SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-25406
TECHNICAL CHEMICALS AND PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0308922
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
3341 S.W. 15th Street, Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 979-0400
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Exchange Act during the past 12
months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES x NO___
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
Class Outstanding As Of August 11, 1998
----- ---------------------------------
Common Stock $ .001 par value 10,015,036
Transitional Small Business Disclosure Format (check one):
YES NO x
--- ---
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
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June 30, December 31,
1998 1997
--------------------------------------------
ASSETS (Unaudited) *(Audited)
Current assets:
Cash and cash equivalents $ 15,008 $ ,3,316
Investments 1,106 4,021
Accounts receivable, net 1,422 2,055
Inventory 2,878 1,852
Other 333 226
--------------------------------------------
Total current assets 20,747 11,470
--------------------------------------------
Property and equipment, net 2,692 2,831
Patents and trademarks, net 12,414 12,912
Goodwill, net 2,066 2,151
Deferred tax asset, net 4,140 4,140
Other assets 92 93
--------------------------------------------
Total assets $ 42,151 $33,597
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 708 $ 1,729
Accrued expenses 115 340
--------------------------------------------
Total current liabilities 823 2,069
--------------------------------------------
Other liabilities 169 170
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares--25,000,000;
Series A 6% Convertible Preferred stock,
$.001 par value:
Issued and outstanding shares--15,000 15,106 --
Common stock, $.001 par value:
Authorized shares--100,000,000;
Issued and outstanding shares--
10,015,036 at 6/30/98 and 12/31/97 10 10
Additional paid-in capital 39,326 39,807
Accumulated deficit (13,283) (8,459)
--------------------------------------------
Total stockholders' equity 41,159 31,358
--------------------------------------------
Total liabilities and stockholders' equity $ 42,151 $33,597
============================================
</TABLE>
*Note: The Balance Sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See accompanying notes to the consolidated financial statements.
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share data)
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
----------------------------------- -----------------------------------
Gross product sales $ 1,155 $ 1,569 $ 2,786 $ 2,809
Returns and allowances -- (10) -- (20)
----------------------------------- -----------------------------------
Net product sales 1,155 1,559 2,786 2,789
Cost of product sales 546 945 1,310 1,574
----------------------------------- -----------------------------------
Gross profit 609 614 1,476 1,215
R&D contract revenue 52 160 157 210
Operating expenses:
Selling, general and administrative 2,065 1,474 4,113 2,763
Research and development 698 598 1,442 1,149
Depreciation and amortization 456 438 909 847
----------------------------------- -----------------------------------
3,219 2,510 6,464 4,759
----------------------------------- -----------------------------------
Loss from operations (2,558) (1,736) (4,831) (3,334)
Other income (expense):
Interest income 131 121 244 492
Interest expense (2) (4) (8) (7)
----------------------------------- -----------------------------------
Loss before income tax benefit (2,429) (1,619) (4,595) (2,849)
Income tax benefit -- 599 -- 1,054
----------------------------------- -----------------------------------
Net loss (2,429) (1,020) (4,595) (1,795)
Accrued preferred redemption
accretion and dividends 196 -- 196 --
Loss attributable to common stock $ (2,625) $ (1,020) $ (4,791) $ (1,795)
=================================== ===================================
Net Loss per common share - Basic
and Dilutive $ (.26) $ (.10) $ (.48) $ (.18)
=================================== ===================================
Weighted average number of common
shares outstanding 10,015,036 9,984,471 10,015,036 9,973,798
=================================== ===================================
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
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Six Months Ended June 30,
-------------------------
1998 1997
----------------------------------------
OPERATING ACTIVITIES
Net loss $ (4,595) $ (1,795)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 909 847
Deferred income taxes -- (1,054)
Changes in operating assets and liabilities:
Accounts receivable 633 384
Inventory (1,026) (407)
Accounts payable and accrued expenses (1,246) 413
Other (107) (86)
----------------------------------------
Net cash used in operating activities (5,432) (1,698)
INVESTING ACTIVITIES
Purchase of property and equipment (188) (131)
Investment in patents and trademarks 1 (8)
Purchase of investments (1,108) --
Proceeds from sale of investments 3,990 962
Net cash (used in) provided by investing activities 2,695 823
FINANCING ACTIVITIES
Net proceeds from issuance of Preferred Stock 14,429
Proceeds from stock options exercised -- 173
Net cash provided by financing activities 14,429 173
Net increase (decrease) in cash and cash equivalents 11,692 (702)
Cash and cash equivalents at beginning of period 3,316 1,607
Cash and cash equivalents at end of period $ 15,008 $ 905
========================================
See accompanying notes to the consolidated financial statements.
</TABLE>
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements (the
"Financial Statements") of Technical Chemicals and Products, Inc. and
Subsidiaries (the "Company" or "TCPI") are unaudited, and in the opinion of
management, include all normal and recurring adjustments which are necessary for
a fair presentation. The Financial Statements should be read in conjunction with
more complete disclosures contained in the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. The results of operations for interim periods
are not necessarily indicative of the results of operations for the entire year.
RECLASSIFICATIONS
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the current period's presentation.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes". Deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
In evaluating whether or not an increase to the prior year valuation
allowance for deferred tax assets was required in the second quarter of 1998,
the Company recognized that all elements of evidence required to recognize the
second quarter of 1998 net operating loss tax benefits were not present.
Accordingly, the Company increased the valuation allowance related to the
deferred tax asset in the amount of $1.7 million for the six months ended June
30, 1998.
INVENTORIES
Inventories, consisting of raw materials and finished goods, are valued
at the lower of cost (computed on the first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The cost of maintenance and repairs are charged to operations as incurred.
Significant renewals and betterments are capitalized or depreciated over their
estimated useful lives.
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
2. DETAILS OF BALANCE SHEET
Details of selected balance sheet accounts are as follows (in thousands):
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<S> <C> <C>
June 30, 1998 December 31, 1997
---------------------------------------
Accounts receivable
Accounts receivable $1,440 $2,073
Allowance for doubtful accounts (18) (18)
-----------------------------------------------
$1,422 $2,055
===============================================
Property and equipment
Furniture, fixtures and equipment $3,035 $2,849
Real property 217 217
Leasehold improvements 906 904
-----------------------------------------------
4,158 3,970
Accumulated depreciation (1,466) (1,139)
-----------------------------------------------
$2,692 $2,831
===============================================
Patents and trademarks
Patents and trademarks $15,024 $15,025
Accumulated amortization (2,610) (2,113)
-----------------------------------------------
$12,414 $12,912
===============================================
Goodwill
Goodwill $2,494 $2,494
Accumulated amortization (428) (343)
-----------------------------------------------
$2,066 $2,151
===============================================
</TABLE>
3. ISSUANCE OF PREFERRED STOCK
On May 19, 1998, the Company executed an agreement with a single
institutional investor (the "Investor") pursuant to which the investor purchased
15,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock")
and warrants to purchase 150,000 of the Company's common stock for a gross
purchase price of $15,000,000 of which the Company received $14.4 million in net
proceeds. The conversion price of the Preferred Stock is subject to adjustments
based on the future market price of the common stock. The warrants are
exercisable at $11.89 per share and have a term of five years. The
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. ISSUANCE OF PREFERRED STOCK (Continued)
Preferred Stock is entitled to a preferred return, payable in kind, at the
annual rate of 6%, and will accumulate until such time as the Preferred Stock is
converted into common stock at which time the accrued return will be converted
into common stock at the same conversion rate as the Preferred Stock. The terms
of the Preferred Stock restrict, among other things, the Company's ability to
authorize or issue equity securities and the payment of dividends on the common
stock. The placement agents who arranged this transaction received a
non-transferable option to purchase up to 1,200 shares of the Preferred Stock,
based upon the same terms and conditions as the Investor; and this
non-transferable option expires on December 31, 1998.
4. RELATED PARTY TRANSACTION
On August 13, 1998, the Company's outside directors unanimously
approved the Company's guarantee for a period of up to 90 days of up to $750,000
of the collateral obligations of the Company's Chairman, President and Chief
Executive Officer's ("Chairman") family limited partnership ("Partnership") to a
brokerage house.
Under the terms of the Company's agreement with the Partnership, in
the event that the brokerage house calls on the Company's guarantee, the
Partnership is obligated to execute and deliver to the Company a promissory note
personally guaranteed by the Chairman in an amount equal to the amount of the
guarantee so called. The note will be payable on demand (but in no event later
than six months after the guarantee is called) and will bear interest at the
rate of interest charged by the brokerage house.
5. SUBSEQUENT EVENTS
Formation of Technical Electronics Corporation, a Joint Venture Company
On July 27, 1998, the Company announced the formation of Technical
Electronics Corporation, a Joint Venture between TCPI and privately held Micro
Weiss Electronics of Babylon, New York. TCPI will hold an 80 percent equity
ownership in the joint venture with Micro Weiss Electronics holding the
remaining 20 percent. TCPI will retain all rights, title, and interest,
including patent rights, to the technology for its meter devices. Technical
Electronics Corporation will develop and manufacture electronic measuring
devices for TCPI's non-invasive TD Glucose Monitoring System, the Company's
Total and HDL (good) cholesterol testing meter, and other diagnostic monitoring
products being developed by TCPI. The Joint Venture company will initially focus
on the cholesterol meter product - and in the coming months, also will start
activities related to the production of the TD Glucose Meter. See Management's
Discussion and Analysis Item 5 for additional information.
<PAGE>
Stock Repurchase Program
On July 28, 1998, TCPI's Board of Directors authorized a stock
repurchase program to buy-back up to 10 percent of the Company's outstanding
common stock. Purchases of common stock by the Company may be made from
time-to-time in the open market and/or through privately negotiated transactions
at prevailing market prices depending on market conditions. Due to the timing of
this announcement and proximity to reporting financial results for the period
ended June 30, 1998, as well as compliance with applicable securities
regulations, the Company has not, to date, repurchased any shares of common
stock.
Legal Proceedings
The Company, together with its Chairman, has been named in a civil
action by the United States of America, under the Comprehensive Environmental
Response Compensation and Liability Act of 1983. The action involves real
property previously occupied by an entity unrelated to the Company. The Company
believes the action is without merit.
The Company was also made a defendant in a lawsuit filed by a law firm over
disputed legal fees. The Company believes this action is without merit.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STRATEGIC DIRECTION AND COMPANY BACKGROUND
The Company is in the midst of completing a transition. TCPI was
formerly a developmental company that manufactured and sold a narrow range of
medical diagnostic products and specialty chemicals on an Original Equipment
Manufacture ("OEM") basis. TCPI is now approaching its goal of being a designer,
developer, manufacturer and global marketer of a wide range of point-of-care
medical diagnostic products for use at home, in physician offices, and other
healthcare locations with growing distribution channels for its products. In
addition, through its Pharmetrix Division located in Menlo Park, California, the
Company is also focused on the research and development and commercialization of
transdermal and dermal drug delivery technologies and skin permeation enhancers.
TCPI also manufactures high purity specialty biochemicals.
TCPI or its founder have developed more than 330 medical diagnostic and
pharmaceutical products which have received marketing clearance by the United
States Food and Drug Administration (the "FDA")-- including those related to its
patented membrane-based technology platform -- and also has manufactured OEM
products for leading multinational pharmaceutical and medical diagnostic
companies. The Company presently holds 22 U.S. and 29 foreign patents, and has
five pending patent applications in the U.S. and more than 30 foreign patent
applications pending.
TCPI is currently scaling-up the manufacture of more than 47 patented
membrane-based diagnostic tests in the U.S. and internationally, 28 of which
have received 510(k) clearance from the FDA. In addition, the Company has over
20 other diagnostic and transdermal drug delivery products in various stages of
development and governmental approval. Foremost in TCPI's product portfolio is
its TD GlucoseTM Monitoring System (the "TD Glucose Monitoring System") -- an
innovative non-invasive glucose testing system for diabetics presently in the
development phase and undergoing comparison studies. The Company's present
portfolio of diagnostic products also include tests and screens for cholesterol
monitoring, pregnancy, ovulation timing, urinary glucose levels, urinary tract
infection, skin cancer, deteriorating vision, infectious diseases, drugs of
abuse, cardiac markers and certain types of cancer. TCPI's portfolio of
transdermal drug delivery technology focuses on smoking addiction, hormone
replacement therapy, cardiovascular disease and other areas.
The Company's products are distributed worldwide under OEM marketing
relationships with multinational pharmaceutical and diagnostic companies, and
also are directly marketed for over-the-counter use by consumers. In the OEM
sector, most of TCPI's tests were sold through the Company's alliance with
Boehringer Mannheim Italia. This alliance also extended to the marketing and
distribution of certain other products, including the Company's Serum Dilution
Reagent (hCG Test) and its One Step LH Ovulation Tests. In February 1998, the
Company established a new agreement to supply finished and packaged family
planning products directly to Boehringer Mannheim distributors. This replaced an
earlier worldwide marketing and distribution agreement where the Company's
family planning products utilizing TCPI's technology were packaged in Europe.
Over-the-counter products are marketed to consumers in the U.S. and
Canada for at-home use under TCPI's proprietary HealthCheckTM and private-label
brands. These over-the-counter products are sold in pharmacies, supermarkets and
mass merchandise retail stores. The HealthCheck line consists of 14 testing and
screening products for cholesterol, diabetes, urinary tract infection,
pregnancy, ovulation, skin cancer, deteriorating vision and a series of health
journals. TCPI distributes its private label family planning
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STRATEGIC DIRECTION AND COMPANY BACKGROUND (continued)
products to approximately 20 leading drug, discount and supermarket chains and
catalog retailers. The Company's at-home diagnostics products are available
through such leading consumer outlets as Walgreen Drug Stores, Eckerd Corp.,
CVS-Revco, Rite Aid, Thrifty Payless, Wal-Mart Stores, and Kroger, as well as
leading drug wholesale distributors McKesson Corp., AmeriSource Health Corp.,
Bindley Western Industries, Bergen Brunswig Drug Company, and featured in Amway
Corporation's Personal Shopper catalog.
The Company expects to continue developing its medical diagnostic
products internally and also intends to enter into strategic alliances with
major international diagnostic and pharmaceutical companies for the marketing
and distribution of certain of its products. With respect to the development and
commercialization of its transdermal drug delivery technologies and skin
permeation enhancers, the Company intends to enter into strategic alliances with
third parties that may, in some cases, fund a portion of the product development
costs, participate in clinical testing, obtain regulatory approvals and market
the product.
In April 1998, the Board of Directors appointed Noel Buterbaugh to TCPI's
Board, replacing Dr. Stephen Dresnick. Mr. Buterbaugh is the President and Chief
Executive Officer of BioWhittaker, Inc., which was acquired by Cambrex
Corporation (NYSE: CMB) in 1997. Mr. Buterbaugh has been with BioWhittaker since
the early 1950's and served as President and Chief Executive Officer of
BioWhittaker, Inc. (NYSE: BWI) from 1992 to 1997 and President and Chief
Operating Officer since 1991. From 1979 to 1991, he was President of Whittaker
Bioproducts, Inc., a subsidiary of Whittaker Corporation, which was spun-off to
shareholders in 1991. From 1958 to 1979, he held numerous senior management
positions in sales and marketing and product manufacturing with Microbiological
Associates, Inc., a Division of Whittaker Corporation.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the information
incorporated by reference herein, includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended, and is subject to the
safe-harbor created by such sections. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements. See
Item 2 "Management's Discussion And Analysis of Financial Condition And Results
Of Operations" for further information relating to forward-looking statements.
Statements regarding future products, future prospects, business plans
and strategies, future revenues and revenue sources, future liquidity and
capital resources, health care market directions, future acceptance of the
Company's products, possible recommendations of health care professionals or
governmental agencies regarding use of diagnostic products, possible growth in
markets for at-home diagnostic testing, as well as other statements contained in
this report that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, and similar
statements are forward looking statements. These statements are based upon
assumptions and analyses made by the Company in light of current conditions,
future developments and other factors the Company believes are appropriate in
the circumstances, or information obtained from third parties and are subject to
a number of assumptions, risks and uncertainties. Readers are cautioned that
forward-looking statements are not guarantees of future
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STRATEGIC DIRECTION AND COMPANY BACKGROUND
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; risksrelated 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. The Company may determine to discontinue or delay the
development of any or all of its products under development at any time.
For a complete description of the Company's products and business, see
Part I, Item 1 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
PRODUCT SALES. The Company's net product sales for the six months ended
June 30, 1998 and 1997 were $2.8 million, and net product sales for the three
months ended June 30, 1998, were $1.2 million as compared to $1.6 million in the
second quarter of the prior year. During the second quarter of 1998, sales of
TCPI's HealthCheck at-home diagnostic products, private label family planning,
drug of abuse and infectious disease screening products experienced substantial
increases over the comparable periods a year earlier. Offsetting these sales
gains was an anticipated slowdown in shipments of OEM family planning products
during the second quarter due primarily to seasonal variations in the Company's
European sales while TCPI continues to transition to its new program of directly
shipping finished and packaged products worldwide. Despite this lag in shipping,
the order-flow continued and created a backlog of in-house orders which the
Company expects to ship during the balance of 1998 along with regular third and
fourth quarter business.
During the first six month period of 1998, the Company's operations
continued to reflect the manufacturing scale-up and build-up of inventory, which
increased by approximately $1.0 million to $2.9 million, for HealthCheck
products as well as more than 20 new diagnostic testing and screening products
for infectious diseases, drugs of abuse and certain types of cancer which are
planned for distribution worldwide.
GROSS PROFIT. TCPI's gross profit on product sales was $609,000 in the
second quarter of 1998 and $1.5 million for the first six months of 1998, as
compared to $614,000 and $ 1.2 million for the comparable periods of 1997. Gross
profit as a percent of net sales for both periods advanced to 53% as compared to
39% and 44% in the comparable periods a year earlier. These gains were achieved
principally due to increased in-house manufacturing which provided various
economies of scale-up, a change in product mix and market introduction of new
diagnostic testing and screening products such as the HealthCheck line, drug of
abuse and infectious diseases screening products, as well as a more favorable
packaging and distribution program related to the Company's OEM family planning
products.
SELLING, GENERAL AND ADMINISTRATIVE. Selling general and administrative
("SG&A") expenses increased in the second quarter of 1998 to $2.1 million andfor
the six months ended June 30, 1998 to $4.1 million, as compared to $1.5 million
and $2.8 million for the comparable periods of 1997. The SG&A expenses remained
relatively constant between the first two quarters of 1998. The increases over
the comparable periods of 1997 were primarily due to the ongoing implementation
of strategic marketing programs, including those related to the HealthCheck
product line and introduction of various new products. Through the first six
months of 1998, TCPI also continued to hire operating personnel for the further
scale-up of in-house manufacturing as well as ongoing facility expansion at its
Pompano Beach, Florida manufacturing, laboratory, warehouse, and office space.
This increase included the payment of significantly higher than usual
nonrecurring legal fees, for the filing of certain patents associated with the
TCPI's non-invasive glucose monitoring system, participation in the successful
appeal connected to patents utilized in the Company's family planning products,
as well as the pursuit of certain litigation matters.
RESEARCH AND DEVELOPMENT. The Company continued to advance its various
diagnostic testing products and transdermal drug delivery technologies through
development towards commercialization. The Company's investment in R&D has
contributed to the development of several new products including its TD Glucose
Monitoring System, HealthCheck family of at home diagnostics, and meter and
visual-read Total and HDL cholesterol monitoring products, infectious diseases
and drug of abuse, as well as several other products. The future level of R&D
expenditures will depend on, among other things, the outcome of clinical
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
testing of products under development (including the TD Glucose Monitoring
System), delays or changes in government required testing and approval
procedures, technological and competitive developments and strategic marketing
decisions. The Company's R&D expenses increased to $1.4 million in the six
months of 1998, or approximately 26% over the same six month period in 1997. The
Company's R&D expenses for the quarter ended June 30, 1998, increased by
approximately 17% to $698,000 from $598,000 in the same quarter in 1997.
NET LOSS. The Company posted a loss from operations of $4.8 million in
the first six months of 1998 which represented an increase from a loss of $3.3
million in the same period a year earlier. For the second quarter ended June 30,
1998, TCPI incurred a $2.6 million loss from operations versus a $1.7 million
loss in the second quarter of 1997. These increases resulted from expenses
associated with the planned scale-up of manufacturing and certain start-up
expenses connected with the new Boehringer Mannheim Italia program; ongoing
investment in personnel, research and development and facility expansion;
expenses for ongoing testing of TCPI's non-invasive glucose monitoring system
and its cholesterol testing and screening products; and substantially higher
than usual nonrecurring legal fees for the period which relate to the filing of
certain patents associated with TCPI's non-invasive glucose monitoring system,
participation in the successful appeal connected to patents utilized in the
Company's family planning products, as well as the pursuit of certain other
litigation matters.
The net loss attributable to common stock was $4.8 million for the six
months and $2.6 million loss for the quarter ended June 30, 1998, as compared to
$1.8 million and $1.0 million for the comparable periods of 1997. The increase
in loss attributable to common stock for the quarter and six month periods over
the same periods in 1997 was also due to the increase in the valuation allowance
related to the tax deferred asset and the accrued redemption accretion and
accrued dividends of the preferred stock.
FINANCIAL CONDITION
The Company had cash and investments of $16.1 million at June 30, 1998,
as compared to $7.3 million at December 31, 1997. The increase is due primarily
to the Company's sale to a single institutional investor of 15,000 shares of the
Company's Series A Convertible Preferred Stock. The Company received net
proceeds of $14.4 million from the transaction. See Notes to Condensed
Consolidated Financial Statements. Working capital at the end of the second
quarter was $19.9 million, as compared to $9.4 million at December 31, 1997.
This increase is due primarily to the preferred stock transaction described
above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company's working capital totaled $19.9 million,
as compared to $9.4 million at December 31, 1997. Cash and investments were
$16.1 million at June 30, 1998, as compared to $7.3 million at year-end 1997.
These increases were primarily attributed to the preferred stock transaction.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company expects to continue to draw upon its working capital to
purchase production equipment, develop and manufacture the TD Glucose Monitoring
System, engage in research and development related to transdermal drug delivery
technology, develop new diagnostic products, conduct clinical trials, continue
its investment in personnel and facility expansion, and continue its day-to-day
business. In addition, on July 28, 1998, TCPI's Board of Directors authorized a
stock repurchase program to buy-back up to 10 percent of the Company's
outstanding common stock. Purchases of common stock by the Company may be made
from time-to-time in the open market and/or through privately negotiated
transactions at prevailing market prices depending on market conditions. To
date, the Company has not repurchased any such shares.
TCPI's future long-term capital expenditure requirements and its
ability to ultimately return to profitability will depend on the following
factors: (i) the time required to obtain regulatory approvals; (ii) the progress
of the Company's research and development program; (iii) the ability of the
Company to develop additional marketing and distribution alliances, and (iv) the
Company's ability to develop and obtain regulatory approval to market new and
improved products. The Company anticipates that it will continue to incur net
losses until such time, if any, as the Company is able to generate sufficient
revenues from product sales to sustain its operations and cover expenses related
to its growth. There is no assurance that the Company will generate sufficient
cash to fund operations and the necessary cash requirements thereof.
Consequently, there can be no assurance that the Company will be able to fund
all of its cash requirements and operating losses or that any additional
financing will be available to the Company on acceptable terms or at all.
The Company's future working capital and capital expenditure
requirements may vary materially from those now planned depending on numerous
factors, including additional manufacturing scale-up for the Company's current
and future products, possible future acquisitions, the focus and direction of
the Company's research and development programs, competitive and technological
advances, future relationships with corporate marketing partners, the FDA
regulatory process and the Company's marketing and distribution strategy.
YEAR 2000
During 1997, the Company added to its existing computer capabilities
and began installation of new computer systems and programs to accommodate
anticipated future growth of TCPI's business and internal operations. Due to the
recent nature of any computer-related additions, as well as preliminary
discussions with certain vendors and customers, the Company believes the Year
2000 computer issue will not have a material impact on its business, operations
or financial condition.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to claims and suits arising in the ordinary
course of business. Other than described below, there has been no material
change in pending legal matters. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's results of operations or financial position.
The Company, together with its Chairman, has been named in a civil
action by the United States of America, under the Comprehensive Environmental
Response Compensation and Liability Act of 1983. The action involves real
property previously occupied by an entity unrelated to the Company. The Company
believes the action is without merit.
The Company was also made a defendant in a lawsuit filed by a law firm
over disputed legal fees. The Company believes this action is without merit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 19, 1998, the Company executed an agreement with a single
institutional investor (the "Investor") pursuant to which the investor purchased
15,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock")
and warrants to purchase 150,000 of the Company's common stock for a gross
purchase price of $15,000,000 of which the Company received $14.4 million in net
proceeds. The conversion price of the Preferred Stock is subject to adjustments
based on the future market price of the common stock. The warrants are
exercisable at $11.89 per share and have a term of five years. The Preferred
Stock is entitled to a preferred return, payable in kind, at the annual rate of
6%, and will accumulate until such time as the Preferred Stock is converted into
common stock at which time the accrued return will be converted into common
stock at the same conversion rate as the Preferred Stock. The terms of the
Preferred Stock restrict, among other things, the Company's ability to authorize
or issue equity securities and the payment of dividends on the common stock. The
placement agents who arranged this transaction received a non-transferable
option to purchase up to 1,200 shares of the Preferred Stock, based upon the
same terms and conditions as the Investor; and this non-transferable option
expires on December 31, 1998.
The net proceeds of this financing will be used primarily to establish
manufacturing capabilities for the various electronic meters used with TCPI's
non-invasive TD Glucose Monitoring System, its Total and HDL (good) cholesterol
testing products, and other future applications for the Company's diagnostic
products; as well as purchase equipment and secure a facility for the
manufacture of the TD Glucose Patches; and for working capital and general
corporate purposes.
ITEM 5. SUBSEQUENT EVENTS
Formation of Technical Electronics Corporation, a Joint Venture Company
On July 27, 1998, the Company announced the formation of Technical
Electronics Corporation, a Joint Venture between TCPI and privately held
MicroWeiss Electronics of Babylon, New York.
TCPI will hold an 80 percent equity ownership in the joint venture with
Micro Weiss Electronics holding the remaining 20 percent. TCPI will retain all
rights, title, and interest, including patent rights, to the
<PAGE>
PART II OTHER INFORMATION
ITEM 5. SUBSEQUENT EVENTS (Continued)
technology for its meter devices. Technical Electronics Corporation will develop
and manufacture electronic measuring devices for TCPI's non-invasive TD Glucose
Monitoring System, the Company's Total and HDL (good) cholesterol testing meter,
and other diagnostic monitoring products being developed by TCPI. The Joint
Venture company will initially focus on the cholesterol meter product - and in
the coming months, also will start activities related to the production of the
TD Glucose Meter.
MicroWeiss Electronics is the development group for a Joint Venture
between Weiss Instruments, Inc., a 115-year old manufacturer of precision
temperature and pressure equipment, and Micro Idea Instrument Company, Ltd. of
Taipei, Taiwan, with ISO-9000, FDA and RSW (the German counterpart to the FDA)
certified manufacturing facilities in Shenzen, China.
Under the Joint Venture Agreement, manufacturing of these electronic
devices will occur at a TCPI- developed or designated manufacturing facility
which meets or exceeds ISO-9000 and U.S. Food and Drug Administration GMP (good
manufacturing practice) standards. Technical Electronics Corporation also has
electronics manufacturing capabilities through its affiliation with Micro Idea
which TCPI anticipates will give it the ability to bring its new cholesterol
meter product to market as soon as practical following receipt of FDA marketing
clearance and required machine tooling should domestic manufacturing still be in
the scale-up process.
Stock Repurchase Program
On July 28, 1998, TCPI's Board of Directors authorized a stock
repurchase program to buy-back up to 10 percent of the Company's outstanding
common stock. Purchases of common stock by the Company may be made from
time-to-time in the open market and/or through privately negotiated transactions
at prevailing market prices depending on market conditions. To date, the Company
has not repurchased any such shares of common stock.
Related Party Transaction
The Company believes that it is in the best interests of its
shareholders for there to exist an orderly market for the Company's securities,
including its common stock. On August 13, 1998, the Company's outside directors
unanimously approved the Company's guarantee for a period of up to 90 days of up
to $750,000 of the collateral obligations of the Company's Chairman, President
and Chief Executive Officer's ("Chairman") family limited partnership
("Partnership") to a brokerage house.
The guarantee was extended for the purpose of providing additional
collateral to secure a loan from the brokerage house and prevent a liquidation
of the Company's common stock in the brokerage house, which the Company believes
could have a material adverse effect on the marketplace for the Company's common
stock. The Chairman and the other member of the Company's Board of Directors who
is a member of management took no part in the decision to approve the
transaction. The required consent of the holder of the Company's preferred stock
was obtained. Under the terms of the Company's agreement with the Partnership,
in the event that the brokerage house calls on the Company's guarantee, the
Partnership is obligated to execute and deliver to the Company a promissory note
personally guaranteed by the Chairman in an amount equal to the amount of the
guarantee so called. The note will be payable on demand (but in no event later
than six months after the guarantee is called) and will bear interest at the
rate of interest charged by the brokerage house.
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Exhibit Description
Number
3.1 ** Amended and Restated Articles of Incorporation of the Company.
3.2 ** Amended and Restated Bylaws of the Company.
4.1 * Form of Common Stock Certificate of the Company.
10.1 Joint Venture Agreement dated July 27, 1998 between the Company
and MicroWeiss Electronics
27 Financial Data Schedule
* Incorporated by reference to exhibit of the same number in
Amendment No. 4 to the Registration Statement on Form S-1 filed
April 23, 1996 (No. 333-1272).
** 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).
(b) Reports On Form 8-K
On May 21, 1998, the Company filed a Report on Form 8-K related to
the consummation of the sale to a single institutional investor 15,000 shares of
Series A Convertible Preferred Stock ("Preferred Stock") and warrants
("Warrants") to purchase 150,000 shares of the Company's Common Stock, $.001 par
value ("Common Stock").
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TECHNICAL CHEMICALS AND PRODUCTS, INC.
Date: August 14, 1997 By: /s/
-----------------------------
Stuart R. Streger
Vice President and Chief Financial Officer
(Duly authorized officer and principal
accounting officer)
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