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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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.
(Exact name of registrant as specified in its charter)
Florida 65-0308922
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3341 S.W. 15th Street, Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 979-0400
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
Indicate by check mark whether the registrant (1) has 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 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates as of
March 18, 1997 was approximately $49,044,303 (based upon the closing sale price
of $8 5/8 per share on the Nasdaq National Market on March 18, 1997).
As of March 18, 1997, 9,974,162 shares of the Registrant's $.001 par value
Common Stock were outstanding. Documents Incorporated By Reference None
EXHIBIT INDEX IS LOCATED ON PAGE 61
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INDEX
Description Page Number
PART I
Item 1. Business................................................... 4
Strategy............................................................ 5
Non-Invasive Transdermal Glucose Monitoring ........................ 6
Cholesterol Monitoring ............................................. 8
Other Medical Diagnostic Products ..................................10
Diagnostic Product Portfolio .......................................16
HealthCheck Home Health Product Portfolio ..........................17
Transdermal Drug Delivery Systems ..................................19
Drug Delivery Product Portfolio ....................................22
Biochemical Manufacturing ..........................................22
Product Research and Development ...................................23
Manufacturing and Materials ........................................23
Patents, Trademarks and Technologies ...............................23
Competition ........................................................25
Marketing and Sales ................................................25
Employees ..........................................................26
Governmental Regulation ............................................26
Product Liability Insurance ........................................27
Executive Officers of the Company...................................27
Item 2. Properties ................................................28
Item 3. Legal Proceedings .........................................28
Item 4. Submission Of Matters To A Vote Of Security Holders .......28
Part II
Item 5. Market For Registrant's Common Equity And Related
Stockholder Matters .......................................29
Item 6. Selected Financial Data ...................................30
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations .................................31
General.............................................................31
Results Of Operations ..............................................32
Liquidity And Capital Resources ....................................33
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INDEX
(Cont'd.)
Item 8. Financial Statements And Supplemental Data .................35
Report Of Independent Certified Public Accountants ..................36
Consolidated Balance Sheets .........................................37
Consolidated Statements Of Operations ...............................38
Consolidated Statements Of Shareholders' Equity .....................39
Consolidated Statements Of Cash Flows ...............................40
Notes To Consolidated Financial Statements ..........................41
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure ........................55
Part III
Item 10. Directors And Officers Of The Registrant ............................55
Part IV
Item 14. Exhibits, Financial Statement Schedule, And
Reports On Form 8-K ........................................58
Schedule II - Valuation and Qualifying Accounts......................59
Signatures ..........................................................60
Index to Exhibits....................................................61
Consent of Ernst & Young LLP.........................................62
Financial Data Schedule..............................................63
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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. TCPI is also engaged in the research and development of its TD
Glucose Monitoring System, a non-invasive glucose testing process for diabetics.
In addition to its ongoing diagnostics business, the Company, through its
Pharmetrix Division located in Menlo Park, California, is involved in the
research, development and commercialization of transdermal and mucosal drug
delivery systems and skin permeation enhancer. The Company currently owns 19 US
patents and 27 foreign patents, and has four pending US patent applications and
38 pending foreign patent applications.
TCPI currently manufactures and markets more than 47 membrane-based
diagnostic tests in the United States and internationally, 26 of which have
received 510(k) clearance from the FDA. The Company's products include tests and
screens for pregnancy, ovulation timing, cholesterol levels, blood glucose
levels, infectious diseases, drugs of abuse and certain types of cancer. In
addition, the Company has over 20 other diagnostic and transdermal drug delivery
products in various stages of development and governmental approval. Certain
products described herein are the registered and/or trademarked property of the
Company. See "Business - Patents, Trademarks and Technologies."
Overall, the Company or its founder has developed over 330 FDA cleared
medical diagnostic and drug products. In 1996, the Company sold approximately
5.4 million pregnancy tests, representing about 11% of the estimated 50.5
million tests sold worldwide. A shift in the mix of products sold toward more
accurate and expensive new technology resulted in higher year-over-year sales on
lower unit volume. In 1995, the Company sold approximately six million pregnancy
tests, representing more than 12% of approximately 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 One Step LH Ovulation Tests. The Company
also markets its products under its proprietary brand name, PDQ, and distributes
approximately 53 private label products with drug, discount and supermarket
chains such as CVS, Thrifty Payless, Thrift Drug, Woolworth, Fedco, Long's and
Smith's Food & Drug. In 1996, the Company captured more than 20% market
penetration of the US private label segment of at-home pregnancy test kits for
consumers, according to a report published by Town-Oller and Associates. In
addition, the Company's One Step hCG Pregnancy Midstream Wand, One Step hCG
Pregnancy Test Slide and One Step LH Ovulation Test Strip are 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 One Step CholestoCheck 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."
Statements regarding future products, future prospects, business plans and
strategies, future revenues and revenue sources, future liquidity and capital
resources, health care market directions, future acceptance of the Company's
products, possible recommendations of health care professionals or governmental
agencies regarding use of diagnostic products, possible growth in markets for
at-home diagnostic testing, as well as other statements contained in this report
that address activities, events or developments that the Company expects,
believes or anticipates will or may occur in the future, and similar statements
are forward looking statements. These statements are based upon assumptions and
analyses made by the Company in light of current conditions, future developments
and other factors the Company believes are appropriate in the circumstances,
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or information obtained from third parties and are subject to a number of
assumptions, risks and uncertainties. Readers are cautioned that forward-looking
statements are not guarantees of future performance and that actual results
might differ materially from those suggested or projected in the forward-looking
statements. Some of the factors that may cause actual future events to differ
from those predicted or assumed include: future advances in technologies and
medicine; the uncertainties of health care reform; risks related to the early
stage of the Company's existence and its products' development; the Company's
ability to execute on its business plans; the Company's dependence on outside
parties such as its key customers and alliance partners; competition from major
pharmaceutical, medical and diagnostic companies; risks and expense of
government regulation and affects of changes in regulation; the limited
experience of the Company in manufacturing and marketing products; uncertainties
connected with product liability exposure and insurance; risks associated with
growth and expansion; risks associated with obtaining patents and other
protections on intellectual property; uncertainties in availability of expansion
capital in the future and other risks associated with capital markets.
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 and market 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.
PROVIDE A BROAD RANGE OF PRODUCTS. The Company has developed and is
continuing to develop and market 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 1996 were: glucose monitoring, over $1.8 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 broader 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. In some cases, the Company will fund development of
products requiring an ANDA approval and which can be sold through the Company's
Health-Mark Diagnostics, L.L.C. subsidiary.
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EXPAND DIRECT DISTRIBUTION. In the past, the Company's medical diagnostic
products had been primarily distributed through strategic alliances. In 1996,
however, the Company directly distributed its private label One Step hCG
Pregnancy Midstream Wand and Slide and One Step LH Ovulation Test Strip under
more than 53 different brands to 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, in 1997, the Company launched its own
over-the-counter medical diagnostic testing devices to drug, discount and
supermarket chains under its HealthCheck brand name, utilizing colorful
point-of-sale displays that contain both the Company's products and health
information journals. See "Business - HealthCheck Home Health Screens - Health
Test Center."
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 patch technology and a monitoring
reflectance meter to test blood glucose levels. The TD Glucose System is
intended to overcome the discomfort and potential for infection 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 reinforcing the technical
feasibility of the Company's product. Subject to completion of production
quality TD Glucose Patches and meters, the Company expects to begin full
clinical trials of its TD Glucose System during 1997. Although preliminary
discussions with the FDA indicate that this product should be eligible for a
rapid 510(k) review, there can be no assurance that the FDA will consider the TD
Glucose System for 510(k) clearance or, if considered, that the TD Glucose
System will receive 510(k) clearance 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 5-cent coin and will be packaged in a pouch that can
also 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.
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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 diet, 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-monitoring blood glucose 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-monitoring blood glucose 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 $1.5 billion in 1997.
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 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 self-monitoring blood glucose system.
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The Company believes that growth in demand for self-monitoring blood
glucose 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-MONITORING BLOOD GLUCOSE 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
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
One Step CholestoCheck System is comprised of: (i) visual and meter-read One
Step Total Cholesterol Test Strips used for measuring total cholesterol levels;
(ii) visual and meter-read One Step HDL Cholesterol Test Strips used for
measuring HDL cholesterol; and (iii) the hand-held CholestoCheck Meter used for
reading the meter-read versions of these test strips with greater accuracy. The
One Step 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 One Step CholestoCheck 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 One Step Cholesterol Test Strip. The One Step
Cholesterol Test Strip then rapidly provides a visually measurable color change
in response to either the total or HDL (good cholesterol) cholesterol present in
the blood. With the meter-read versions of the One Step Cholesterol Test Strips,
the CholestoCheck Meter provides a digital readout of the cholesterol level.
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The One Step CholestoCheck 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 One
Step CholestoCheck System will be as accurate as laboratory testing methods.
The Company's One Step CholestoCheck 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 One Step
CholestoCheck System to conventional laboratory testing. The results demonstrate
a reproducibility 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) clearance from the FDA for the visually
read version of its One Step Total Cholesterol Test Strip. This test strip has
also received a waiver under CLIA. The Company expects to conduct clinical
trials of its One Step HDL Cholesterol Test Strips and its CholestoCheck Meter
prior to submitting its 510(k) application for these products. The Company
expects to submit a 510(k) application for its One Step CholestoCheck System
during the second half of 1997.
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 One Step CholestoCheck 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.
Starting in 1987, when 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 world
wide growth of 14% per year. Since this initial study was done, it has been
reconfirmed and stands as the official NIH position.
The North American cholesterol test market is by far the largest in the
world, representing more than 67% of the market. In 1997, it is expected that
the American market will grow to sales of $17.0 million and is projected to
reach $21.0 million with nearly 2.1 billion tests being performed in 1999.
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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.
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 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.
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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)
clearance of its One Step 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 will also be available
for use with the Company's One Step Blood Glucose Meter. In addition, the
Company has received a 510(k) clearance for its One Step 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 One Step hCG
Pregnancy and One Step LH Ovulation Tests. These products are sold in component
parts for assembly by customers, and as finished shelf packages under the
Company's PDQ label, HealthCheck brand and under more than 53 private labels.
The Company's One Step hCG Pregnancy and One Step 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 One Step hCG
Pregnancy 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
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 1995-1996, the Company's wholly-owned subsidiary, Health-Mark
Diagnostics, L.L.C., 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 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 detect 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.
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To date, the Company's drugs of abuse tests for cocaine, opiates,
methamphetamine, and canabinoids have received 510(k) clearance utilizing urine
samples. Two other tests for amphetamine and barbiturates have been submitted
for 510(k) clearance utilizing urine samples. Tests for phencyclidine (PCP),
benzodiazepine and methadone are presently in clinical trials. Obtaining 510(k)
clearance will allow the Company's tests to be used in clinical laboratories and
by other 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.
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, US companies lose an estimated $100 billion per
year due to problems such as inefficiency, theft, absenteeism and higher
insurance rates associated with drug abuse.
The company has an exclusive marketing and distribution agreement with
Boehringer Mannheim for its drugs of abuse screening products, as well as its
diagnostic products for infectious diseases and certain types of cancer.
INFECTIOUS DISEASE SCREENING. The Company has developed and is developing
the following products for the screening of infectious diseases:
HUMAN IMMUNODEFICIENCY VIRUS (HIV). 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 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
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 HIV Screen to enzyme immunoassay and western blot were
published in 1995 in the proceedings of the American Society for Microbiology.
The results of this study indicated that the RapidTest 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 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 and a
99.3% specificity on a total of 457 specimens. The Company expects to market the
components of its RapidTest HIV Screen outside of the United States, and has
included this product in a recently completed exclusive agreement with
Boehringer Mannheim to market and distribute the Company's diagnostic products
for infectious diseases, drugs of abuse and certain cancer screens throughout
Latin America. Industry sources indicate that more than 33 million HIV tests are
performed annually worldwide.
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<PAGE>
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 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 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 HBsAg was also evaluated and met
the criteria of efficacy required by the WHO. The Company expects to market the
components of its RapidTest 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 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 US hepatitis
testing market in 1995 was approximately $210 million.
STREP A. The Company's One Step 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.
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 One Step 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.
CARDIAC TROPONIN I AND MYOGLOBIN. Coronary events result in 1.5 million
reported cases of acute myocardial infarction (MI) annually in the United
States, accounting for approximately 500,000 deaths. Advancement in the
treatment of MI have increased the 30-day survival rate from approximately 75%
in 1970 to 90% today.
Cardiospecificity has long been the focus of the search for an efficacious
biochemical marker for MI and with the advent of the Company's sensitive
immunoassay of the cardiac isoform of Troponin I (cTnI), a cardiac specific
serum marker has been found. Several studies confirm that cTnI is elevated very
early in cardiac injury and suggest that it has equal sensitivity and greater
specificity than both CK-MB and cardiac Troponin T (cTnT) in detecting
myocardial injury.
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Currently diagnosing a MI in the field has carried a high life-and-death
risk during the rush to the hospital. The problem is that symptoms associated
with heart attacks, i.e., chest pain, clammy skin and labored breathing, are
also symptoms for many other ailments, such as stomach problems and lesser heart
problems. Paramedics say that one of the best features of the Company's test is
that it can be performed during the transport of the patient to the Emergency
Room and appropriate treatment initiated much earlier than in the past.
Myoglobin tests have been successfully used in conjunction with CK-MB and
with cTnI immunoassays to both confirm and exclude MI in patients being admitted
to a hospital with chest pains and non-diagnostic ECGs. Myoglobin levels also
are reported to correlate with the size of the infarct and to predict successful
revascularization following reperfusion therapy. As a result, Myoglobin's role
in the diagnosis of MI is becoming better defined and the Company believes that
its simple and rapid assay will further enhance the usefulness of the cTnI test.
LUPUS. Systemic Lupus Erythematosus (Lupus) is a chronic, often fatal
disease, manifested by inflammation of multiple organs, including joints, skin,
kidneys, heart, blood, blood vessels and the brain. There are more than 2.5
million diagnosed Lupus suffers in the United States and 3.5 million in Europe
who might benefit from a simple, daily, inexpensive diagnostic test for Lupus.
Among the potential benefits of this prospective test would be to assist
physicians in identifying Lupus, which has been difficult because symptoms are
similar to other diseases, such as arthritis. The test could also help
physicians identify periods of remission and active inflammation, facilitate
appropriate therapy exactly when needed, minimize debilitating drug therapy and
improve the quality of life for Lupus patients.
In 1996, the Company signed a definitive 15-year agreement with the
University of Kansas to use the university's patented synthetic antigen
technology for identifying Lupus to develop a point-of-care diagnostic test for
the disease. The University of Kansas has developed an antibody found in the
system of Lupus patients. The Company has been granted the exclusive, worldwide
license for this technology and has developed a rapid, one-step test to identify
Lupus antibodies present in the urine of individuals with the disease. This
technology currently has two US patents issued.
SALIVA SAMPLE COLLECTOR. The Company's Sani-Sal 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 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 Saliva Collector with the Company's
drugs of abuse screens and clinical trials are ongoing for use of the Sani-Sal
Saliva Collector with the Company's infectious disease screens. The target
market for the Sani-Sal 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 One Step PSA
Test and is currently undergoing clinical trials in preparation for submission
of this product to the FDA for Pre-Market Approval ("PMA"). The One Step 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
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.
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ALPHAFETOPROTEIN ("AFP"). The Company's One Step 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. The Company is currently undergoing
clinical trials in preparation for submission of this product to the FDA for
Pre-Market Approval ("PMA").
FECAL OCCULT BLOOD. The Company's One Step 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
One Step 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.
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.
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<PAGE>
<TABLE>
<CAPTION>
DIAGNOSTIC PRODUCT PORTFOLIO
PRODUCT STATUS (1) MARKETING STRATEGY
- - ---------------------------------------------- -------------------------------------- ------------------------------------------
<S> <C> <C>
GLUCOSE MONITORING:
TD GlucoseTM System Clinical trials in 1997 Ongoing discussions (2)
One Step Whole Blood Glucose Test StripTM 510 (k) cleared (3) Ongoing discussions (4)
One Step Blood Glucose Meter Production enginnering started Ongoing discussions (4)
1Q97(3)
Uri-TestTM Glucose Test Strip 510 (k) cleared Health-Mark Diagnostics
CHOLESTEROL MONITORING:
CholestoChekTM Total Cholesterol Test Strip 510 (k) cleared (5) Health-Mark Diagnostics
CholestoChekTM HDL Cholesterol Test Strip Clinical trials in 1997 (5) Ongoing discussions (2)
CholestoChekTM Meter Clinical prototype completed (5) Ongoing discussions (2)
FAMILY PLANNING:
hCG Pregnancy One Step(R) Test Slide 510 (k) cleared Boehringer Mannheim; Health-Mark (6)
hCG Pregnancy One Step(R) Midstream Wand 510 (k) cleared Boehringer Mannheim; Health-Mark (6)
hCG Pregnancy One Step(R) Test Strip 510 (k) cleared Boehringer Mannheim; Health-Mark (6)
One Step LH Test Strip(R) (Ovulation) 510 (k) cleared Boehringer Mannheim; Health-Mark (6)
Serum Dilution Reagent (hCG Test) 510 (k) cleared Boehringer Mannheim; Health-Mark (6)
DRUGS OF ABUSE SCREENING:
One Step Cocaine Test StripTM 510 (k) cleared Boehringer Mannheim Argentina (8)
One Step Opiate Test StripTM 510 (k) cleared Boehringer Mannheim Argentina (8)
One Step Amphetamine Test StripTM 510 (k) application filed Boehringer Mannheim Argentina (7) (8)
One Step Methamphetamine Test StripTM 510 (k) cleared Boehringer Mannheim Argentina (8)
One Step Phencyclidine (PCP) Test StripTM Clinical trials Boehringer Mannheim Argentina (7) (8)
One Step Benzodiazepine Test StripTM Clinical trials Boehringer Mannheim Argentina (7) (8)
One Step Canabinoids (THC) Test StripTM 510 (k) cleared Boehringer Mannheim Argentina (8)
One Step Methadone Test StripTM Clinical trials Boehringer Mannheim Argentina (7) (8)
One Step Barbiturates Test StripTM 510 (k) application filed Boehringer Mannheim Argentina (7) (8)
INFECTIOUS DISEASE SCREENING:
RapidTest HIVTM Screen WHO criteria met (8) Boehringer Mannheim Argentina (8)
RapidTest HBsAgTM Screen (Hepatitis) WHO criteria met (8) Boehringer Mannheim Argentina (8)
One Step Strep BTM Screen Clinical trials Boehringer Mannheim Argentina (8)
One Step Strep ATM Screen 510 (k) cleared Boehringer Mannheim Argentina (8)
RapidTest ChlamydiaTM Screen Clinical trials Boehringer Mannheim Argentina (8)
RapidTest H. pyloriTM Screen Preclinicals completed Boehringer Mannheim Argentina (8)
SALIVA SAMPLE COLLECTOR:
Sani-SalTM Saliva Collector In development (9) To be offered with drugs of abuse and
infectious disease screens
CARDIAC MARKERS:
One Step Cardiac Troponin I Test (cTnI) Clinical trials in 1997 Will seek marketing partner
One Step Myoglobin In development Will seek marketing partner
CANCER SCREENS:
One Step PSA Test Clinical trials (PMA) (10) Boehringer Mannheim Argentina (8)
One Step Alphafetoprotein Test Clinical trials (PMA) (10) Boehringer Mannheim Argentina (8)
One Step LE Test (Lupus) In Development Will seek marketing partner
FecOne Step al Occult Blood Test(R) Clinical trials Boehringer Mannheim Argentina (8)
<FN>
_____________________
(1) Except where noted, preclinicals and clinical trials refer to FDA's rapid 510 (k) clearance 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 One Step Blood Glucose Test Strip has received 510 (k) clearance for visual monitoring. Pending completion of
clinical trials for the One Step Blood Glucose Meter, the Company will submit a 510 (k) application for its One
Step 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 One Step Total Cholesterol Test Strip has received 510 (k) clearance for visual monitoring. Pending completion
of clinical trials for the CholestoCheck meter and the One Step HDL Cholesterol Test Strip, the Company will
submit a 510 (k) application for its One Step CholestoCheck System.
(6) Boehringer Mannheim is the non-exclusive worldwide marketing distributor of this product and Health-Mark is the
exclusive US over-the-counter marketing distributor of this product.
(7) At this time, the Company cannot market this test in the United States, however it will market outside the United
States.
(8) Boehringer Mannheim is the exclusive marketing distributor of this product in South America, Central America, and
certain Caribbean nations. 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.
</FN>
</TABLE>
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HealthCheck Home Health Screens - Health Test Center.
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 name. HealthCheck will
include both diagnostic tests and companion products. The Company plans to
distinguish HealthCheck from other similar products by its packaging and
labeling and by selling its products primarily through colorful "HealthCheck
Center" point-of-sale displays. Each 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 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.
<TABLE>
<CAPTION>
HEALTHCHECKTM HOME HEALTH PRODUCT PORTFOLIO
PRODUCT INDICATIONS STATUS MARKETING STRATEGY
- - ------------------------------- -------------------------- --------------------- -------------------------------
HEALTHCHECK HOME HEALTH SCREENING AND MONITORING PRODUCTS :
<S> <C> <C> <C>
HOME SCREENING TESTS:
CholestoCheckTM Total Screening test for 510 (k) cleared Health-Mark Diagnostics
Cholesterol Test Kit elevated Total
(Visual) Cholesterol
CholestoCheckTM HDL Screening test for Clinical trials Health-Mark Diagnostics
Cholesterol Test Kit (Visual) elevated HDL Cholesterol
Uri-TestTM Urinary Tract Urinary tract and/or 510 (k) cleared Health-Mark Diagnostics
Infection (UTI) Test Kit bladder infections noted
by presence of nitrite
in urine
Uri-TestTM Diabetes Test Kit Screening test for 510 (k) cleared Health-Mark Diagnostics
glucose in urine
Uri-TestTM Protein Test Kit Screening test for 510 (k) application Health-Mark Diagnostics
detection of protein in filed
urine indicating kidney
infection
</TABLE>
<TABLE>
<CAPTION>
REPRODUCTIVE HOME TESTS FOR WOMEN:
<S> <C> <C> <C>
HealthCheckTM Pregnancy Test Detection of pregnancy 510 (k) cleared Health-Mark Diagnostics
Kit: Midstream Wand
HealthCheckTM Pregnancy Test Detection of pregnancy 510 (k) cleared Health-Mark Diagnostics
Kit: Midstream Wand
Double-Pack
HealthCheckTM Pregnancy Value: Detection of pregnancy 510 (k) cleared Health-Mark Diagnostics
Pack. hCG Test Strip
Double-Pack
HealthCheckTM Ovulation Ovulation predictor 510 (k) cleared Health-Mark Diagnostics
Predictor Test Kit
FAMILY MONITORING KITS
HealthCheckTM Vision Screening Blurry vision monitor Clear to market Health-Mark Diagnostics
Test for near and far vision
HealthCheckTM Skin Growth Skin growths and moles Clear to market Health-Mark Diagnostics
Monitoring System are warning signs of
skin cancer
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PERSONAL HEALTH JOURNALS:
<S> <C> <C> <C>
Men's Journal Educational information and Clear to Health-Mark Diagnostics
organizer for medical, market
prescription, and insurance
information
Woman's Journal Educational information and Clear to Health-Mark Diagnostics
organizer organizer for medical, market
prescription, and insurance
information
Senior's Journal Educational information and Clear to Health-Mark Diagnostics
organizer organizer for medical, market
prescription, insurance
information, and living will
"My Pregnancy Journal" Guide to prenatal care for Clear to Health-Mark Diagnostics
pregnant women market
"All About Me" Children's Record of a child's growth and Clear to Health-Mark Diagnostics
Journal development for parents market
</TABLE>
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<PAGE>
TRANSDERMAL DRUG DELIVERY SYSTEMS
The Company's Pharmetrix Division is engaged in the research, development
and commercialization of transdermal drug delivery systems based on patented and
proprietary multi-laminate adhesive matrix and skin permeation technology. The
Company is using this technology to 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 clearance 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 clearance 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. 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 concerning the development and commercialization of estradiol,
nicotine and nitroglycerin transdermal products with selected companies. 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 nextseveral 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. Industry
sources estimate that the 1995 worldwide market for estrogen and combination
transdermal drug delivery systems was approximately $350 million.
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<PAGE>
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 1995 was approximately
$400 million.
SMOKING ADDICTION. Industry sources estimate that in 1991 26% of adults in
the United States smoked tobacco products, and it is well recognized that
tobacco smoking is the leading cause of preventable disease and death. In 1991,
there were more than 434,000 smoking-related deaths in the US accounting for a
mortality rate of more than one in every six deaths. 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.
The Company has entered into and completed a development contract for one
of the first generation nicotine patches currently on the market. The Company
has the rights to manufacture a nicotine patch from this development contract
and has currently initiated a project to complete a second generation nicotine
patch in 1997. The Company intends to manufacture and commercialize this product
through its Health-Mark Diagnostics subsidiary under both the HealthCheck brand
and private label identity in the over-the-counter market segment. The Company
has held preliminary distribution discussions with major drug chains and mass
merchandisers.
Industry sources estimate that the worldwide market for transdermal smoking
cessation products was approximately $245 million in 1994.
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 possible future commercialization of a transdermal
drug delivery system for the treatment of urinary 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.
20
<PAGE>
PAIN MANAGEMENT. Traditionally narcotic analgesics have been the mainstay
for the treatment of moderate to sever pain, however, their addictive potential,
development of tolerance and respiratory depressant side effects often limit
their use for continuous or intermittent chronic administration. Many of the
approved narcotic analgesics are injected with multi-daily dosing regimens. The
introduction of fentanyl transdermal therapeutic system is an improvement
compared to the injectable form of the drug since it provides for constant blood
levels resulting in an improved safety profile for the drug, however, this
product also has the typical addictive potential and adverse side effect profile
of the narcotic analgesics. The analgesic market is large and there are
opportunities for improved analgesic agents and additional controlled release
dosage forms for their administration.
Ketorolac tromethamine is a non-narcotic analgesic agent having similar
potency to morphine without the life-threatening side effect profile of the
narcotic analgesics, and offers an alternative to the use of narcotic analgesic
agents and belongs to the class of nonsterodial anti-inflammatory analgesic
drugs (NSAID).
The Company's Pharmetrix Division has developed several transdermal
therapeutic system designs for delivery of Ketorolac for use in management of
moderate to severe pain. Proprietary technology for liquid reservoir-type, solid
state reservoir-type, and adhesive matrix-type prototype patches have been
developed. These systems employ proprietary excipients for enhancement of skin
permeation. Initial pre-clinical irritation studies have been completed on all
patch designs which are suitable for further clinical development. Two US
patents have been issued which provide broad coverage for transdermal delivery
of Ketorolac from several transdermal delivery system designs. The key aspects
of the technology include cosmetic elegance and convenience of daily
administration, which offer an opportunity for improved patient compliance
compared to multiple daily injections or multiple oral dosing which is required
for the current products on the market.
21
<PAGE>
<TABLE>
<CAPTION>
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
PRODUCT INDICATIONS STATUS MARKETING STRATEGY
- - ----------------------------- ---------------------------------------- ----------------------- ------------------------
TRANSDERMAL DRUG DELIVERY SYSTEMS:
HORMONE REPLACEMENT / OSTEOPOROSIS:
<S> <C> <C> <C>
Estradiol Estrogen replacement Phase I clinicals Available for
completed (1) licensing. Seeking
marketing partner
Estradiol / Progestin Hormone replacement and contraception Preclinicals Available for
licensing. Seeking
marketing partner
Testosterone Hormone replacement Preclinicals Seeking development &
marketing partner
CARDIOVASCULAR DISEASE:
Nitroglycerin Angina Preclinicals Available for
licensing.
Definitive Development
& Marketing Agreement
for Asia in prepartion.
Isosorbide Dinitrate (ISDN) Angina Phase I clinicals Available for
completed licensing. Seeking
marketing partner
SMOKING ADDICTION:
Nicotine Smoking cessation Phase I clinicals Royalty agreement with
completed Pharmacia.
Available for
licensing. Seeking
marketing partner.
ANDA being prepared
for addition to
HealthCheck line as a
generic.
OTHER:
Bup-4 Incontinence Urinary Incontinence Preclinicals Agreement with Taiho
Pharmaceutical Co.,
Ltd.
Ketorolac Analgesia Preclinicals Available for licensing
Seeking marketing
partner
SKIN PERMEATION ENHANCER:
SR-38 Skin permeation enhancer Samples available for Available for
formulation licensing. Seeking
development marketing partners
</TABLE>
BIOCHEMICAL MANUFACTURING
The Company currently manufactures the specialty chemical Tris and its
analogues, 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.
22
<PAGE>
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.
MANUFACTURING AND MATERIALS
During 1996, the Company significantly expanded its manufacturing
capabilities and expects to continue to do so in 1997 in order to further reduce
its dependence on third party contractors, which manufactured a majority of the
Company's products in 1996. 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 is devoting a
major portion of its manufacturing to the production of new products.
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
PATENTS. The Company currently owns 19 US patents and 27 foreign patents,
and has four pending US 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 biochemistry, medical device or
health care products are the property of the Company. See "Certain Relationships
and Related Transactions."
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
US 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 requires each of its key 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.
23
<PAGE>
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.
TRADEMARKS. The following represents the Company's products which have
received registered and/or trademark authority
TCPI REGISTERED TRADEMARKS
hCG Pregnancy One Step(R)
Pregnancy One Step(R)
Pregnancy One Step Test Strip(R)
One Step LH Test Strip(R)
One Step Whole Blood Cholesterol Test Strip(R)
Health Test Center(R)
One Step Fecal Occult Blood Test(R)
Soft-E-Touch(R)
TCPI TRADEMARKS
TD GlucoseTM
HealthCheckTM
CholestoCheckTM
Uri-TestTM
Pregnancy One StepTM
One Step Pregnancy StripTM
Pregnancy One Step Test Strip For Urine And SerumTM
One Step Whole Blood Glucose Test StripTM
One Step Cholesterol Test StripTM
One Step HDL Cholesterol Test StripTM
One Step Drugs of Abuse Test Strip - CocaineTM
One Step Drugs of Abuse Test Strip - Canabinoids (THC) TM
One Step Drugs of Abuse Test Strip - AmphetamineTM
One Step Drugs of Abuse Test Strip - MethamphetamineTM
One Step Drugs of Abuse Test Strip - OpiatesTM
One Step Drugs of Abuse Test Strip - BenzodiazepineTM
One Step Drugs of Abuse Test Strip - BarbiturateTM
One Step Drugs of Abuse Test Strip - Phencyclidine (PCP) TM
One Step Drugs of Abuse Test Strip - MethadoneTM
RapidTest HIV TM
RapidTest Chlamydia ScreenTM
RapidTest HBsAg ScreenTM
One Step Strep A ScreenTM
One Step Strep B ScreenTM
One Step H. pylori ScreenTM
Sani Sal TM
24
<PAGE>
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, Thrifty Payless, Thrift Drug,
Woolworth, Fedco, Long's and Smith's Food & Drug. The Company has expanded
direct distribution of its diagnostic products as evidenced by the creation of
the HealthCheck line of products and the Health Test Center, 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
two significant components (a) identify and bring to market those products which
are candidates for the ANDA process, and can go over-the-counter for sale as
HealthCheck products, and (b) 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.
25
<PAGE>
Since 1992, Boehringer Mannheim has had an exclusive agreement to
distribute the Company's One Step hCG Pregnancy Test Strip, its One Step hCG
Midstream Wand and its One Step LH Ovulation Test Strip products worldwide. In
March 1997, the Company signed another exclusive marketing agreement with
Boehringer Mannheim to market a minimum of $50 million of its new diagnostic
products for infectious diseases, drugs of abuse testing and cancer screening
throughout Latin America during the next 10-years. In addition, the Company is
engaged in ongoing discussions with Boehringer Mannheim to identify other
potential product additions to this agreement. Boehringer Mannheim is the
largest diagnostic distribution company in Latin America.
EMPLOYEES
As of December 31, 1996, the Company employed 54 full-time employees,
including 17 involved in research and development, 12 involved in
administration, 20 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. The Company has no
collective bargaining or similar agreement with its employees, but does have an
employment agreement with its President. See "Note 9 to the accompanying
Consolidated Financial Statements." 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 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. A company that manufactures devices
subject to 510(k) clearance must also comply with device good manufacturing
practices ("CGMP") and will be subject to periodic inspections by the FDA to
confirm compliance.
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 CGMP and pass an FDA Inspection
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.
A device requiring a PMA that has not been cleared 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, subject to the
laws of the such foreign jurisdictions.
26
<PAGE>
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 clearance for use in other dosage forms
(e.g., oral solution, tablet). If the drug is a new chemical entity that has not
been cleared, 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 clearance of the NDA. If the drug
has been previously cleared, 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.
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 clearance 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 clearance for each drug product, each
manufacturing establishment of new drugs must receive clearance 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 CGMP regulations. Drug manufacturers are also subject to periodic
CGMP 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 clearance 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
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. Product
clearances 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 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.
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.
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.
EXECUTIVE OFFICERS OF THE COMPANY
See Item 10 - "Directors and Executive Officers of the Registrant."
27
<PAGE>
Item 2. PROPERTIES
The Company leases approximately 33,000 square feet of space, including its
corporate headquarters, general office, manufacturing, and warehouse space, in a
building located at 3341 S.W. 15th Street, Pompano Beach, Florida 33069. The
Company also maintains approximately 6,500 square feet of additional warehouse
space in Pompano Beach, Florida. The Company currently pays approximately
$16,000 per month in rent, including sales tax and maintenance fees. The rent is
adjusted annually based upon changes in the US Consumer Price Index. The lease
also requires the Company to pay real estate taxes, insurance and certain costs
for maintaining the premises. 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. The lawsuit seeks injunctive relief and monetary damages in
excess of $15,000.
Management, after consultation with its counsel, believes that each of the
allegations made against it in the Lawsuit are without merit and plans to
contest each of the allegations vigorously. This lawsuit is in its preliminary
stages and discovery has not been completed. At this time, it is not possible to
estimate the ultimate loss, if any, related to this lawsuit. 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.
28
<PAGE>
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 National 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 Nasdaq.
<TABLE>
<CAPTION>
Sale Prices (1)
High Low
Fiscal Year 1995
<S> <C> <C> <C>
Period from February 2, 1995 to March 31, 1995 (2) . . . . . . . $ 2 44/64 $ 2
Quarter Ended June 30, 1995 . . . . . . . . . . . . . . . . . . . $ 6 5/8 $ 2 3/8
Quarter Ended September 30, 1995 . . . . . . . . . . . . . . . . $ 15 1/2 $ 6 5/16
Quarter Ended December 31, 1995 . . . . . . . . . . . . . . . . . $ 19 3/4 $ 11 3/8
</TABLE>
<TABLE>
<CAPTION>
Sale Prices
High Low
Fiscal Year 1996
<S> <C> <C> <C>
Quarter Ended March 31, 1996 . . . . . . . . . . . . . . . . . . $ 22 3/8 $ 13 1/4
Quarter Ended June 30, 1996 . . . . . . . . . . . . . . . . . . . $ 20 1/4 $ 9 5/8
Quarter Ended September 30, 1996 . . . . . . . . . . . . . . . . $ 14 5/8 $ 7 1/8
Quarter Ended December 31, 1996 . . . . . . . . . . . . . . . . . $ 11 3/4 $ 6 3/4
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1997
<S> <C> <C> <C>
Quarter Ended March 31, 1997 (to March 18, 1997) . . . . $ 10 7/8 $ 8 1/8
<FN>
(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 92 holders of record of Common Stock as of March
18, 1997. In addition, the Company estimates there are more than 1,800
beneficial owners of its Common Stock. The Company has not paid cash dividends
in the past.
</FN>
</TABLE>
29
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements and the notes thereto included elsewhere in this
report. The statement of operations data for the years ended December 31, 1996,
1995 and 1994, respectively, and the balance sheet data at December 31, 1996,
and 1995, respectively, are derived from the audited financial statements
included elsewhere in this report and should be read in conjunction with those
financial statements and the notes thereto.
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 30,
Statement of Operations Data: 1992 (Inception) through
DECEMBER 31, DECEMBER 31, 1992
--------------------------------------------------- ------------------------
($000)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross sales............................... $ 7,008 $ 4,712 $ 3,013 $ 1,784 $ 2,451
Net sales................................. 6,848 4,188 3,013 1,784 2,451
Gross profit.............................. 3,142 936 1,037 757 1,230
Selling, general and administrative....... 4,079 1,807 666 682 889
Research and Development.................. 1,766 435 73 3 -
Depreciation and amortization(2).......... 1,671 219 22 - -
(Loss) Income from operations............. (4,374) (1,525) 276 72 341
Net (Loss) Income(1)...................... (2,550) (1,273) 156 59 214
Net (Loss) Income per common share(1)..... $ (.27) $ (.18) $ .04 $ .01 $ .05
Weighted average common shares outstanding
9,290 7,069 4,295 4,067 4,067
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
DECEMBER 31,
-------------------------------
($000)
1996 1995
---- ----
<S> <C> <C>
Cash, cash equivalents and investments
available for sale ....................... $ 13,300 $ 1,777
Working capital (deficiency).............. 15,348 (2,979)
Total assets.............................. 37,526 22,610
Short-term notes payable.................. -0- 5,264
Total liabilities and minority interest... 1,831 6,456
Total shareholders'equity................. $ 35,695 $ 16,154
<FN>
(1) For the years ended December 31, 1994, 1993, the period from January
30, 1992 (Inception) through December 31, 1992, 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 directly at the shareholder level. The net income and
earnings per common share amounts for the years ended December 31,
1995, 1994, 1993 and the period from January 30, 1992 (Inception)
through December 31, 1992, assume that the Company was subject to
federal and state income taxes and taxed as a C Corporation in
each of these three years at the tax rates in effect for these periods.
See - Notes 1 and 8 to the accompanying Consolidated Financial
Statements.
(2) For the years ended December 31, 1993 and 1992, depreciation and
amortization was included in selling, general and administrative.
</FN>
</TABLE>
30
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
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. TCPI is also engaged in the research and development of its TD
Glucose Monitoring System, a non-invasive glucose testing process for diabetics.
In addition to its ongoing diagnostics business, the Company, through its
Pharmetrix Division located in Menlo Park, California, is involved in the
research, development and commercialization of transdermal and mucosal drug
delivery systems and skin permeation enhancers. The Company currently owns 19 US
patents and 27 foreign patents, and has four pending US patent applications and
38 pending foreign patent applications.
TCPI currently manufactures and markets more than 47 membrane-based
diagnostic tests in the United States and internationally, 26 of which have
received 510(k) clearance from the FDA. The Company's products include tests and
screens for pregnancy, ovulation timing, cholesterol levels, blood glucose
levels, infectious diseases, drugs of abuse and certain types of cancer. In
addition, the Company has over 20 other diagnostic and transdermal drug delivery
products in various stages of development and governmental approval.
In November 1995, the Company purchased 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") which included,
without limitation, 11 US 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. See - Note 2 of the
accompanying financial statements.
In 1996, the Company completed the 100% acquisition of its wholly-owned
subsidiary, Health-Mark Diagnostics, L.L.C., which established the capability
for the Company to market its diagnostic products in the private label and
over-the-counter market segments. The Company currently markets its products
under its proprietary brand name, PDQ, and distributes approximately 53 private
label products with drug, discount and supermarket chains in North America. In
February 1997, the Company launched its HealthCheck brand of over-the-counter
diagnostic products and health journals for consumers.
In February 1997, the Company officially launched its HealthCheck brand of
over-the-counter diagnostic products and health journals. The HealthCheck line
presently consists of 14 accurate and easy to use products for consumers which
include diagnostic tests and screens for cholesterol, diabetes, urinary tract
infection, pregnancy, ovulation, deteriorating vision and skin cancer, as well
as a series of health journals designed to educate and keep track of important
health information for women, men, seniors, children and pregnant women. In
March 1997, the Company announced that Eckerd Corp., a 2,700 store drug chain,
placed initial orders for the HealthCheck tests for diabetes and cholesterol.
The Company expects its ongoing marketing efforts will result in similar
discussions with other drugstore chains, retailers and discount retailers.
In March 1997, the Company signed an exclusive marketing agreement with
Boehringer Mannheim to market a minimum of $50 million of its diagnostic
products for infectious diseases, drugs of abuse testing and cancer screening
throughout Latin American during the next 10-years. In addition, the Company is
engaged in ongoing discussions with Boehringer Mannheim to identify other
potential product additions to this agreement. Boehringer Mannheim is the
largest diagnostic distribution company in Latin America.
31
<PAGE>
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 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.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
---------------------------------------------------------------------
The Company acquired the assets of its Pharmetrix Division in November
1995. The results of operations reflect 12-months of Pharmetrix expenses in
1996, two months in 1995 and zero in 1994. Therefore, the results of operations
for the year ended December 31, 1996 are not directly comparable to 1995 or 1994
results of operations.
SALES. The Company's net sales increased by approximately 64% to $6,848,382
in 1996 from $4,188,461 in 1995. This increase resulted principally from higher
sales of the Company's private label Family Planning products in the United
States, increased foreign sales of diagnostic products and fees received from
Taiho Pharmaceutical Co., Ltd. for the development of a urinary incontinence
transdermal drug delivery product by the Company's Pharmetrix Division. In
addition, since 1994, sales of the Company's products and to its largest
customer, Boehringer Mannheim, have increased by more than 18%.
GROSS PROFIT. The Company's gross profit increased by $2,206,404 to
$3,142,115 in 1996 from $935,711 in 1995. Gross profit as a percent of net sales
increased to 45.9% in 1996 from 22.3% in 1995. The increase was principally due
to improvement in product mix. As a wholly-owned subsidiary, the array of
Health-Mark Diagnostic, L.L.C. products have a positive impact to the
consolidated gross profit return. The gross profit return also improved as a
result of bringing product manufacturing in-house and achieving various
economics of scale.
SELLING, GENERAL AND ADMINISTRATIVE. Selling general and administrative
(SG&A) expenses increased substantially in 1996 as compared to 1995, principally
due to the acquisition of the Pharmetrix Division. SG&A expenses were impacted
by the hiring of additional laboratory, manufacturing, and administrative
personnel to support the growth in sales, manufacturing scale-up and facility
expansion. The Company's SG&A expenses, increased to $4,079,325 in 1996 from
$1,806,910 in 1995.
RESEARCH AND DEVELOPMENT. The greatest impact on the increase in operating
expenses were higher research and development (R&D) expenses associated with the
Pharmetrix Division. The Company's investment in R&D has contributed to the
development of several new products, such as its TD Glucose System. The
Company's R&D expenses increased to $1,766,590 in 1996 from $434,981 in 1995.
NET INCOME (LOSS). The Company posted a net loss of $2,550,107 in 1996 from
$1,432,678 in 1995 as a result of the integration of the Pharmetrix Division,
investment in research and development, manufacturing scale-up and facility
expansion.
32
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
---------------------------------------------------------------------
SALES. The Company's net sales increased 39.0% to $4,188,461 in 1995 from
$3,012,967 in 1994. This increase resulted principally from the introduction of
the over-the-counter One Step hCG Pregnancy Midstream Wand, production of the
specialty chemical Tris (hydroxy methyl) aminomethane ("Tris") and successful
establishment of the Company's direct distribution of over-the-counter products.
The net sales gain included 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 first quarter of 1996.
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.
SELLING, GENERAL AND ADMINISTRATIVE. The Company's SG&A expenses increased
to $2,025,847 in 1995 from $688,036 in 1994. This increase was principally
attributable to costs associated with additional marketing, regulatory, quality
control, laboratory, production and administrative personnel.
RESEARCH AND DEVELOPMENT. The Company's R&D expenses increased to $434,981
in 1995 from $73,402 in 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 One Step Helicobacter pylori
Screen, its CholestoCheck Meter, its TD Glucose System and certain of its drugs
of abuse screens.
NET INCOME (LOSS). The Company experienced a net loss of $1,493,628 in 1995
as compared to net income of $244,621 in 1994. The net loss for 1995 resulted
primarily from the factors described above.
For the year ended December 31, 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 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 years, would have been $156,154 and
$(1,273,469), respectively.
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Company completed a secondary public offering and issued
1,600,000 shares of common stock, raising net proceeds of approximately $21.2
million. Proceeds from this offering enabled the Company to purchase the
additional research and development manufacturing equipment necessary to speed
the development and production of several new products. In 1995, the Company
completed a $4.4 million initial public offering, of which net proceeds were
used to expand the Company's manufacturing facility and to introduce and market
new products.
As of December 31, 1996, cash and cash equivalents and investments totaled
$13,300,454. The Company had current assets of $17,007,959 and working capital
of $15,348,191. Shareholders' Equity at December 31, 1996 was $35,694,621.
The Company plans to earmark funds to (a) increase its R&D budget related
to the completion and commercialization of the Company's products currently
under development, including its non-invasive transdermal glucose monitoring
system (TD Glucose System), its One Step CholestoCheck System, and various
transdermal drug delivery products and skin permeation enhancer, (b) expand
direct distribution of medical diagnostic products, (c) introduce direct
distribution of its cholesterol monitoring system (One Step CholestoCheck
System), (d) hire additional personnel, and (e) expand its facilities and
revenue generating manufacturing equipment. For additional information related
to the Company's cash flow activities, See - "Consolidated Statements of Cash
Flow."
33
<PAGE>
The Company's future long-term capital expenditure requirements will depend
on the following factors: (i) the time required to obtain regulatory approvals;
(ii) the progress of the Company's research and development program; 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
until such time, if any, as the Company is able to generate sufficient revenues
from product sales to offset expenses related to its growth. Management believes
that, during 1996, the impact of inflation was immaterial to the Company's
results of operations.
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.
34
<PAGE>
Item 8. 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
TECHNICAL CHEMICAL AND PRODUCTS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1995 and 1994
Contents
Report of Independent Certified Public Accountants.......................F-1
Audited Consolidated Financial Statements
Consolidated Balance
Sheets...................................................................F-2
Consolidated Statements of Operations....................................F-3
Consolidated Statements of Shareholders' Equity..........................F-4
Consolidated Statements of Cash Flows....................................F-5
Notes to Consolidated Financial Statements...............................F-6
35
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Technical Chemicals and Products, Inc.
We have audited the accompanying consolidated balance sheets of Technical
Chemicals and Products, Inc. and subsidiaries as of December 31, 1996 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, 1996.
Our audits also included the financial statement schedule listed in the Index at
Item 14a. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 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, 1996 and 1995, and
the consolidated results of their operations and their cash flows for the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/Ernst & Young LLP
Miami, Florida
February 19, 1997
F-1
36
<PAGE>
<TABLE>
<CAPTION>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1996 1995
------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,607,311 $ 666,486
Investments 11,693,143 1,110,932
Accounts receivable, net of allowances for doubtful accounts of
$18,000 in 1996 and 1995 2,177,700 939,263
Inventory 1,039,390 548,555
Other 490,415 207,996
-----------------------------
Total current assets 17,007,959 3,473,232
-----------------------------
Property and equipment, net 2,708,481 1,925,789
Patents and trademarks, net of accumulated amortization of $1,120,786 in
1996 and $120,244 in 1995 13,887,357 14,878,507
Goodwill, net of accumulated amortization of $165,985 in 1996 and $6,221
in 1995 2,327,975 2,195,695
Other assets 1,594,268 136,521
==============================
Total assets $37,526,040 $22,609,744
==============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 1,458,101 $ 1,002,582
Accrued expenses 201,667 185,420
Notes payable - 5,188,888
Notes payable to related parties - 75,336
-----------------------------
Total current liabilities 1,659,768 6,452,226
-----------------------------
Other liabilities 171,651 -
Minority interest in subsidiary - 3,971
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.001 par value:
authorized shares - 25,000,000 in 1996;
No issued and outstanding shares - -
Common stock, $.001 par value:
authorized shares - 100,000,000 in 1996 and
25,000,000 in 1995
Issued and outstanding shares - 9,938,634 in 1996
and 8,117,880 in 1995 9,939 8,118
Additional paid-in capital 39,608,217 17,583,104
Accumulated deficit (3,923,535) (1,437,675)
-----------------------------
Total shareholders' equity 35,694,621 16,153,547
-----------------------------
Total liabilities and shareholders' equity $ 37,526,040 $22,609,744
=============================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-2
37
<PAGE>
<TABLE>
<CAPTION>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
1996 1995 1994
<S> <C> <C> <C>
Gross sales (including $1,280,000 of research and
development service revenue in 1996) $7,007,641 $ 4,711,994 $3,012,967
Returns and allowances 159,259 523,533 -
----------------------------------------------
Net sales 6,848,382 4,188,461 3,012,967
Cost of sales 3,706,267 3,252,750 1,976,006
----------------------------------------------
Gross profit 3,142,115 935,711 1,036,961
----------------------------------------------
Operating expenses:
Selling, general and administrative 4,079,325 1,806,910 666,182
Research and development 1,766,590 434,981 73,402
Depreciation and amortization 1,670,529 218,937 21,854
------------------------------------------------------
7,516,444 2,460,828 761,438
------------------------------------------------------
(Loss) income from operations (4,374,329) (1,525,117) 275,523
Other income (expense):
Interest income 528,741 164,012 1,708
Interest expense (207,650) (71,573) (32,610)
------------------------------------------------------
(Loss) income before income tax benefit and extraordinary item (4,053,238) (1,432,678) 244,621
Income tax benefit 1,503,131 - -
------------------------------------------------------
(Loss) income before extraordinary item (2,550,107) (1,432,678) 244,621
Extraordinary item-loss on early extinguishment of debt - 60,950 -
======================================================
Net (loss) income $(2,550,107) $(1,493,628) $ 244,621
======================================================
(Loss) income per common share:
Before extraordinary item $ (.27) $ (.20) $ .06
Extraordinary loss - (.01) $ -
------------------------------------------------------
Net (loss) income per common share $ (.27) $ (.21) .06
======================================================
Weighted average number of common shares outstanding 9,290,476 7,069,507 4,295,116
======================================================
Unaudited pro forma information:
(Loss) income before income taxes and extraordinary item $(1,432,678) $ 244,621
Income tax (benefit) provision:
Current (213,856) 86,961
Deferred (6,303) 1,506
------------------------------------
(220,159) 88,467
------------------------------------
(Loss) income before extraordinary item (1,212,519) 156,154
Extraordinary item - loss on early extinguishment of debt 60,950 -
------------------------------------
Net (loss) income $(1,273,469) $ 156,154
====================================
(Loss) income per common share:
Before extraordinary item $ (.17) $ .04
Extraordinary loss (.01) -
------------------------------------
====================================
Net (loss) income per common share $ (.18) $ .04
====================================
<FN>
See accompanying notes
</FN>
</TABLE>
F-3
38
<PAGE>
<TABLE>
<CAPTION>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Common Stock Retained
-------------------------- Earnings
Number of Additional (Accumulated
Shares Amount Paid-In Capital Deficit) Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 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 investments - - - 14,500 14,500
-----------------------------------------------------------------------------------------
Balance at December 31, 1995 8,117,880 8,118 17,583,104 (1,437,675) 16,153,547
-----------------------------------------------------------------------------------------
Shares issued, net of costs
of $1,102,660 1,600,000 1,600 21,225,473 - 21,227,073
Shares issued upon exercise
of options and warrants 190,754 191 379,670 - 379,861
Shares issued in connection
with acquisition of
Health-Mark 15,000 15 194,985 - 195,000
Shares issued in lieu of rent 15,000 15 224,985 - 225,000
Net loss - - - (2,550,107) (2,550,107)
Adjustment for unrealized
gains on investments - - - 64,247 64,247
=========================================================================================
Balance at December 31,1996 9,938,634 $9,939 $39,608,217 $(3,923,535) $35,694,621
=========================================================================================
<FN>
See accompanying notes.
</FN>
</TABLE>
F-4
39
<PAGE>
<TABLE>
<CAPTION>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net (loss) income $(2,550,107) $(1,493,628) $244,621
Adjustments to reconcile net (loss) income to net cash
(used) provided by operating activities:
Depreciation and amortization 1,670,529 218,937 21,854
Issuance of stock for rent 37,360 - -
Deferred income taxes (1,503,131) - -
Loss on extinguishment of debt - 60,950 -
Minority interest in subsidiary - 3,971 -
Changes in operating assets and liabilities,
net of acquisition:
Accounts receivable (1,339,452) (172,054) (380,398)
Inventory (490,835) (162,487) (264,016)
Other current assets 56,420 (103,502) -
Accounts payable and accrued expenses 471,766 376,293 449,080
----------------------------------------------------
Net cash (used) provided by operating activities (3,647,450) (1,271,520) 71,141
----------------------------------------------------
Investing activities
Purchase of property and equipment (1,272,603) (111,608) (177,048)
Deposit on equipment - (79,494) -
Decrease (increase) in other assets 45,384 57,576 (26,602)
Cash paid for acquisition of certain assets
of Pharma Patch Public Limited Company - (285,945) -
Purchase of investments (11,617,964) (2,101,245) -
Proceeds from sale of investments 1,100,000 1,004,813 -
Investment in patents and intangible assets (9,392) (20,404) -
Payments to affiliates - (30,000) -
------------------------------------------------------
Net cash used in investing activities (11,754,575) (1,566,307) (203,650)
------------------------------------------------------
Financing activities
Net proceeds from issuance of common stock $21,227,213 $3,834,126 $220,063
Proceeds from issuance of notes payable to shareholders - - 219,050
Proceeds from stock options exercised 379,861 100,000 -
Repayment of notes (5,188,888) - -
Repayment of notes payable to related parties (75,336) - -
Payments on notes payable to shareholders - (280,000) -
Payments on note payable to majority shareholder - (100,000) (50,000)
Costs related to initial public offering - - (72,330)
Shareholder distributions - (268,992) (18,200)
------------------------------------------------------
Net cash provided by financing activities 16,342,850 3,285,134 298,583
------------------------------------------------------
Net increase in cash and cash equivalents 940,825 447,307 166,074
Cash and cash equivalents at beginning of year 666,486 219,179 53,168
Cash and cash equivalents at end of year $ 1,607,311 $ 666,486 $219,242
======================================================
Supplemental disclosure of cash activities
Cash paid during the year for interest $ 207,650 $ 7,965 $ 22,110
======================================================
<FN>
Supplemental disclosure of non-cash activities
See Notes 2, 7, and 12 for certain non-cash investing and financing activities.
See accompanying notes.
</FN>
</TABLE>
F-5
40
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Technical Chemicals and Products, Inc. and subsidiaries (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. The Company's medical diagnostic products
employ its patented and proprietary membrane-based technology. In addition to
its ongoing diagnostics business, the Company is involved in the research,
development and commercialization of transdermal and mucosal drug delivery
systems and skin permeation enhancers.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include Health-Mark
Diagnostic, L.L.C. (Health-Mark) (see Note 2) which is a wholly-owned
subsidiary. Significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Deposits in
banks may exceed the amount of insurance provided on such deposits. These
deposits may be redeemed upon demand and, therefore, bear minimal risk. The
Company has not experienced any losses on its deposits of cash and cash
equivalents.
INVESTMENTS
Investments are carried at fair market value, with resulting unrealized
holding gains and losses reported as a separate component of stockholders'
equity. Realized gains and losses and declines in value judged to be
other-than-temporary are included in other income. Interest and dividends on
investments are included in interest income. The cost of investments sold is
based on the specific identification method.
F-6
41
<PAGE>
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 as events or circumstances indicate a possible inability
to recover their carrying amount. 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.
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.
RESEARCH AND DEVELOPMENT
Research and development is expensed as incurred. Payments received for
research and development arrangements are recognized as service revenue.
42
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
Prior to February 2, 1995, the Company had elected to be taxed as an
Scorporation 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 (LOSS) INCOME PER SHARE
Net (loss) income 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 1996
and 1995 as their effect is antidilutive.
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.
2. ACQUISITIONS
Health-Mark is a wholesale representative company used in marketing certain
of the Company's products. In 1994, the Company issued 125,000 shares of its
common stock to the Company's majority shareholder for a 50% interest in
Health-Mark. Since 1994, the Company has acquired all of the outstanding common
stock of Health Mark in a series of transactions for total consideration of
$53,000 and 15,000 shares of the Company's common stock valued at $195,000.
Beginning in 1995, the financial statements of Health Mark have been
consolidated into the accompanying inancial statements.
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). The Purchased Assets consisted 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 its common stock valued at
$13,435,000; (ii) assumed responsibility for an approximate $5,000,000 debt owed
to Flora, Inc. (Flora) (see Note 7) by issuing promissory notes in the aggregate
principal amount of $5,188,888, and (iii) paid $10,000 in cash. The Company
incurred acquisition costs of $275,945 which are included in intangible assets.
43
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. ACQUISITIONS (Continued)
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
principally in research and development activities.
The following summarized unaudited pro forma results of operations for the
years ended December 31, 1995 and 1994 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
1995 1994
---------------------------------
(Unaudited)
<S> <C> <C> <C>
Net sales $ 4,577,516 $ 3,012,967
================================
Loss before extraordinary item $(5,799,174) $(5,534,771)
Extraordinary loss 60,950 -
--------------------------------
Net Loss $(5,860,125) $(5,534,771)
================================
Loss per common share:
Before extraordinary item $ (.73) (1.07)
Extraordinary loss (.01) -
--------------------------------
Net loss per common share $ (.74) $ (1.07)
================================
</TABLE>
3. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, investments, 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.
44
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. INVENTORY
<TABLE>
<CAPTION>
Inventory at December 31 consists of the following:
1996 1995
------------------------------------
<S> <C> <C> <C>
Raw materials and supplies $ 577,719 $377,610
Work in process 50,483 -
Finished goods 411,188 170,945
------------------------------------
$ 1,039,390 $548,555
====================================
</TABLE>
5. INVESTMENTS
<TABLE>
<CAPTION>
Investments consist of the following:
Gross Unrealized
Gains Fair
December 31, 1996 Cost Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Government bonds $ 7,618,396 $71,917 $ 7,690,313
Corporate bonds 3,996,000 6,830 4,002,830
------------------------------------------------------
$ 11,614,396 $78,747 $ 11,693,143
======================================================
December 31, 1995
U.S. Corporate bond $ 96,432 $ 4,580 $ 101,012
U.S. Government agency bond 1,000,000 9920 1,009,920
------------------------------------------------------
$ 1,096,432 $14,500 $ 1,110,932
======================================================
</TABLE>
The contractual maturity of investments at December 31, 1996, is as follows:
<TABLE>
<CAPTION>
Fair
Cost Value
------------------------------------
<S> <C> <C> <C>
Due within one year $ 5,935,162 $ 5,990,310
Due between one year and five years 5,679,234 5,702,83
------------------------------------
$11,614,396 $11,693,143
====================================
</TABLE>
45
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment at December 31 consists of the following:
1996 1995
-----------------------------------
<S> <C> <C> <C>
Furniture, fixtures and equipment $2,193,454 $1,261,533
Real property 216,793 -
Leasehold improvements 863,401 787,302
----------------------------------
3,273,648 2,048,835
Accumulated depreciation (565,167) (123,046)
----------------------------------
$2,708,481 $1,925,789
==================================
</TABLE>
7. NOTES PAYABLE
At December 31, 1995, notes payable consisted of two promissory notes
(which were paid in full during 1996) with an aggregate principal amount of
$5,000,000 payable to Flora (see Note 2), bearing interest at 10% per annum.
8. INCOME TAXES
Historical
As discussed in Note 1, the Company became subject to corporate income
taxes concurrent with the February 2, 1995 public offering. For the year ended
December 31, 1994, the Company elected S corporation status and was not subject
to income taxes.
The Company accounts for income taxes under FASB Statement No. 109,
Accounting for Income Taxes (SFAS 109). Deferred income tax assets and
liabilities are determined based upon differences between financial reporting
and tax basis 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.
46
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. INCOME TAXES (Continued)
<TABLE>
<CAPTION>
The components of the income tax provision (benefit) for the years ended
December 31 are as follows:
1996 1995
-----------------------------------
<S> <C> <C> <C>
Current $ - $ (6,303)
Deferred (1,503,131) 6,303
===================================
Total $ (1,503,131) -
===================================
</TABLE>
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 (liabilities) as of December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------
<S> <C> <C> <C>
Net operating losses $1,935,993 $641,663
Depreciation and amortization 132,955 (72,310)
Other 6,984 3,448
-----------------------------------
Net deferred tax assets 2,075,932 572,801
Valuation allowance (572,801) (572,801)
-----------------------------------
Net deferred taxes $1,503,131 $ -
===================================
</TABLE>
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $572,801 valuation allowance at December 31, 1996 and 1995 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. At December 31, 1996, the Company has available net
operating loss carryforwards of approximately $4,979,000, which expire in the
years 2010 and 2011.
The reconciliation of the expected income tax expense for the years ended
December 31 computed on loss before income taxes at federal statutory rates is
as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate (34.00)% (34.00)%
State and local income taxes, net of
federal tax benefit (4.88) (5.83)
Nondeductible items 1.50 -
Change in valuation allowance - 38.85
Other .30 1.48
-----------------------------
Total (37.08)% 0.5%
=============================
</TABLE>
47
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
8. INCOME TAXES (Continued)
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.
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 as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate (34.00)% 34.00%
State and local income taxes,
net of federal tax benefit
(5.83) 3.71
Change in valuation allowance 24.03 .00
Other 1.06 (1.54)
-------------------------------
(14.74)% 36.17%
===============================
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company and its founding major shareholder are parties to an exclusive,
worldwide license agreement dated January 31, 1996 (License Agreement) under
which the Company has the right to manufacture, promote, market and sell all
medical, pharmaceutical and health care products and devices created by the
major shareholder on or before the date of the License Agreement (Technology).
The License Agreement is for a term of twenty years with automatic renewals and
requires annual fees equal to the greater of (i) 3% of net collected sales
revenues from products based upon the Technology or (ii) $10,000, with an
aggregate maximum limitation of $10,000,000. The License Agreement replaces an
earlier license agreement with similar provisions. During 1996, the major
shareholder earned $114,417 pursuant to the License Agreement. The major
shareholder waived all licensing fees due him for the years ended December 31,
1995 and 1994.
The Company and its major shareholder entered into an employment agreement
effective January 16, 1996, amending an employment agreement dated January 1,
1993, under which the major shareholder serves as president. The terms provide
for a salary of $125,000 per year for the first five years beginning 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 income of the Company. During
1996 and 1995, the president received salaries of $144,800 and $137,813,
respectively. During 1994, the president received $36,000 of salary and waived
any additional compensation due him through December 31, 1994.
48
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. RELATED PARTY TRANSACTIONS (Continued)
In connection with the amendment of the employment agreement described
above, the Company issued its major shareholder a warrant to purchase 500,000
shares of common stock at an exercise price of $15 per share.
10. SIGNIFICANT CUSTOMER
A significant part of the Company's business is dependent upon one European
customer. During the years ended December 31, 1996, 1995 and 1994, this customer
accounted for $3,099,125, $2,971,274 and $2,621,370 of sales, respectively. As
of December 31, 1996 and 1995, accounts receivable from this customer were
$1,078,885 and $471,715, respectively.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its operating facilities under operating leases expiring
in June and October 1999. Rent expense under operating leases for the years
ended December 31, 1996, 1995 and 1994 was $582,316, $179,901 and $87,409,
respectively.
At December 31, 1996, future minimum rentals, subject to cost-of-living
adjustments, are approximately as follows:
<TABLE>
<S> <C> <C>
1997 $ 477,500
1998 477,500
1999 301,700
----------------
$ 1,256,700
================
</TABLE>
LITIGATION
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. The plaintiffs seek injunctive relief and monetary damages
in excess of $15,000. 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 discovery has not been completed. At this time, it is not possible to
estimate the ultimate loss, if any, related to this lawsuit.
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 or financial position.
49
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. COMMITMENTS AND CONTINGENCIES (Continued)
FINANCING
During 1996, the Company entered into a standby letter of credit
arrangement with a financial institution. As of December 31, 1996 no amounts
were outstanding on the letter of credit.
12. SHAREHOLDERS' EQUITY
In April 1996, the Company completed a secondary public offering and issued
1,600,000 shares of common stock, raising net proceeds of approximately
$21,227,000. During February, 1995, the Company raised net proceeds of
approximately $3,800,000 and issued 2,570,000 shares of common stock in a public
offering (including 150,000 shares to a public relations firm).
During 1995, a two-for-one stock split was distributed to shareholders. 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.
In January 1996, the Company adopted Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws which include certain
anti-takeover provisions. In addition, the Company adopted a Shareholder
Protection Agreement (the Rights Amendment). Pursuant to the terms of the Rights
Agreement, preferred stock purchase rights (Rights) were distributed, as a
dividend, to shareholders of record as of the date the Company entered into the
Rights Agreement, at a rate of one Right for each share of the Company's common
stock held on the record date.
In March 1996, the Company adopted Amended and Restated Articles of
Incorporation increasing the authorized capital stock of the Company to
125,000,000 shares (one hundred million (100,000,000) common, par value $.001,
and twenty-five million (25,000,000) preferred, par value of $.001).
During 1996, the Company issued 15,000 shares of common stock in lieu of
rent for a warehouse facility. The agreement guarantees a minimum stock price of
$15 per share at the end of the three year lease; otherwise, additional shares
will be issued to provide $225,000 of compensation for the three year lease.
In January 1996, Pharma Patch was granted a two-year warrant to purchase
100,000 shares of the Company's common stock at an exercise price of $15 per
share, in exchange for certain concessions regarding the Company's 1996 public
offering.
In August 1994, the Company consummated a private placement of securities
issuing 420,000 shares of its common stock for $280,000 and notes totaling
$280,000 at 9% annual interest. The notes 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.
50
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. SHAREHOLDERS' EQUITY (Continued)
In October 1996, the Company entered into an agreement with a consulting
firm to provide promotional services over a minimum of one year. In return for
the services, the Company granted warrants at an exercise price of $13 per share
that vest as the Company's common stock achieves specified performance target
prices as follows:
<TABLE>
<CAPTION>
Vesting
Number of Options Target Price
- - ------------------------------------------------------------------------
<S> <C>
60,000 None
60,000 $20
60,000 $25
60,000 $30
60,000 $35
<FN>
As of December 31, 1996 none of the warrants had been exercised; 60,000 are
exercisable and expire October 7, 2001.
</FN>
</TABLE>
In November 1996, the Company entered into an agreement with a consulting
firm to provide promotional services over a three year term. In return for the
services the Company granted 50,000 warrants with an exercise price of $8 per
share, vesting upon the Company's common stock achieving a $15 target price
before November 8, 1998 and 50,000 warrants with an exercise price of $10 per
share, vesting upon the Company's common stock achieving a $20 target price
before November 8, 1998. At December 31, 1996 none of these warrants had vested.
The warrants terminate in November 1999.
In conjunction with the 1995 initial public offering, the Company issued
220,000 warrants with an exercise price of $2.60 to the representative of the
underwriters. All of the warrants were outstanding as of December 31, 1995.
During 1996, 104,754 warrants were exercised and as of December 31, 1996,
115,246 warrants were outstanding which expire in February 1999.
During 1995, the Company's Board of Directors approved a distribution of
$268,992 to shareholders, of which $256,920 was paid to the majority
shareholder.
During 1996, the Company amended its 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 at least equal to the fair market value
of the shares on the date of the grant. Under the Amended Plan options expire
seven years from the date of the grant, but the vesting period is discretionary.
The vesting period for all options outstanding at December 31, 1996 is four
years from the date of grant.
51
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. SHAREHOLDERS' EQUITY (Continued)
The following table summarizes information relative to the Company's
options granted under the Plan:
<TABLE>
<CAPTION>
Shares Weighted
Average
Exercise Price
--------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1996 - $ -
Granted 12,500 15
--------------------------
Outstanding at December 31, 1996 12,500 $ 15
==========================
Exercisable at December 31, 1996 - -
==========================
Weighted-average fair value of options
granted during 1996 $ 8.00
============
</TABLE>
The Company has also 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 not issued under the Plan:
<TABLE>
<CAPTION>
Weighted
Average
Shares Exercise Price
---------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1994 - $ -
Granted 116,000 3.37
----------------------------
Outstanding at December 31, 1994 116,000 3.37
Granted 40,000 7.85
Exercised (50,000) 2.00
----------------------------
Outstanding at December 31, 1995 106,000 3.74
Granted 732,000 14.65
Exercised (86,000) 1.25
----------------------------
Outstanding at December 31, 1996 752,000 $14.65
============================
Exercisable at December 31, 1996 520,000 $14.98
============================
Weighted-average fair value of options
granted during 1996 $5.25
=============
</TABLE>
52
<PAGE>
Technical Chemicals and Products, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. SHAREHOLDERS' EQUITY (Continued)
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method required by
Statement 123. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996: risk-free interest rate of 6.11%;
volatility factors of the expected market price of the Company's common stock of
.701; and a weighted-average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options. Because the Company's employee
stock options have characteristics significantly different from those of traded
options, and because subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------
<S> <C> <C>
Pro $(2,818,532) $(1,734,628)
Pro forma loss per share (.30) (.24)
<FN>
The weighted-average remaining contractual life of options is 5.9 years.
</FN>
</TABLE>
53
<PAGE>
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, 1996
are as follows:
<TABLE>
<S> <C> <C>
Options 1,552,000
Warrants 515,24
--------------
2,067,246
==============
</TABLE>
54
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. 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, 1996.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Jack L. Aronowitz(1)(2)(3)................... 56 President, Chief Executive Officer and Chairman of the
Board of Directors
Martin Gurkin, Ph.D.......................... 64 Senior Vice President, Chief Operating Officer and
Director
John E. Pippert.............................. 64 Senior Vice President, Marketing and Sales
Stuart R. Streger, C.P.A.(1) ................ 45 Vice President and Chief Financial Officer
Colin A. Morris.............................. 56 Vice President, Transdermal Manufacturing and Chief
Operating Officer of the Pharmetrix Division
Thomas S. Spencer, Ph.D...................... 51 Vice President, Pharmetrix Division
Cleve W. Laird, Ph.D......................... 58 Director
Clayton Rautbord(2)(3)....................... 69 Director
Kathryn R. Harrigan(1)(2)(3)................. 45 Director
<FN>
________________________________________
(1) Member of the Company's Audit Committee
(2) Member of the Company's Compensation Committee
(3) Member of the Company's Stock Option Committee
</FN>
</TABLE>
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.
55
<PAGE>
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. was Executive Vice President of the Company from
February 1992 until December 1996 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, to which endeavor he
returned full-time during December 1996. 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.
STUART R. STREGER, C.P.A. has been Vice President and Chief Financial
Officer of the Company since April 1996. Prior to joining TCPI, Mr. Streger
served as Chief Financial Officer of Carfel, Inc., an auto parts manufacturer
and after-market distribution company from September 1994 to March 1996. From
August 1993 to September 1994, he was Chief Financial Officer of Chick Master
International, a global manufacturer and distributor of poultry equipment. From
August 1980 to August 1993, Mr. Streger was Chief Financial Officer of Rosco
Laboratories, Inc., a worldwide distributor and manufacturer of television and
film poduction products. From 1973 to 1977, Mr. Streger was employed as a senior
auditor and served in many other capacities with the accounting firm of KPMG
Peat Marwick LLP.
COLIN A. MORRIS has been Vice President of Transdermal Manufacturing since
February 1997. He has operating responsibilities for TCPI's portfolio of
transdermal drug delivery products and related contract services, and directs
all activities at the Company's R & D facility in Menlo Park, California,
operated by its Pharmetrix Division. In addition, Mr. Morris is involved in the
ongoing development of the Company's TD Glucose Monitoring System. Prior
thereto, the transitioned Noven Pharmaceuticals, which operates of one of the
most advanced transdermal R & D and manufacturing facilities in the world, from
the development stage to global commercialization as Vice President of
Operations and later as Vice President of Corporate Planning. Mr. Morris also
has held senior-level positions with Rhone-Poulenc Rorer, Inc. as Senior
Director of World Wide Engineering, Director of Process Engineering with
Sterling Drug, Inc., and international and domestic positions with Johnson &
Johnson.
THOMAS S. SPENCER, Ph.D. has been a Vice President 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.
56
<PAGE>
CLAYTON L. RAUTBORD has been a Director of the Company since August 1996.
Mr. Rautbord is presently the Secretary and Treasurer of Wenk Aviation Insurance
Corporation. From 1980-1989, he was the founder and President of Photo
Con-X-Ion, Inc., a manufacturer of photographic chemicals, and was the President
and CEO of APECO, a company listed on the NYSE, from 1963-1974. Mr. Rautbord has
previously served on the boards of Ozark Airlines, Metropolitan Bank of Chicago,
Amalgamated Bank of Chicago, and Euclid Equipment Company of Long Island, New
York. In addition to TCPI's Board of Directors, Mr. Rautbord also serves on the
Board of Directors of Albany Bank and TrustCompany in Chicago.
KATHRYN R. HARRIGAN, M.B.A., Ph.D., has been a Director of the Company
since 1996. 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 Corporation, an international building and
filtration company.
There is no family relationship between any executive officer or director
of the Company.
57
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 11, 12 and 13 is incorporated by
reference from the Company's definitive proxy statement to be filed in
connection with the Company's Annual Meeting of Shareholders to be held during
1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K
A. The following documents are filed as part of the report:
(1) 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.
(2) Financial Statement Schedules
TECHNICAL CHEMICALS & PRODUCTS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER, 31 1996
<TABLE>
<CAPTION>
BALANCE AT BEGINNING OF ADDITIONS CHARGED TO BALANCE AT END OF
DESCRIPTION PERIOD COST PERIOD
------------- ----------------------- -------------------- -----------------
<S> <C> <C> <C>
Year Ended December 31, 1996;
Allowance for doubtful accounts $ 18,000 - $ 18,000
Tax Valuation Allowance 572,801 - 572,801
------------------------------------------------------------------------
Total $ 590,801 - $ 590,801
========================================================================
Year Ended December 31, 1995;
Allowance for boubtful accounts $ 10,000 $ 8,000 $ 18,000
Tax Valuation Allowance - 572,801 572,801
------------------------------------------------------------------------
Total $ 10,000 $ 580,801 $ 590,801
========================================================================
Year Ended December 31, 1994;
Allowance for doubtful accounts $ 10,000 - $ 10,000
------------------------------------------------------------------------
Total $ 10,000 - $ 10,000
========================================================================
</TABLE>
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.
(3) Exhibits
58
<PAGE>
Exhibit Exhibit Description
Number
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
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
23 Filed
Herewith Consent of Ernst & Young LLP
27. Filed
Herewith Financial Data Statement (EDGAR Filing)
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).
*** Incorporated by reference to exhibit of the same number
in Amendment No. 4 to the Registration Statement on
Form S-1 filed on April 23, 1996 (No. 333-1272).
**** 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.
B. No reports on Form 8-K have been filed by the Company during
the last quarter of 1996.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TECHNICAL CHEMICALS AND PRODUCTS, INC.
By: /SIGNED/
Jack L. Aronowitz
President, Chief Executive Officer
and Chairman of the Board
Date: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/SIGNED/ President, Chief Executive March 25, 1997
Jack L. Aronowitz Officer and Chairman of the
Board (Principal Executive
Officer)
/SIGNED/ Senior Vice President, Chief March 25, 1997
Martin Gurkin Operating Officer and Director
/SIGNED/ Vice President, Chief Financial March 25, 1997
Stuart R. Streger Officer (Principal Financial
Officer and Principal Accounting
Officer)
/SIGNED/ Director March 25, 1997
Cleve W. Laird, Ph.D.
/SIGNED/ Director March 25, 1997
Kathryn R. Harrigan
/SIGNED/ Director March 25, 1997
Clayton Rautbord
60
<PAGE>
Exhibit Index to Exhibit
Number
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
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
23 Filed
Herewith Consent of Ernst & Young LLP
27. Filed
Herewith Financial Data Schedule (EDGAR Filing)
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).
*** Incorporated by reference to exhibit of the same number
in Amendment No. 4 to the Registration Statement on
Form S-1 filed on April 23, 1996 (No. 333-1272).
**** 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.
61
EXHIBIT 23
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-5035) of Technical Chemicals & Products, Inc. and in the
related Prospectus of our report dated February 19, 1997, with respect to the
consolidated financial statements and schedule of Technical Chemicals &
Products, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
/s/ ERNST & YOUNG LLP
Miami, Florida
March 24, 1997
62
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(The Company's Annual Report on Form 10K for the Period
Ending December 31, 1996)
</LEGEND>
<CIK> 0000924921
<NAME> STU STREGER
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,607,311
<SECURITIES> 11,693,143
<RECEIVABLES> 2,195,700
<ALLOWANCES> 18,000
<INVENTORY> 1,039,390
<CURRENT-ASSETS> 17,007,959
<PP&E> 3,273,648
<DEPRECIATION> 565,167
<TOTAL-ASSETS> 37,526,040
<CURRENT-LIABILITIES> 1,659,768
<BONDS> 171,651
0
0
<COMMON> 9,939
<OTHER-SE> 35,684,682
<TOTAL-LIABILITY-AND-EQUITY> 37,526,040
<SALES> 6,848,382
<TOTAL-REVENUES> 7,007,641
<CGS> 3,706,267
<TOTAL-COSTS> 3,706,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207,650
<INCOME-PRETAX> (4,053,238)
<INCOME-TAX> (1,503,131)
<INCOME-CONTINUING> (2,550,107)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,550,107)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
