. Laird's employment is terminated by the
Company other than For Cause (as that phrase is defined in the agreement) or
due to the death or disability of Dr. Laird, the
34
<PAGE> 78
Company must pay Dr. Laird an amount equal to two times his then base salary as
liquidated damages. Pursuant to a Stock Option Agreement dated July 29, 1994,
Dr. Laird received an option to purchase 66,000 shares of Common Stock at an
exercise price of $1.25 per share (after giving effect to a two-for-one stock
split effectuated by the Company as of July 31, 1995).
The Company entered into an employment agreement with John E. Pippert,
as of January 31, 1996, pursuant to which Mr. Pippert serves as a Senior Vice
President of the Company. The agreement provides that Mr. Pippert receive a
base salary of $70,000, which may be increased at the Board of Directors'
discretion. The agreement also provides that Mr. Pippert receive a bonus based
on a percent of forecasted net sales agreed upon as the Company's annual
target. The maximum bonus payable in the first year of the agreement is
$50,000. Mr. Pippert also receives health insurance, other fringe benefits,
and, at the Board of Directors' discretion, reimbursement for various expenses.
In addition, the agreement prohibits Mr. Pippert: (i) during and after the term
of the agreement, from disclosing confidential information relating to the
Company; and (ii) during the term of the agreement and for a period of two
years after the termination thereof, from competing with the Company anywhere
in the United States where the Company is engaged in business or has taken
steps to engage in business. Notwithstanding the foregoing, if Mr. Pippert's
employment is terminated by the Company other than For Cause (as that phrase is
defined in the agreement) or due to the death or disability of Mr. Pippert, the
Company must pay Mr. Pippert an amount equal to two times his then base salary
as liquidated damages. Pursuant to a Stock Option Agreement dated March 24,
1995, Mr. Pippert received an option to purchase 20,000 shares of Common Stock
at an exercise price of $1.25 per share (after giving effect to a two-for-one
stock split effected by the Company as of July 31, 1995).
The Company entered into an employment agreement with Martin Gurkin,
dated as of February 26, 1996, pursuant to which Mr. Gurkin serves as a Senior
Vice President of the Company. The Agreement provides that Mr. Gurkin receive
a base salary of $50,000, which may be increased at the Board of Directors'
discretion. The agreement also provides that Mr. Gurkin receive a bonus based
on a percent of forecasted net sales agreed upon as the Company's annual
target. The maximum bonus payable in the first year of the agreement is
$50,000. Mr. Gurkin also receives health insurance, other fringe benefits,
and, at the Board of Directors' discretion, reimbursement for various expenses.
In addition, the agreement prohibits Mr. Gurkin: (i) during and after the term
of the agreement, from disclosing confidential information relating to the
Company; and (ii) during the term of the agreement and for a period of two
years after the termination thereof, from competing with the Company anywhere
in the United States where the Company is engaged in business or has taken
steps to engage in business. Notwithstanding the foregoing, if Mr. Gurkin's
employment is terminated by the Company other than For Cause (as that phrase is
defined in the agreement) or due to the death or disability of Mr. Gurkin, the
Company must pay Mr. Gurkin an amount equal to two times his then base salary
as liquidated damages. Pursuant to a Stock Option Agreement dated November 17,
1995, Mr. Gurkin received an option to purchase 20,000 shares of Common Stock
at an exercise price of $14.44 per share.
35
<PAGE> 79
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company, during the
fiscal years ended December 31, 1995, 1994 and 1993 to Jack L. Aronowitz,
President, Chief Executive Officer and Chairman of the Board of the Company
(the "Named Executive Officer"). No restricted stock awards, long-term
incentive plan payouts or other types of compensation other than the
compensation identified in the chart below were paid to Mr. Aronowitz. No
other executive officer of the Company earned a total annual salary and bonus
during 1995, 1994 and 1993 in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- -------------------------- -------
NAME AND ALL
- -------- RESTRICTED SECURITIES OTHER
PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN-
- --------- SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS SATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- -------- ---- -------- ------ ------------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jack L. 1995 $137,813 $ -- $17,209(1)(2) $ -- $ -- $ -- $ --
Aronowitz, 1994 $ 36,000 $ -- $15,310(1) $ -- $ -- $ -- $ --
President, Chief 1993 $ 36,000 $ -- $16,369(1) $ -- $ -- $ -- $ --
Executive
Officer and
Chairman of
the Board
</TABLE>
___________________________
(1) Includes the cost of an automobile and health insurance.
(2) Does not include $256,920 paid as a dividend by the Company to Mr.
Aronowitz soon after the Company's initial public offering. The
dividend represented Mr. Aronowitz's pro rata share of the Company's
retained earnings distributed to all of the Company's shareholders
prior to the revocation of the Company's S election and was not
intended as a form of compensation.
OPTION GRANTS AND EXERCISES; LONG-TERM INCENTIVE PLANS
During 1995, Mr. Aronowitz was not granted any options to purchase
shares of Common Stock or stock appreciation rights, nor has he exercised any
options to purchase Common Stock or stock appreciation rights since the
Company's inception. No awards have ever been made by the Company to Mr.
Aronowitz under any long-term incentive plan. After the end of 1995, Mr.
Aronowitz was granted a warrant to purchase 500,000 shares of Common Stock at
an exercise price equal to the per share Offering price. See "Certain
Relationships and Related Transactions."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth, as of April 30, 1996, information with
respect to the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to beneficially own more than five percent (5%) of
the outstanding shares of the Company's Common Stock; (ii) each director and
director nominee of the Company; (iii) the Company's Named Executive Officer;
and (iv) all directors and executive officers as a group. Unless otherwise
indicated, each of the persons named in this table: (a) has sole voting and
investment power with respect to all shares of Common Stock beneficially owned;
and (b) has the same address as the Company.
36
<PAGE> 80
<TABLE>
<CAPTION>
Amount and Nature
of
Name and Address of Beneficial Owner(1) Beneficial Ownership(2) Percent
- --------------------------------------- ----------------------- -------
<S> <C> <C>
Jack L. Aronowitz . . . . . . . . . . . . . . . . . . . . 4,591,666(3) 44.9%
Pharma Patch Public Limited Company(4)(5) . . . . . . . . 676,214(6) 6.9%
Cleve W. Laird . . . . . . . . . . . . . . . . . . . . . 61,000 0.6%
Martin Gurkin . . . . . . . . . . . . . . . . . . . . . . 20,000(7) 0.2%
Murray D. Watson . . . . . . . . . . . . . . . . . . . . -- --
Elias Amador . . . . . . . . . . . . . . . . . . . . . . -- --
Kathryn R. Harrigan . . . . . . . . . . . . . . . . . . . -- --
All directors, director nominees and officers as a group
(10) persons . . . . . . . . . . . . . . . . . . . . . . 4,704,666 45.6%
</TABLE>
_________________
(1) The business address for Messrs. Aronowitz, Laird, Gurkin and
Amador and Ms. Harrigan is 3341 S.W. 15th Street, Pompano Beach,
FL 33069.
(2) Beneficial ownership of shares, as determined in accordance
with applicable Securities and Exchange Commission rules, includes
shares as to which a person has or shares voting power and or
investment power. The Company has been informed that all shares shown
are held of record with sole voting and investment power, except as
otherwise indicated.
(3) Includes the presently exercisable right to exercise a warrant to
purchase 500,000 shares of Common Stock.
(4) This shareholder's address is 15/16 Fitzwilliam Place, Dublin,
Ireland.
(5) Mr. Murray D. Watson, an executive officer of Pharma Patch, served
as a director of the Company from January 1996 to May 1996.
Mr. Watson does not beneficially own any shares of Common Stock.
(6) The Company has granted Pharma Patch a warrant to purchase 100,000
shares of Common Stock. See "Certain Relationships and Related
Transactions."
(7) Represents the presently exercisable right to exercise an option to
purchase 20,000 shares of Common Stock.
The Company knows of no contractual arrangements, including any pledge
by any person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into an Exclusive License Agreement with Mr.
Aronowitz, dated November 11, 1992 (the "First License Agreement"), which was
superseded by a Cancellation and Exclusive License Agreement, dated January 31,
1996 (the "Second License Agreement"). The Second License Agreement is for an
initial term of 20 years and automatically renews for successive 20 year terms
thereafter. Pursuant to the terms of the Second License Agreement, Mr.
Aronowitz has granted to the Company an exclusive license to manufacture,
promote, market and sell all medical and related products developed using
certain patented technology owned by Mr. Aronowitz (the "Products"). The
Second License Agreement provides that the Company is required to pay Mr.
Aronowitz an annual fee equal to the greater of (i) 3% of net collected sales
revenues on sales of Products by the Company or any sublicensee of the Company
or (ii) $10,000, subject to a maximum limit on aggregate payments made
throughout the term of the Second License Agreement of $10.0 million. In
addition, the Second License Agreement also provides that any patents,
products, inventions, devices or other items developed by Mr. Aronowitz during
the term of the Second License Agreement in the field of medical diagnostics,
pharmaceuticals, transdermal testing, transdermal drug delivery, medical
chemistry or medical biochemistry, medical devices or health care products
(excluding the Products) are the property of the Company. In consideration for
the cancellation of the First License Agreement, the Company will issue to Mr.
Aronowitz a warrant to purchase 500,000 shares of Common Stock at an exercise
price equal to the per share Offering (as defined below) price.
In connection with the Company's proposed underwritten public offering
of Common Stock (the "Offering"), the Company entered into a Supplemental
Agreement with Pharma Patch dated January 16, 1996, amending certain provisions
of the Asset Purchase Agreement entered into between the Company and Pharma
Patch in November 1995 and addressing certain additional matters. Pursuant to
the terms of the Supplemental Agreement, Pharma Patch agreed to execute a
lock-up letter with the Representative of the Underwriters providing that it
would not sell or otherwise dispose of any of its shares of Common Stock for a
period to expire on the later to occur of 180 days after: (a) the effective
date of the Offering;
37
<PAGE> 81
or (b) the first date on which Shares are offered to the public in the
Offering. As consideration for the execution of this lock-up agreement, the
Company agreed: (i) to terminate an existing lock-up agreement covering Common
Stock owned by Pharma Patch, executed in connection with the Asset Purchase
Agreement; (ii) effective as of the closing date of the Offering, to terminate
the voting trust agreement, shareholders' agreement and irrevocable proxy
executed in connection with the Asset Purchase Agreement which, among other
things, limited Pharma Patch's ability to vote or dispose of its shares of
Common Stock; (iii) allow Pharma Patch to offer for sale 100,000 shares of its
Common Stock in the Offering (plus an additional 110,000 shares if the
Underwriters' over-allotment option is exercised in its entirety); (iv)
effective as of the closing date of the Offering, issue to Pharma Patch a
two-year warrant to purchase 100,000 shares of Common Stock at an exercise
price equal to the per share Offering price (the "Warrant Shares"); and (v) to
file a registration statement on Form S-3 to register all of the remaining
shares of Common Stock owned by Pharma Patch after the Offering, including the
Warrant Shares (collectively, the "Remaining Shares").
In May 1995, the Company repaid the outstanding amount of $104,978.58
due under a note issued by the Company to Mr. Aronowitz. The note was for the
principal amount of $100,000, payable on demand, with interest accruing at the
prime rate.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the report:
1. and 2. The Financial Statements filed as part of this report are
listed separately in the index to Financial Statements beginning on
page F-1 of this report.
3. For Exhibits see Item 13(c), below. Each management contract or
compensatory plan or arrangement required to be filed as an exhibit
hereto is listed in Exhibits Nos. 10.4, 10.5, 10.8, 10.17, 10.12,
10.10 and 10.18 of Item 13(c) below.
(b) The Company filed a report on Form 8-K on November 29, 1995, as
amended by Form 8-K/A on January 24, 1996.
38
<PAGE> 82
(c) List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
<S> <C>
2. * Asset Purchase Agreement among Pharma Patch Public Limited Company, PP
Holdings, Inc. and the Company
3.1 ** Articles of Incorporation of the Company, as amended
3.2 ** By-laws of the Company
3.3 ***** Amended and Restated Articles of Incorporation of the Company
3.4 ***** Amended and Restated Bylaws of the Company
4.1 ***** See Exhibits 3.3 and 3.4 for provisions of the Amended and Restated Articles of
Incorporation 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
9. ***** Voting Trust Agreement by and between Pharma Patch Public Limited
Company and Jack L. Aronowitz dated November 1, 1995
10.1 ****** Employment Agreement between Jack L. Aronowitz and the Company dated
December 31, 1992, as amended
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 ***** Employment Agreement between John Pippert and the Company dated January
31, 1996
10.5 ***** Employment Agreement between Cleve Laird and the Company dated January
31, 1996
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. dated November 15,
1995
10.7 ** Health-Mark Diagnostics, Inc. Shareholders Agreement dated March 7, 1994
10.8 **** Stock Option Agreement with Cleve Laird dated July 29, 1994
10.9 ** Letter Agreement with John Faro (for stock options) dated August 12, 1994
10.10 ****** Warrant Agreement between the Company and Jack L. Aronowitz
10.11 ***** Supplemental Agreement by and between Pharma Patch Public Limited
Company and PP Holdings, Inc. dated January 16, 1996
10.12 ***** Stock Option Agreement with John Pippert
</TABLE>
39
<PAGE> 83
<TABLE>
<S> <C>
10.13 ** Agreement between Company and Equity Communications dated January 6,
1995
10.14 ***** Letter Agreement between the Company and Redstone Securities, Inc. dated
January 15, 1996
10.15 ***** Letter Agreement between the Company and Ira Weingarten dated January 15,
1996
10.16 ***** Letter Agreement with Flora, Inc. dated February 5, 1996
10.17 ****** Employment Agreement between the Company and Martin Gurkin dated
January, 1996
10.18 ****** Stock Option Agreement with Martin Gurkin dated November, 1996
21 ***** Subsidiaries of the Company
99.1 ** Licenses, Permits and Approvals--Federal
99.2 ** Licenses, Permits and Approvals--State
99.3 ** Licenses, Permits and Approvals--County
99.4 ** FDA Product List
99.5 ** United States Patents
99.7 ****** Pharmetrix Division of TCPI Patents
99.8 ****** Pharmetrix Division of TCPI Licenses, Permits and Approvals
99.6 ** Canadian Patents
* Incorporated by reference to the exhibit of the same number in the Company's
Form 8-K filed on November 29, 1995.
** Incorporated by reference to exhibit of the same number in Registration
Statement on Form SB-2 filed on October 28, 1994 (No. 33-85756).
*** Previously filed with the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995 which this amendment amends and restates.
**** Incorporated by reference to exhibit of the same number in Amendment No. 1 to
Registration Statement on Form SB-2 filed on January 13, 1995 (No. 33-85756).
*****Incorporated by reference to exhibit of same number filed in the Company's
Registration Statement on Form S-1 on February 12, 1996 (No. 333-1272)
******Incorporated by reference to exhibit of the same number filed in Amendment
No. 2 to the Company's Registration Statement on Form S-1 on March 20, 1996.
</TABLE>
(d) Financial Statement Schedules
All other Financial Statements and schedules not listed have been
omitted since the required information is included in the Consolidated
Financial Statements or the Notes thereto, or is not applicable, material or
required.
40
<PAGE> 84
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
TECHNICAL CHEMICALS AND PRODUCTS, INC.
By: /s/ JACK L. ARONOWITZ
-----------------------------------
Jack L. Aronowitz, President, Chief
Executive Officer and Chairman
of the Board
Date: June 11, 1996
In accordance with the Securities Exchange Act of 1934, this amendment
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JACK L. ARONOWITZ President, Chief Executive June 11, 1996
- ----------------------------------------- Officer and Chairman of the
Jack L. Aronowitz Board (Principal Executive
Officer, Principal Financial
Officer and Principal
Accounting Officer)
/s/ MARTIN GURKIN Senior Vice President, Chief June 11, 1996
- ----------------------------------------- Operating Officer and
Martin Gurkin Director
/s/ CLEVE W. LAIRD Executive Vice President and June 11, 1996
- ----------------------------------------- Director
Cleve W. Laird
/s/ ELIAS AMADOR Director June 11, 1996
- -----------------------------------------
Elias Amador
/s/ KATHRYN R. HARRIGAN Director June 11, 1996
- -----------------------------------------
Kathryn R. Harrigan
</TABLE>
