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, 1998
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
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3341 S.W. 15th Street, Pompano Beach, Florida 33069
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(Address of principal executive offices) (Zip Code)
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
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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 24, 1999 was approximately $8,719,443 (based upon the closing sale price
of $1.281 per share on the Nasdaq National Market on March 24, 1999).
As of March 24, 1999, 10,570,893 shares of the Registrant's $.001 par
value Common Stock were outstanding.
Documents Incorporated By Reference
-----------------------------------
The Registrant's Definitive Proxy Statement related to the 1999
Annual Shareholder's Meeting is incorporated by reference in Part
III to the extent provided in Items 10, 11, 12 and 13 hereof.
EXHIBIT INDEX IS LOCATED ON PAGE 55
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INDEX
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Description Page Number
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PART I
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Item 1. Business.......................................................... 4
The Company............................................... 4
Forward Looking Statements................................ 5
Strategy Direction........................................ 5
Non-Invasive Glucose Monitoring........................... 6
Cholesterol Monitoring.................................... 9
HealthCheck(R)Diagnostic Testing and Screening Products... 11
Diagnostic Product Portfolio.............................. 12
Transdermal Drug Delivery Product Portfolio............... 14
Biochemical Manufacturing................................. 14
Product Research and Development.......................... 14
Manufacturing and Materials............................... 15
Patents, Trademarks and Technologies...................... 15
Competition............................................... 16
Marketing and Sales....................................... 17
Employees................................................. 17
Year 2000................................................. 18
Governmental Regulation................................... 18
Product Liability Insurance............................... 19
Executive Officers of the Company......................... 19
Item 2. Properties........................................................ 20
Item 3. Legal Proceedings................................................. 20
Item 4. Submission Of Matters To A Vote Of Security Holders............... 21
PART II
Item 5. Market For Registrant's Common Equity And Related
Stockholder Matters............................................... 22
Item 6. Selected Financial Data........................................... 23
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations......................................... 24
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PART II
(Cont'd.)
The Company.............................................. 24
Results Of Operations.................................... 26
Year Ended December 31, 1998 Compared....................
To Year Ended December 31, 1997.......................... 26
Year Ended December 31, 1997 Compared....................
To Year Ended December 31, 1996.......................... 26
Financial Condition...................................... 27
Liquidity And Capital Resources.......................... 28
Item 8. Financial Statements And Supplementary Data...................... 29
Report Of Independent Certified Public Accountants....... 30
Consolidated Balance Sheets.............................. 31
Consolidated Statements Of Operations.................... 32
Consolidated Statements Of Shareholders' Equity.......... 33
Consolidated Statements Of Cash Flows.................... 35
Notes To Consolidated Financial Statements............... 36
Item 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure...................... 47
PART III
Item 10. Directors And Officers Of The Registrant......................... 48
Item 11. Executive Compensation........................................... 51
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 51
Item 13. Certain Relationships and Related Transactions................... 51
PART IV
Item 14. Exhibits, Financial Statement Schedules, And
Reports On Form 8-K............................................. 51
Schedule II - Valuation and Qualifying Accounts.......... 51
Exhibits Description..................................... 52
Signatures............................................... 54
Index to Exhibits........................................ 55
Consent of Ernst & Young LLP............................. 60
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PART I
ITEM 1. BUSINESS
The Company
Technical Chemicals and Products, Inc. (the "Company" or "TCPI") is in
the final stages of completing a transition towards becoming an integrated
designer, developer, manufacturer and global marketer of a wide range of
point-of-care medical diagnostic products for use at home, in physician offices,
and other healthcare locations which are distributed through domestic and
international channels. In addition, the Company's Pharmetrix Division is also
involved in the research, development and commercialization of transdermal and
dermal drug delivery technologies and skin permeation enhancers. TCPI also
manufactures high purity specialty biochemicals. TCPI was formerly a
developmental company that manufactured and sold a narrow range of medical
diagnostic products and specialty chemicals on an Original Equipment Manufacture
("OEM") basis.
During the past 29 years, TCPI or its founder have developed more than
330 medical diagnostic and pharmaceutical products which have received marketing
clearance by the United States Food and Drug Administration (the "FDA"). Many of
the currently marketed products incorporate the Company's patented and
proprietary membrane-based technology platform, as do those in various stages of
development and regulatory approvals. TCPI presently holds 26 U.S. and foreign
patents, and has 23 domestic and foreign patent applications pending.
TCPI is currently scaling-up to manufacture and market in the U.S. and
internationally more than 47 diagnostic tests which utilize the Company's
patented membrane-based technology, 29 of which have received 510(k) clearance
from the FDA. In addition, the Company has more than 20 other diagnostic and
transdermal drug delivery products in various stages of development and
regulatory approval in the United States and/or various foreign countries.
Foremost in TCPI's product portfolio are its non-invasive TD
Glucose(TM) Monitoring System (the "TD Glucose Monitoring System") for
diabetics, its new Total and HDL (good) cholesterol monitoring products, and its
HealthCheck(R) and private-label brands of over-the-counter diagnostic tests and
screens for at-home use by consumers. At present, the Company's portfolio of
diagnostic products includes tests and screening kits for cholesterol
monitoring, pregnancy, ovulation timing, glucose, urinary tract infection,
kidney and bladder infection, skin cancer, deteriorating vision, infectious
diseases, drugs of abuse, cardiac markers and certain types of cancer. TCPI's
portfolio of transdermal drug delivery technology focuses on smoking addiction,
hormone replacement therapy, cardiovascular disease and other areas.
The Company's products are distributed worldwide under both OEM
marketing relationships with multinational pharmaceutical and diagnostic
companies, and are also available to consumers on an over-the-counter basis
under TCPI's proprietary HealthCheck and private-label brands. In the OEM
sector, most of TCPI's tests for pregnancy and fertility are sold through
corporate Roche Boehringer Mannheim Diagnostics distributors as well as
independent distributors around the world. In January 1999, TCPI opened its
international sales and marketing office in Milan, Italy to focus on expanding
distribution of the Company's core diagnostic products in Europe, Asia, Africa,
the Middle East and Latin America. International expansion of the Company's OEM
family planning and HealthCheck diagnostic testing and screening products is
ongoing. Product sales and/or registration has begun in Argentina, Australia,
Austria, Bangladesh, Canada, Chile, China, Cyprus, Denmark, Egypt, Germany, Hong
Kong, Macao, Malaysia, Netherlands, Norway, Oman, Philippines, Portugal, South
Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Tunisia, and Turkey.
TCPI's HealthCheck and private-label products are marketed directly and
indirectly to pharmacies, supermarkets and mass merchandise retail stores, as
well as leading drug wholesale distributors. The Company private labels its
family planning products for approximately 20 leading drug, discount and
supermarket chains and catalog retailers. In 1998, sales of the Company's
products to Roche Boehringer Mannheim Diagnostics and CVS drug stores were
approximately 33% and 24% of TCPI's total product sales, respectively.
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ITEM 1. BUSINESS (Continued)
On July 27, 1998, the Company formed Technical Electronics Corporation,
a Joint Venture between TCPI and privately held Micro Weiss Electronics of
Babylon, New York in which TCPI holds an 80% equity ownership in the joint
venture with Micro Weiss Electronics holding the remaining 20%. The Company
retains all rights, title, and interest, including patent rights, to the
technology for its meter devices. Technical Electronics Corporation will develop
and manufacture electronic measuring devices for TCPI's non-invasive TD Glucose
Monitoring System, Total and HDL cholesterol testing meter, and other diagnostic
monitoring products being developed by TCPI.
Forward Looking Statements
Information in this Form 10-K, including any information incorporated
by reference herein, includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, and is subject to the safe-harbor created by
such sections. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements.
Statements regarding future products, future prospects, business plans
and strategies, future revenues and revenue sources, future liquidity and
capital resources, health care market directions, future acceptance of the
Company's products, possible recommendations of health care professionals or
governmental agencies regarding use of diagnostic products, possible growth in
markets for at-home diagnostic testing, as well as other statements contained in
this report that address activities, events or developments that the Company
expects, believes or anticipates will or may occur in the future, and similar
statements are forward looking statements. These statements are based upon
assumptions and analyses made by the Company in light of current conditions,
future developments and other factors the Company believes are appropriate in
the circumstances, or information obtained from third parties and are subject to
a number of assumptions, risks and uncertainties. Readers are cautioned that
forward-looking statements are not guarantees of future performance and that
actual results might differ materially from those suggested or projected in the
forward-looking statements. Factors that may cause actual future events to
differ from those predicted or assumed include, but are not limited to: the
satisfactory completion of clinical trials demonstrating efficacy of the TD
Glucose Monitoring System; delays in product development; risks associated with
the Company's ability to successfully develop and market new products on a
profitable basis or at all; availability of labor and sufficient parts and
materials to complete the design, construction and manufacturing scale-up of
required equipment; ability to complete the design, construction and
manufacturing scale-up on a timely basis within budget parameters; receipt of
any required regulatory approvals for manufacturing equipment or related
facilities; future advances in technologies and medicine; the uncertainties of
health care reform; risks related to the early stage of the Company's existence
and its products' development; the Company's ability to execute on its business
plans; engineering development; lead time for delivery of equipment; the
Company's dependence on outside parties such as its key customers, suppliers and
alliance partners; competition from major pharmaceutical, medical and diagnostic
companies; risks and expense of government regulation and affects of changes in
regulation (including risks associated with obtaining requisite governmental
approvals for the Company's products); the limited experience of the Company in
manufacturing and marketing products; uncertainties connected with product
liability exposure and insurance; risks associated with domestic and
international growth and expansion; risks associated with international
operations (including risk associated with international economies, currencies
and business conditions); risks associated with obtaining patents and other
protections on intellectual property; results of litigation and appeals; the
Company's limited cash reserves and sources of liquidity; uncertainties in
availability of expansion capital in the future and other risks associated with
capital markets, as well as those listed in the Company's other press releases
and in its other filings with the Securities and Exchange Commission. The
Company may determine to discontinue or delay the development of any or all of
its products under development at any time.
Strategic Direction
TCPI's strategic objective is to continue to develop, manufacture and
market a wide range of point-of-care medical diagnostic products for
distribution through multiple channels on a global basis. To do so, it intends
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to become a fully integrated organization capable of providing the medical
diagnostic marketplace 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 seek 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 (see Item 1. Business). In
addition, the Company is developing transdermal drug delivery technologies that
are intended to offer a high degree of efficacy, convenience and economy. The
Company believes that its business approach is consistent with current trends to
reduce the overall cost of health care by providing high quality, value-added
health care products that offer an improved benefit to cost ratio over
competitive products, where they exist.
Provide a Broad Range of Products. The Company has developed and is
continuing to develop and market a broad range of medical diagnostic and
transdermal drug delivery products. The Company believes that a diversified
product base could 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. For example, industry
estimates project the worldwide finger-stick glucose monitoring market to be
approximately $2 - $3 billion annually.
Enter into Strategic Alliances. TCPI intends to expand distribution of
certain of its medical diagnostic products as well as enter into strategic
alliances with large multinational medical diagnostic and pharmaceutical
companies as well as independent distributors for the marketing of many of its
medical diagnostic products. The Company expects that these companies will have
significantly greater financial, marketing and other resources than the Company,
they will be able to market TCPI's products through a broader range of
distribution channels.
Expand Distribution. The Company intends to continue to expand direct
and indirect distribution of its over-the-counter HealthCheck and private-label
diagnostic products as well as tests and screens for drugs of abuse, infectious
diseases and certain types of cancer throughout North America and certain
international markets.
There can be no assurance that the Company will be able to successfully
develop and market new products on a profitable basis or at all; or that the
Company will be able to successfully negotiate strategic alliances with such
major multinational medical diagnostic and pharmaceutical companies or at all,
or that the terms of any such alliance will be more favorable to the Company
than the terms that the Company could otherwise obtain.
Non-Invasive Glucose Monitoring
The Product. TCPI is developing its non-invasive TD Glucose Monitoring
System intended to be used by diabetics to test their glucose levels without the
discomfort and inconvenience associated with available finger stick blood
glucose monitoring systems. The TD Glucose Monitoring System consists of the TD
Glucose Meter, a hand-held electronic meter, and TD Glucose Patches, transdermal
patches which are applied to the patient and read by the TD Glucose Meter.
The TD Glucose Monitoring System combines proprietary and patent-pending
transdermal technology with TCPI's patented membrane-based diagnostic
technology. The alliance of these technologies permits dermal glucose to be
drawn and transported into the patch where it causes an end-point chemical
reaction and color change in the membrane. Special optics in a hand-held
electronic meter detects the color change and provides a glucose reading.
The TD Glucose Monitoring System is completely non-invasive, non-toxic
and safe. A small skin patch provides diabetics with a painless, bloodless, easy
to use and rapid method to monitor their glucose levels. After the patch has
been placed on the forearm for about five minutes, a small electronic meter is
held up to the patch and produces an instant glucose reading. The single-use
patch is then removed and easily disposed of. The retail price of the TD Glucose
Monitoring System is expected to be competitive with currently available
finger-stick blood glucose monitoring systems.
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Clinical Trials. Clinical trials for the TD Glucose Monitoring System
remain ongoing. TCPI plans to complete final clinical trials for the Company's
non-invasive TD Glucose Monitoring System during 1999 and submit related data to
the FDA for marketing clearance under the provisions of Section 510(k). Based on
the prior submission of TCPI's protocol to the FDA to conduct its clinical
trials, which was acknowledged without comment, the Company believes its TD
Glucose Monitoring System is eligible for the expedited 510(k) clearance
process.
Based upon the Company's external studies, as presented at the European
Association For The Study Of Diabetes in Barcelona, Spain in September of 1998,
the Company believes that the TD Glucose Monitoring System has achieved efficacy
and substantial correlation with current finger-stick glucose tests. Based on
these correlation results and scientific verification of the algorithms (complex
mathematical formulas) needed to calibrate the TD Glucose Meter to the
individual patient, TCPI began limited clinical trials to obtain data for an FDA
submission. During 1999, the Company has expanded these clinical trials to
include at least three independent university medical centers in several
geographic regions across the United States. Given the initial time necessary to
calibrate the TD Glucose Meter to each patient and conduct testing over an
extended period, TCPI estimates it will take approximately six to eight months
to conduct these clinical trials and up to 90 days to complete the requisite
documentation for an FDA submission.
The Company anticipates that its first-generation non-invasive
technology would be available by prescription and calibrated to the individual
diabetic patient by a physician. While the recommended calibration interval
required for the TD Glucose Meter will be determined in the final clinical
trials, during nearly six months of comparison study testing no additional
calibration was necessary once the initial patient calibration was completed. In
addition, the Company anticipates that future generations of the TD Glucose
Monitoring System may include advancements in available features as well as
utilize universal algorithms so that individual calibration will no longer be
necessary.
There can be no assurance the clinical trials will be completed on the
anticipated basis or that such clinical trials will be successful or produce
data suitable for submission to the FDA. In addition, there can be no assurances
that the FDA will consider the TD Glucose Monitoring System for 510(k)
clearance, expedited or otherwise, or if considered, that the TD Glucose
Monitoring System will receive 510(k) clearance. Further, the FDA may elect to
consider the TD Glucose Monitoring System under the regulatory diagnostic
guidelines for a Pre-Market Approval ("PMA"). In the event this regulatory
change occurs, there can be no assurances that the FDA will consider the TD
Glucose Monitoring System for PMA clearance, expedited or otherwise, or if
considered, that the TD Glucose Monitoring System will receive PMA clearance.
(See Governmental Regulation.)
Manufacturing. The Company intends to manufacture both TD Glucose
Meters and TD Glucose Patches and sell these finished goods to its marketing
partners for worldwide distribution. In July 1998, the Company established
Technical Electronics Corporation, a joint venture company 80% owned by TCPI, to
manufacture electronic devices for TCPI's non-invasive glucose monitoring
system, cholesterol monitoring meter and other future electronic products.
Technical Electronics Corporation presently has manufacturing capabilities in
China through an affiliate. In January 1999, TCPI announced the commencement of
the engineering phase of the manufacturing scale-up process to commercially
produce TD Glucose patches. The Company's plans include the design and
construction of high-speed state-of-the-art machinery to conduct the complex
manufacture and automatic packaging of TD Glucose patches. The engineering phase
is a key element to the manufacturing scale-up process. It is anticipated that
the engineering and manufacturing scale-up process will require a minimum of 24
months to complete - and include equipment installation and full-scale operation
under FDA diagnostic Good Manufacturing Practices, and inventory build-up prior
to market introduction. There can be no assurance that the engineering or
manufacturing scale-up process for the TD Glucose Patches and/or TD Glucose
Meters will be successful or produce finished product in sufficient quality or
quantity, or on a cost-effective basis.
Marketing. TCPI is presently working towards a definitive licensing
agreement with Daiichi Pharmaceutical Co. Ltd. for the TD Glucose Monitoring
System in Japan and Taiwan. The Company also is involved in ongoing negotiations
with several pharmaceutical and medical diagnostic companies with respect to
marketing and distribution rights for the balance of the world. The typical
structure of licensing agreements in the pharmaceutical, biotechnology and
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medical technology environment is milestone driven whereby both parties define
major and minor development events and associated payment for achieving each
threshold. Such agreements may also include provisions for royalty payments
based on sales and transfer pricing of finished goods, among other terms and
conditions. There can be no assurance that TCPI will be successful in completing
ongoing contract negotiations or executing licensing agreements, or that the
terms and conditions of such agreements are as favorable as possible to the
Company.
Blood Glucose Monitoring Market. Diabetes is a chronic disease in which
the body does not produce the protein insulin. Insulin permits metabolized
sugar, starches and other food energy (glucose) to transfer via osmosis from the
interstitial fluid (ISF) into the cells. Without insulin, the cells are unable
to receive nutrition. ISF is an extra-cellular fluid that is prevalent
throughout the body, including the skin. Scientific research indicates that ISF
glucose levels correlate closely with blood glucose levels. At present, there is
no cure for diabetes and the exact cause is unknown, although such factors as
heredity, obesity and lack of exercise appear to play roles. 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.
Diabetes is the fourth leading cause of death by disease in the U.S.
with about 625,000 new cases diagnosed each year. Medical costs in the U.S. for
the treatment of diabetes and diabetes related conditions are estimated to be
more than $100 billion annually. Worldwide there are in excess of 110 million
people with diabetes and only 18 - 20 million people that regularly monitor
their glucose levels. Approximately 16 million people with diabetes are in the
United States. The worldwide market for finger stick glucose monitoring products
is presently $2 - $3 billion per year.
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
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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 Monitoring System has been designed by the Company to address the need
for a convenient, blood-free, pain-free self-monitoring blood glucose system.
The Company believes that growth in demand for self-administered blood
glucose monitoring products will also be driven by the trend toward greater
patient involvement in personal health management. Many chronic conditions may
be managed more cost effectively in the home. The Company believes that these
benefits are consistent with recent initiatives, particularly in the United
States, to control overall health care expenditures. It is estimated that
expenditures in the United States for costs associated with diabetes are
approximately $132 billion annually. The Company believes that a compelling case
can be made that increased expenditures for preventive care, which would include
more frequent testing, can lead to reduced expenditures for care relating to
complications.
Existing Self-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. 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.
Alternatively, the blood glucose level can be obtained by conducting
the finger stick method and placing blood on a chemically-treated disposable
test strip which must be blotted or wiped off and then, after an additional
amount of time has elapsed, the result is read by visually comparing the color
of the test strip to that of a color chart.
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 Products. TCPI has developed cholesterol monitoring products for
use by healthcare professionals as well as for consumer use at home to determine
Total and HDL (good) cholesterol levels. These diagnostic products will be sold
under the Company's HealthCheck brand. The over-the-counter screening tests for
consumers will utilize the Company's visual-read test strips for Total and HDL
cholesterol - healthcare professionals will have the option of using the
Company's quantitative system consisting of a small electronic meter and strips
for Total and HDL Cholesterol or the visual products for initial screening. The
professional meter-read system will also measure blood glucose obtained by the
finger-stick method. The Total and HDL Cholesterol Test Strips and Glucose Test
Strips utilize the Company's patented and proprietary membrane-based technology
and produce an end-point color reaction in the membrane in direct proportion to
the amount of Total or HDL cholesterol or glucose present.
Typically, a lancet is used to collect a drop of blood from a finger
where it is placed on the Test Strip. During the approximate three-minute
reaction time, a blue-green color is produced on the strip. The shade of color
produced is related to the amount of Total or HDL cholesterol in the blood. The
over-the-counter visually-read screening kits are expected to be available in
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Total, HDL, and combination Total and HDL formats packaged with supplies for two
screenings per box that include test strips, lancets, alcohol wipes, plastic
pipettes and a corresponding color chart.
Clinical Trials. At present, clinical trials for the over-the-counter
visually-read Total and HDL cholesterol screening tests are in the final stages
and the Company anticipates filing corresponding 510(k) applications with the
FDA approximately during the second quarter of 1999. Following this activity,
TCPI anticipates commencing clinical trials for the meter-read format of its
Total and HDL cholesterol monitoring system during the second quarter of 1999
and filing corresponding 510(k) applications with the FDA approximately around
mid-1999. The Company's blood glucose test strip being used with this monitoring
system previously received 510(k) marketing clearance from the FDA in 1987.
There can be no assurance that clinical studies for the Company's visually-read
or meter-ready monitoring system will be successful or produce data suitable for
a 510(k) submission to the FDA, nor that it will receive 510(k) marketing
clearance.
Marketing. The meter-read version of the monitoring system provides a
quantitative digital readout of the Total and HDL cholesterol and glucose value.
This product is expected to offer several advantages over the leading finger
stick cholesterol monitoring system which include: (i) the cost to the physician
is expected to be less than $2 per test, which is significantly below present
reimbursement amounts, (ii) it requires less blood thereby permitting the use of
a smaller lancet that clinical trials demonstrated was less painful; (iii)
results are provided in approximately three minutes; (iv) the cost of the meter
to the physician is expected to be less than $150, which is highly favorable as
compared to other meters that cost up to $1,500; (v) the Company's cholesterol
monitoring system is anticipated to be as accurate as measurements performed in
a clinical laboratory; and (vi) the Company's visual-read screening test is
initially expected to be the only product which also measures HDL cholesterol.
The Company's Total and HDL Cholesterol System overcomes the
disadvantages of laboratory testing by offering the healthcare provider and
patient a quick and easy-to-use method of testing for cholesterol in the
physician's office, clinic, pharmacy or other location. With a real-time result,
the healthcare provider is able to counsel the patient and begin immediate
treatment, eliminating the need for a follow up visit. The Company's test also
eliminates the costs and delays associated with utilizing laboratories,
including those associated with specimen collection, preservation,
transportation, processing and reporting results.
TCPI has held discussions with several pharmaceutical and medical
diagnostic companies with respect to possible collaboration in the marketing and
distribution of the Company's monitoring system and strips to measure Total and
HDL cholesterol and blood glucose. There can be no assurance, however, that any
definitive arrangements 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 for 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
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tested at least every three months to track the effectiveness of the therapy.
While early federal initiatives focused on males and coronary disease, recent
initiatives emphasize the incidence of coronary artery disease in women.
According to industry research conducted by Frost and Sullivan, the
U.S. market for all cholesterol testing is approximately $250 million per year.
At home testing for cholesterol is currently in the introductory stage of market
development. Coronary Artery Disease (CAD) is still the number one cause of
death in the U.S. The disease is typically asymptomatic with the first indicator
being a heart attack. Routine cholesterol screening can identify individuals at
risk.
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 may be as high as
$40 or more, however, the laboratory may offer a panel of tests (lipid profile)
for the same amount, thereby reducing the cost per test performed. In
comparison, the cost to the physician for the Company's product is expected to
be less than $2 per test. The main disadvantage of the existing systems is the
lack of immediate results. There are currently several point-of-care cholesterol
monitoring systems that are either more expensive, lack accuracy, or have a high
acquisition cost.
HealthCheck(R) Diagnostic Testing and Screening Products
In order to capitalize on the growth in the market for over-the-counter
medical diagnostic products, in mid-1997, the Company introduced its HealthCheck
brand of at home medical diagnostic testing and screening products to drug,
discount and supermarket chains.
The HealthCheck line consists of 14 at-home testing and screening
products for diabetes, urinary tract infection, pregnancy, ovulation,
cholesterol, skin cancer, deteriorating vision and a series of health journals
for use by consumers. The Company has distinguished 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 holds a variety of medical diagnostic test products. At present,
HealthCheck products are being sold at approximately 33,600 chain and
independent pharmacies, mass merchandisers and grocery stores in the United
States and Canada. International sales and/or product registration also began
during the past year in Argentina, Australia, Austria, Bangladesh, Canada,
Chile, China, Cyprus, Denmark, Egypt, Germany, Hong Kong, Macao, Malaysia,
Netherlands, Norway, Oman, Philippines, Portugal, South Africa, Spain, Sweden,
Switzerland, Taiwan, Thailand, Tunisia, and Turkey. Industry sources project the
at-home diagnostic marketplace in the U.S. to exceed $3 billion by the year
2002.
The Company believes that simple-to-use products with the ability to
perform accurate, quantitative tests without an instrument will continue to
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
over existing at-home and other point-of-care testing products, where possible.
Growth in the medical diagnostic test market is being experienced as health care
providers and third party payers recognize that regular diagnostic testing can
result in earlier detection of disease, more accurate diagnosis and more
effective treatment as individuals become more involved with their own health.
The Company's strategy for its HealthCheck brand includes ongoing
domestic expansion through greater penetration of the retail pharmacy,
supermarket, mass merchandise and drug wholesale distribution channels as well
as establishing international distribution for its comprehensive family of
at-home testing products that offer cost effective pricing to the consumer and
higher than average profit margin for the retailer.
The following tables set forth information relating to the Company's
diagnostic products and transdermal/dermal drug delivery technologies currently
on the market or in various stages of development and regulatory clearance.
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<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCT MARKET
STATUS SECTOR
--------------------------------------------------- ---------------------------
DIAGNOSTIC PRODUCT PORTFOLIO In Pre- Regulatory On O-T-C O-T-C OEM/
Devel- Clinical Clinical Clear- The Health- Private Pro-
opment Stage Trials ance Market Check Label fessional
- ------------------------------------------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLUCOSE MONITORING:
- ------------------------------------------------------------------------------------------------------ ----------------------------
TD Glucose(TM) Monitoring System o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Whole Blood Glucose Test Strip(TM) o o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Whole Blood Glucose Meter o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Uri-Test(TM) Glucose Test Strip o o o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
CHOLESTEROL MONITORING:
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Cholesterol Meter o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Total Cholesterol Strip (meter) o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step HDL Cholesterol Strip (meter) o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Total Cholesterol Test Kit (visual/professional) o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
AT HOME SCREENING AND MONITORING TESTS:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Total Cholesterol Test Kit (visual) o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
HDL Cholesterol Test Kit (visual) o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Uri-Test(TM) Urinary Tract Infection Test Kit o o o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Uri-Test(TM) Diabetes Test Kit o o o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Uri-Test(TM) Protein Test Kit o o o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Vision Screening Test o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Skin Growth Monitoring System o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
FERTILITY TESTING PRODUCTS:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Pregnancy Test: Midstream Wand o o o o o X X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Pregnancy Test: Midstream Wand Double-Pack o o o o o X X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Pregnancy Value Pack: hCG Test Strip Double-Pack o o o o o X X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Ovulation Predictor Test Kit o o o o o X X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step One Minute(TM) Pregnancy Test: Midstream Wand o o o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Ovulation Midstream Wand o o o o o X X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Pregnancy test strips, vial configurations o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
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- ------------------------------------------------------------------------------------------------------ ----------------------------
PERSONAL HEALTH JOURNALS:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Men's Journal o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Woman's Journal o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Senior's Journal o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
My Pregnancy Journal o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
All About Me Children's Journal o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
DRUGS OF ABUSE SCREENING:
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Cocaine Test Strip(TM) o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Opiate Test Strip(TM) o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Amphetamine Test Strip(TM)** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Methamphetamine Test Strip(TM) o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Phencyclidine (PCP) Test Strip(TM)** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Benzodiazepine Test Strip(TM)** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Canabinoids (THC) Test Strip(TM) o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Methadone Test Strip(TM)** o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Barbiturates Test Strip(TM) o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Drug of Abuse Multi-Panel Tests o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
INFECTIOUS DISEASE SCREENING:
- ------------------------------------------------------------------------------------------------------ ----------------------------
RapidTest HIV(TM) Screen** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
RapidTest HBsAg(TM) Screen (Hepatitis B)** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Strep A(TM) Screen o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Strep B(TM) Screen o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
RapidTest Chlamydia(TM) Screen** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
RapidTest H. pylori(TM) Screen o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
SALIVA SAMPLE COLLECTOR:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Sani-Sal(TM) Saliva Collector** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
CARDIAC MARKERS:
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Cardiac Troponin I Test o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Myoglobin o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
CANCER SCREENS:
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step PSA Test** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Alphafetalprotein Test** o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step LE Test (Lupus) o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
One Step Fecal Occult Blood Test(R) o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
URINALYSIS:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Routine Urine Screening o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Urine Specialty Product / Drug of Abuse Screening o o o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
** Products for Export Only
- ------------------------------------------------------------------------------------------------------ ----------------------------
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<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCT MARKET
STATUS SECTOR
--------------------------------------------------- ---------------------------
TRANSDERMAL DRUG DELIVERY PRODUCT PORTFOLIO In Pre- Regulatory On O-T-C O-T-C OEM/
Devel- Clinical Clinical Clear- The Health- Private Pro-
opment Stage Trials ance Market Check Label fessional
- ------------------------------------------------------------------------------------------------------ ----------------------------
SMOKING CESSATION:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Nicotine* o o o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Nicotine Lozenge o o
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
HORMONE REPLACEMENT / OSTEOPOROSIS:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Estradiol o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Estradiol / Progestin o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Testosterone o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
CARDIOVASCULAR DISEASE:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Nitroglycerin o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Isosorbide Dinitrate (ISDN) o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
OTHER:
- ------------------------------------------------------------------------------------------------------ ----------------------------
Bup-4 Incontinence** o o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Ketorolac o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Vitamin C/E Patch o X X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Pain Patch o o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
Physostigmine o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
- ------------------------------------------------------------------------------------------------------ ----------------------------
SKIN PERMEATION ENHANCER:
- ------------------------------------------------------------------------------------------------------ ----------------------------
SR-38 o X
- ------------------------------------------------------------------------------------------------------ ----------------------------
* Abbreviated New Drug Application ("ANDA") in preparation
** Undergoing clinical evaluation in Japan
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
Product Research and Development
The Company's products are in various stages of commercialization, and
include those that are already on the market and others that are in development
and seeking regulatory clearance. See the "Diagnostic Product Portfolio" and the
"Transdermal Drug Delivery Portfolio". 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.
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Manufacturing and Materials
During 1998, the Company significantly expanded its manufacturing
capabilities and expects to continue to do so in order to accommodate
anticipated growth and further reduce its dependence on third party contractors.
With respect to those product components the Company does not yet manufacture
in-house, it has identified alternate manufacturing sources, however, a change
in manufacturers without appropriate lead time could result in a material delay
in the delivery of the Company's products and may subject the Company to less
favorable price terms. The Company is devoting a major portion of its
manufacturing capabilities 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. TCPI presently holds 26 U.S. and foreign patents, and has 23
domestic and foreign patent applications pending.
The Company's President and Chief Executive Officer, Mr. Jack
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 U.S. with regard to
aspects of its membrane-based technology and specific applications thereof, the
Company does not have European patents that correspond to certain of such U.S.
patents. To the best of the Company's knowledge, however, its membrane-based
technology does not infringe the patent of any third party in the U.S. 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 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.
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
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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 that have received
registered and/or trademark authority:
TCPI Registered Trademarks
- --------------------------
CholestoCheck(R)
hCG Pregnancy One Step(R)
HealthCheck(R)
Health Test Center(R)
Pregnancy One Step(R)
Pregnancy One Step Test Strip(R)
One Step Fecal Occult Blood Test(R)
One Step Drugs of Abuse Test Strip - Cocaine(R)
One Step Drugs of Abuse Test Strip - Opiate(R)
One Step LH Test Strip(R)
One Step HDL Cholesterol Test Strip(R)
One Step Whole Blood Cholesterol Test Strip(R)
Soft-E-Touch(R)
TCPI Trademarks
- ---------------
TD Glucose(TM)
One Step Drugs of Abuse Test Strip - Amphetamine(TM)
One Step Drugs of Abuse Test Strip - Benzodiazepine(TM)
One Step Drugs of Abuse Test Strip - Barbiturate(TM)
One Step Drugs of Abuse Test Strip - Cannabinoids (THC)(TM)
TM One Step Drugs of Abuse Test Strip - Methadone(TM)
One Step Drugs of Abuse Test Strip - Methamphetamine(TM)
One Step Drugs of Abuse Test Strip - Phencyclidine (PCP)(TM)
One Step Drug Scan(TM)
One Step-One Minute Pregnancy Test(TM)
One Step H. pylori Screen(TM)
One Step Strep A Screen(TM)
One Step Strep B Screen(TM)
RapidTest HIVTM RapidTest Chlamydia Screen(TM)
RapidTest HBsAg Screen(TM)
Sani SalTM We're Bringing Healthcare Home(TM)
Competition
Competition in the development and marketing of medical diagnostic
tests and transdermal drug delivery technologies 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. The Company
believes that competition in the sale of medical diagnostic tests is based
primarily upon the factors of accuracy and precision, speed of response, ease of
use and cost. The Company believes that its transdermal drug delivery
technologies 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.
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
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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 or
that the Company will successfully develop technologies and products that are
more effective or affordable than those developed by its competitors. In
addition, one or more of TCPI's competitors may achieve patent protection,
regulatory approval or commercialization earlier than the Company as well as be
subject to a competitor that introduces the first product introduced in a
particular area relative to other entrants to the market.
Marketing and Sales
The Company's medical diagnostic products have historically been
distributed on an OEM basis through strategic alliances with pharmaceutical and
diagnostic companies. However, on an increasing basis since 1996, TCPI's medical
diagnostic products have been marketed directly under private label arrangements
with drug, supermarket and discount retail chains and the Company's proprietary
HealthCheck brand name. The Company also intends to enter into strategic
alliances with major international medical diagnostic and pharmaceutical
companies for the marketing of many of its diagnostic products. The Company
expects that these companies will 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. There is no assurance, however, that
the Company will be able to successfully negotiate such strategic alliances with
such major multinational medical diagnostic and pharmaceutical companies or at
all, or that the terms of any such alliance will be more favorable to the
Company than the terms that the Company could otherwise obtain.
The Company's strategy with respect to development and
commercialization of its transdermal drug delivery technologies and skin
permeation enhancer products have two significant components (i) identify and
bring to market those products which are candidates for the Abbreviated New Drug
Application ("ANDA") process and/or which can be sold over-the-counter as
HealthCheck products, and (ii) 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.
Since 1992, Roche Boehringer Mannheim Diagnostics (formerly Boehringer
Mannheim-Italia) 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 February 1998, the Company
announced a new agreement with Roche Boehringer Mannheim Diagnostics whereby the
Company's finished and packaged family planning products will be directly
supplied to corporate and independent distributors. In mid-1998, the Company
learned that its previous distribution agreement with Boehringer Mannheim
Argentina to market certain of TCPI's diagnostic products in Latin America was
cancelled due to its acquisition by Roche Holdings AG and the overlap of
existing products. As a result, anticipated product sales were not realized.
Employees
As of December 31, 1998, the Company employed 64 full-time employees,
including 13 involved in research and development, 14 involved in
administration, 29 in operations, and 8 in marketing and sales. During February
1999, the Company executed a planned restructuring of its operations. The
Company presently has 50 full-time employees. The Company also hires part time
employees to temporarily expand its capabilities for larger assembly and
packaging projects. The Company has no collective bargaining or similar
agreement with its employees, but does have employment agreements with its
President, its vice president of finance and chief financial officer, and its
vice president and general counsel. See "Note 7 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.
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Year 2000
The Company, its division and operating subsidiaries, each are in the
process of implementing a Year 2000 readiness program with the objective of
having all significant business systems function properly with respect to the
Year 2000 issue before January 1, 2000. Since 1997, the Company has added to its
existing computer capabilities as well as installed new computer systems and
programs to accommodate anticipated future growth of TCPI's business and
internal operations. Due to the recent nature of any computer-related additions,
as well as discussions with key vendors and customers, the Company believes the
Year 2000 computer issue is not likely have a material impact on its business,
operations or financial condition.
Due to the general uncertainty with respect to the Year 2000 issue,
however, there can be no assurance that all Year 2000 issues will be foreseen
and corrected on a timely basis, or that no material disruption of the Company's
business will occur. Further, the Company's expectations are based on the
assumption that there will be no general failure of external local, national or
international systems (including power, communications, postal or transportation
systems) necessary for the ordinary conduct of business. The Company will,
however, continue to assess the risks presented by the Year 2000 problem and
will develop contingency plans if and when such plans become necessary.
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 regulatory requirements that 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 either 510(k) or PMA clearance must operate using CGMP.
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 such foreign jurisdictions.
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
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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 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. 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 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
that 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."
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Item 2. PROPERTIES
The Company leases approximately 40,000 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 as
well as additional warehouse space in Pompano Beach, Florida. The present lease
expires in 2003 and the Company currently pays approximately $26,000 per month
in rent, including sales tax and maintenance fees. The rent is adjusted annually
based upon changes in the U.S. Consumer Price Index. The lease also requires the
Company to pay real estate taxes, insurance and certain costs for maintaining
the premises. 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 transdermal drug delivery
research and development facility in Menlo Park, California that includes office
space, fully equipped laboratories and limited production capabilities. The
Company currently pays approximately $31,000 per month in rent under the lease.
This lease expires in June 1999 and the Company is presently evaluating its
alternatives with respect to this facility.
Item 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits arising in the ordinary
course of business. Management believes, after consultation with counsel, that
each of the allegations against the Company included in the lawsuits described
herein is without merit and the Company is defending each of the allegations
vigorously. At this time, it is not possible to estimate the ultimate loss or
gain, if any, related to these lawsuits, nor if any such loss will have a
material adverse effect on the Company's results of operations or financial
position.
HIV Saliva Collector Technology. A lawsuit was brought against the
Company in 1995 in the Circuit Court of the 17th Judicial Circuit in and for
Broward County, Florida (Joseph D'Angelo, Americare Transtech, Inc., Americare
Biologicals, Inc. and International Medical Associates, Inc. v. Technical
Chemicals & Products, Inc., Jack Aronowitz, Henry Schur, Analyte Diagnostics,
Inc., John Faro and Nicholas Levandoski) related to saliva collector technology
for an HIV diagnostic test.
On December 30, 1998, a jury returned a verdict in this lawsuit finding
that TCPI did not misappropriate the plaintiffs' trade secrets but found that
Mr. Aronowitz had intentionally misappropriated such trade secrets and assessed
damages of $500,000 against him, individually. Additionally, the jury found that
both the Company and Mr. Aronowitz intentionally interfered with the plaintiffs'
business relationships. The jury assessed approximately $328,000 in damages
against TCPI in connection with this second claim but awarded no damages against
Mr. Aronowitz, individually, in connection with that claim. Separately, the jury
assessed more than $4.1 million in damages against the other unrelated corporate
and individual defendants.
On January 29, 1999, one day after receiving the final judgment TCPI
and Mr. Aronowitz filed their appeal. This matter is presently pending before
the Fourth Appellate District Court of Appeals in West Palm Beach, Florida. In
the event that Mr. Aronowitz is ultimately required to pay damages to the
plaintiffs, the Company will indemnify Mr. Aronowitz to the extent permitted by
law.
Non-Invasive Glucose Monitoring Technology. In November of 1997, a
lawsuit was brought against the Company and Mr. Aronowitz in the United States
District Court Southern District of Florida (Americare Diagnostics, Inc. and
Joseph D'Angelo vs. Technical Chemicals and Products, Inc.) related to
non-invasive glucose monitoring technology in which the plaintiffs alleged,
among other things, patent infringement, misappropriation of trade secrets,
breach of contract, breach of fiduciary duty, breach of confidential relations,
breach of trust, unfair competition and conversion against the Company and its
Chairman and Chief Executive Officer.
The Company has pending against Americare Diagnostics and Mr. D'Angelo
counter-claims for libel and slander related to TCPI's non-invasive glucose
monitoring technology.
20 of 61
<PAGE>
On September 23, 1998, the Company's motion to dismiss six of the nine
counts of the patent infringement lawsuit was granted. The order dismissed all
of the counts alleging misappropriation of trade secrets, breach of fiduciary
duty, breach of confidential relations, breach of trust, unfair competition and
conversion. Prior to the court rendering its decision and order to dismiss, on
September 8, 1998, the plaintiffs filed an amended Complaint which contained
some of the same counts based on substantially the same facts as in the original
Complaint. TCPI's motion to dismiss the amended Complaint is presently pending
before the court.
Shareholder Class Action. During November 1998 through January 1999,
several lawsuits were filed in the United States District Court for the Southern
District of Florida against the Company and its Chief Executive Officer on
behalf of various shareholders of TCPI alleging violations of Sections 10(b) and
20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder.
Plaintiffs have brought this action on behalf of all persons, other than
defendants and other related or affiliated entities or persons, who purchased
the common stock of the Company from November 27, 1995 through and including
October 6, 1998. In general, plaintiffs allege that defendants made untrue
statements of material facts necessary to make statements not misleading in the
Company's public disclosure documents and in certain press releases, articles
and reports. The disclosures relate primarily to the development, clinical
testing and viability of the Company's TD Glucose Monitoring System. The
plaintiffs are seeking an unspecified amount of damages, interest, costs and
attorneys' fees. The Company believes these claims are without merit and is
vigorously defending this matter.
The Court has moved forward with the anticipated consolidation of the
lawsuits and, on March 2, 1999, appointed two law firms as co-lead counsel and
also appointed the lead plaintiffs. The Court also established a schedule for
filing the consolidated amended complaint and anticipated subsequent motions.
Plaintiffs will be filing an Amended and Consolidated Complaint.
The Company does maintain Directors and Officer's Liability Insurance,
however, there can be no assurances that such insurance coverage will be
adequate to fund the costs of an award, if any, or attorneys' fees. In addition,
as an officer and director of the Company, Mr. Aronowitz is indemnified by the
Company to the fullest extent permitted under the Florida Business Corporation
Act.
Defamation on the Internet. On March 17, 1999, the Company filed a
multi-count defamation lawsuit in the Circuit Court of the 17th Judicial Circuit
in and for Broward County, Florida against 10 unknown "John Doe" individuals
that have posted statements on the on-line message board maintained by the
Internet service known as "Yahoo!" whereby such statements defamed the Company,
its Chief Executive Officer and its Vice President of Investor Relations. The
Company's investigation related to this matter is ongoing.
Item 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 holders, through the submission of
proxies or otherwise.
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<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The Nasdaq Stock Market(R) and
traded on the Nasdaq National Market System under the symbol TCPI. 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.
Sale Prices
-----------
High Low
---- ---
Fiscal Year 1997
Quarter Ended March 31, 1997.................... $ 10.875 $ 7.750
Quarter Ended June 30, 1997..................... $ 12.125 $ 7.000
Quarter Ended September 30, 1997................ $ 16.625 $ 8.500
Quarter Ended December 31, 1997................. $ 19.375 $ 10.750
Fiscal Year 1998
Quarter Ended March 31, 1998.................... $ 13.750 $ 8.000
Quarter Ended June 30, 1998..................... $ 10.875 $ 7.500
Quarter Ended September 30, 1998................ $ 8.563 $ 1.625
Quarter Ended December 31, 1998................. $ 4.500 $ 1.375
Fiscal Year 1999
Quarter Ended March 31, 1999 (to March 25, 1999. $ 2.250 $ 1.063
- ----------------------------
There are presently approximately 188 holders of record of the
Company's Common Stock. In addition, the Company estimates there are
approximately 4,350 beneficial owners of its Common Stock. The Company has not
paid cash dividends in the past.
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<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the consolidated financial statements and the notes thereto included
elsewhere in this report. The statement of operations data for the years ended
December 31, 1998, 1997 and 1996, respectively, and the balance sheet data at
December 31, 1998, and 1997, respectively, are derived from the audited
consolidated financial statements included elsewhere in this report and should
be read in conjunction with those consolidated financial statements and the
notes thereto.
<TABLE>
<CAPTION>
Statement of Operations Data:
(Amounts in thousands, except share data)
DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net product sales..................................... $ 5,442 $ 6,194 $ 5,568 $ 4,188 $ 3,013
Gross profit.......................................... 2,388 2,777 1,862 936 1,037
Research and development contract revenue............. 585 423 1,280 - -
Operating expenses:
Selling, general and administrative................ 8,809 6,575 4,079 1,807 666
Research and development........................... 2,787 2,726 1,767 435 73
Depreciation and amortization...................... 1,860 1,742 1,670 219 22
(Loss) income from operations......................... (10,483) (7,843) (4,374) (1,525) 276
(Loss) income before income tax benefit............... (9,827) (7,126) (4,053) (1,433) 245
Income tax benefit (expense)(1)....................... - 2,637 1,503 220 (89)
Net (loss) income(1).................................. (9,827) (4,489) (2,550) (1,274) 156
Accrued preferred redemption accretion
and dividends......................................... 1,030 - - - -
(Loss) earnings attributed to common stock(1)......... (10,857) (4,489) (2,550) (1,244) 156
Net (loss) earnings per common share-
Basic and Dilutive(1)................................. $ (1.09) $ (.45) $ (.27) $ (.18) $ .04
Weighted average number of common shares outstanding.. 9,996,951 9,992,066 9,290,476 7,069,507 4,295,116
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data:
(Amounts in thousands)
DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and investments............... $ 10,255 $ 7,337 $ 13,300 $ 1,777 $ 219
Working capital...................................... 14,743 9,401 15,348 (2,979) 2
Total assets......................................... 36,369 33,597 37,526 22,610 1,754
Total current liabilities............................ 713 2,069 1,660 6,452 1,222
Total stockholders' equity........................... 35,487 31,358 35,694 16,154 533
</TABLE>
- --------------------------
Notes:
(1) For the year ended December 31, 1994, and the period from January 1,
1995 to February 1, 1995, 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 and 1994 assume that the Company was
subject to federal and state income taxes and taxed as a C Corporation in
each of these two years at the tax rates in effect for these periods.
23 of 61
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company
Technical Chemicals and Products, Inc. (the "Company" or "TCPI") is in
the final stages of completing a transition towards becoming an integrated
designer, developer, manufacturer and global marketer of a wide range of
point-of-care medical diagnostic products for use at home, in physician offices,
and other healthcare locations which are distributed through domestic and
international channels. In addition, the Company's Pharmetrix Division is also
involved in the research, development and commercialization of transdermal and
dermal drug delivery technologies and skin permeation enhancers. TCPI also
manufactures high purity specialty biochemicals. TCPI was formerly a
developmental company that manufactured and sold a narrow range of medical
diagnostic products and specialty chemicals on an Original Equipment Manufacture
("OEM") basis.
During the past 29 years, TCPI or its founder have developed more than
330 medical diagnostic and pharmaceutical products which have received marketing
clearance by the United States Food and Drug Administration (the "FDA"). Many of
the currently marketed products incorporate the Company's patented and
proprietary membrane-based technology platform, as do those in various stages of
development and regulatory approvals. TCPI presently holds 26 U.S. and foreign
patents, and has 23 domestic and foreign patent applications pending.
TCPI is currently scaling-up to manufacture and market in the U.S. and
internationally more than 47 diagnostic tests which utilize the Company's
patented membrane-based technology, 29 of which have received 510(k) clearance
from the FDA. In addition, the Company has more than 20 other diagnostic and
transdermal drug delivery products in various stages of development and
regulatory approval in the United States and/or various foreign countries.
Foremost in TCPI's product portfolio are its non-invasive TD GlucoseTM
Monitoring System (the "TD Glucose Monitoring System") for diabetics, its new
Total and HDL (good) cholesterol monitoring products, and its HealthCheck(R) and
private-label brands of over-the-counter diagnostic tests and screens for
at-home use by consumers. At present, the Company's portfolio of diagnostic
products includes tests and screening kits for cholesterol monitoring,
pregnancy, ovulation timing, glucose, urinary tract infection, kidney and
bladder infection, skin cancer, deteriorating vision, infectious diseases, drugs
of abuse, cardiac markers and certain types of cancer. TCPI's portfolio of
transdermal drug delivery technology focuses on smoking addiction, hormone
replacement therapy, cardiovascular disease and other areas.
The Company's products are distributed worldwide under both OEM
marketing relationships with multinational pharmaceutical and diagnostic
companies, and are also available to consumers on an over-the-counter basis
under TCPI's proprietary HealthCheck and private-label brands. In the OEM
sector, most of TCPI's tests for pregnancy and fertility are sold through
corporate Roche Boehringer Mannheim Diagnostics distributors as well as
independent distributors around the world. In January 1999, TCPI opened its
international sales and marketing office in Milan, Italy to focus on expanding
distribution of the Company's core diagnostic products in Europe, Asia, Africa,
the Middle East and Latin America. International expansion of the Company's OEM
family planning and HealthCheck diagnostic testing and screening products is
ongoing. Product sales and/or registration has begun in Argentina, Australia,
Austria, Bangladesh, Canada, Chile, China, Cyprus, Denmark, Egypt, Germany, Hong
Kong, Macao, Malaysia, Netherlands, Norway, Oman, Philippines, Portugal, South
Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Tunisia, and Turkey.
TCPI's HealthCheck and private-label products are marketed directly and
indirectly to pharmacies, supermarkets and mass merchandise retail stores, as
well as leading drug wholesale distributors. The Company private labels its
family planning products for approximately 20 leading drug, discount and
supermarket chains and catalog retailers.
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<PAGE>
On July 27, 1998, the Company formed Technical Electronics Corporation,
a Joint Venture between TCPI and privately held Micro Weiss Electronics of
Babylon, New York in which TCPI holds an 80% equity ownership in the joint
venture with Micro Weiss Electronics holding the remaining 20%. The Company
retains all rights, title, and interest, including patent rights, to the
technology for its meter devices. Technical Electronics Corporation will develop
and manufacture electronic measuring devices for TCPI's non-invasive TD Glucose
Monitoring System, Total and HDL cholesterol testing meter, and other diagnostic
monitoring products being developed by TCPI.
25 of 61
<PAGE>
Results of Operations
Due to the timing of the FDA clearance process and the expenses
incurred in the manufacturing scale-up for the Company's products, the Company's
results of operations vary from period to period.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
---------------------------------------------------------------------
Product Sales. The Company's net product sales for 1998 decreased by
12% to $5.4 million from $6.2 million in 1997. The Company experienced higher
year-over-year product sales from its HealthCheck at-home diagnostic tests and
screening products as well as higher sales of its diagnostic products for
infectious diseases and drug of abuse, as well as several other similar testing
products. However, this gain was offset by a decline in international sales of
the Company's OEM family planning products due principally to the acquisition of
TCPI's primary customer by another major pharmaceutical company and its delayed
impact on marketing relationships with independent distributors worldwide. This
acquisition also served to cancel the marketing and distribution agreement for
certain of the Company's diagnostic tests in Latin America which resulted in
anticipated product sales not being realized. During the current year, to date
international sales of the Company's OEM family planning products are
substantially higher than the comparable period of 1998.
Gross Profit. The Company's gross profit on product sales declined to
$2.4 million in 1998 from $2.8 million in 1997. Gross profit as a percent of net
sales moved slightly lower to 44% in 1998 from 45% in 1997. The minor decrease
was principally due to a change in product mix despite the advances made in the
ongoing marketing of HealthCheck and other diagnostic testing products. In
addition, the Company continued to increase its in-house manufacturing
capabilities in anticipation of scale-up for both new and existing diagnostic
products.
Selling, General and Administrative. Selling general and administrative
(SG&A) expenses increased substantially in 1998 as compared to 1997. This
increase was primarily due to the ongoing implementation of sales and marketing
programs related to the HealthCheck product line and future introduction of
various new products. The Company also hired additional operating personnel for
the scale-up of in-house manufacturing in anticipation of new diagnostic
products and also expanded its manufacturing facilities in Pompano Beach,
Florida to approximately 40,000 square feet. The Company's SG&A expenses,
increased by approximately 33% to $8.8 million in 1998 from $6.6 million in
1997.
Research and Development. While the Company continued to advance its
diagnostic testing products and transdermal drug delivery technologies through
the various stages of development and clinical trials towards commercialization,
TCPI held its expenses associated with ongoing R&D activities relatively
constant from the prior year at $2.8 million in 1998 as compared to $2.7 million
in 1997.
Net Loss. The Company posted a pre-tax net loss in 1998 of $9.8
million, which increased from a pre-tax net loss in 1997 of $7.1 million
primarily due to higher than planned operating expenses related to the scale-up
of manufacturing, research and development, and facility expansion which
combined with lower than anticipated product sales. The Company had a net loss
attributable to common stock of $10.9 million in 1998 as compared to a net loss
attributable to common stock of $4.5 million in 1997. This difference was
largely impacted by the above expenses with the non-cash income tax benefit of
$2.6 million recorded in 1997 but not in 1998 as well as the accrued dividend
and accretion to redemption value of $1 million related to the issuance of
preferred stock in 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
---------------------------------------------------------------------
Product Sales. The Company's net product sales increased by 11% to $6.2
million in 1997 from $5.6 million in 1996. This increase resulted principally
from the successful launch of the Company's HealthCheck at-home diagnostic tests
and screening products as well as higher sales of its private label and OEM
family planning products. Also contributing to this growth were sales of TCPI's
new diagnostic products for infectious diseases and drugs of abuse, as well as
several other products.
26 of 61
<PAGE>
Gross Profit. The Company's gross profit on product sales increased by
$915 thousand to $2.8 million in 1997 from $1.9 million in 1996. Gross profit as
a percent of net sales increased to 45% in 1997 from 33% in 1996. The increase
was principally due to a change in product mix, including the market
introduction of the HealthCheck family of at home diagnostic tests and screening
products in addition to increased in-house manufacturing and achieving various
economies of scale-up.
Selling, General and Administrative. Selling general and administrative
(SG&A) expenses increased substantially in 1997 as compared to 1996. This
increase was primarily due to the planned implementation of strategic marketing
programs, including the successful launch of the HealthCheck product line and
introduction of various new products. The Company continues to hire operating
personnel for the scale-up of in-house manufacturing. In addition, facility
expansion conducted in 1997 resulted in further growth of the Company's
manufacturing, laboratory, warehouse, and office space in Pompano Beach, Florida
to approximately 40,000 square feet as compared to 33,000 square feet a year
earlier. The Company's SG&A expenses, increased to $6.6 million in 1997 from
$4.1 million in 1996.
Research and Development. The Company continued to advance its various
diagnostic testing products and transdermal drug delivery systems through
development towards commercialization. The Company's investment in R&D has
contributed to the development of several new products with sizeable market
potential, including its TD Glucose Monitoring System, HealthCheck family of at
home diagnostics, and visual and meter-read Total and HDL cholesterol monitoring
products, infectious diseases and drugs of abuse, as well as several other
products. The Company's R&D expenses increased to $2.7 million in 1997 from $1.8
million in 1996.
Net Loss. The Company posted a net loss of $4.5 million in 1997, which
increased from a net loss in 1996 of $2.6 million primarily as a result of the
planned scale-up of manufacturing, ongoing investment in personnel, research and
development and facility expansion.
Financial Condition
The Company had cash, cash equivalents and investments available for
sale of $10.3 million at December 31, 1998, as compared to $7.3 million at
December 31, 1997. The increase is due primarily to proceeds from the Company's
sale to a single institutional investor of 15,000 shares of the Company's Series
A Convertible Preferred Stock during the second quarter of 1998. See Note 10 to
the Consolidated Financial Statements. Working capital at December 31, 1998 was
$14.7 million, as compared to $9.4 million at December 31, 1997. The Company had
current assets of $15.5 million and stockholders' equity of $35.5 million at
December 31, 1998. This compares to current assets of $11.5 million and
stockholders' equity of $31.4 million a year earlier. These increases are due
primarily to the preferred stock transaction described above.
The Company expects to continue to draw upon its working capital to
purchase production equipment, complete clinical trials and regulatory
submissions relating to the TD Glucose Monitoring System and Total and HDL
cholesterol monitoring products, engage in research and development related to
transdermal drug delivery technology, develop new diagnostic products, conduct
clinical trials, continue its investment in marketing and facility expansion,
and continue its day-to-day business. In addition, on July 28, 1998, TCPI's
Board of Directors authorized a stock repurchase program to buy-back up to 10
percent of the Company's outstanding common stock. Purchases of common stock by
the Company may be made from time-to-time in the open market and/or through
privately negotiated transactions at prevailing market prices depending on
market conditions. To date, the Company has repurchased 87,961 shares. The funds
used for any such purchase will come from the Company's working capital.
27 of 61
<PAGE>
Liquidity and Capital Resources
Throughout 1998 and into 1999, the Company has continued to sustain
operating losses which have resulted in the use of its cash reserves. TCPI's
future long-term capital expenditure requirements and its ability to ultimately
return to profitability will depend on the following factors: (i) the time
required to obtain regulatory approvals; (ii) the progress of the Company's
research and development program; (iii) the ability of the Company to develop
additional marketing and distribution alliances, and (iv) the Company's ability
to develop and obtain regulatory approval to market new and improved products.
The Company anticipates that it will continue to incur net losses until such
time, if any, as the Company is able to generate sufficient revenues from
product sales to sustain its operations and cover expenses related to its
growth. There is no assurance that the Company will generate sufficient cash to
fund operations and the necessary cash requirements thereof. The Company
continues to seek additional financing, however, there can be no assurance that
the Company will be able to fund all of its cash requirements and operating
losses or that any additional financing will be available to the Company on
acceptable terms or at all.
The Company anticipates that net proceeds of the preferred stock
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 cholesterol testing meter, 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.
The Company's future working capital and capital expenditure
requirements may vary materially from those now planned depending on numerous
factors, including additional manufacturing scale-up costs for the Company's
current and future products, possible future acquisitions, the focus and
direction of the Company's research and development programs, competitive and
technological advances, future strategic alliances and relationships with
marketing partners, the FDA regulatory process, the regulatory process in
foreign countries, and the Company's marketing and distribution strategy. If the
Company's growth exceeds its plans, additional working capital may be needed.
Management believes that, during 1998, the impact of inflation and
risks associated with international currency fluctuations were immaterial to the
Company's results of operations. Management further believes that the Company is
not exposed to significant market risk because of the short-term nature and the
liquidity of its financial instruments. In addition, management believes the
Year 2000 computer issue is not likely have a material impact on the Company's
business, operations or financial condition.
Year 2000
The Company, its division and operating subsidiaries, each are in the
process of implementing a Year 2000 readiness program with the objective of
having all significant business systems function properly with respect to the
Year 2000 issue before January 1, 2000. Since 1997, the Company has added to its
existing computer capabilities as well as installed new computer systems and
programs to accommodate anticipated future growth of TCPI's business and
internal operations. Due to the recent nature of any computer-related additions,
as well as discussions with key vendors and customers, the Company believes the
Year 2000 computer issue is not likely have a material impact on its business,
operations or financial condition.
Due to the general uncertainty with respect to the Year 2000 issue,
however, there can be no assurance that all Year 2000 issues will be foreseen
and corrected on a timely basis, or that no material disruption of the Company's
business will occur. Further, the Company's expectations are based on the
assumption that there will be no general failure of external local, national or
international systems (including power, communications, postal or transportation
systems) necessary for the ordinary conduct of business. The Company will,
however, continue to assess the risks presented by the Year 2000 problem and
will develop contingency plans if and when such plans become necessary.
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<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 CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 1998
Contents
Report of Independent Certified Public Accountants...........................F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets..................................................F-3
Consolidated Statements of Operations........................................F-4
Consolidated Statements of Stockholders' Equity..............................F-5
Consolidated Statements of Cash Flows........................................F-7
Notes to Consolidated Financial Statements...................................F-8
F-1
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<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 (the Company) as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for the three
years in the period ended December 31, 1998 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
March 3, 1999
F-2
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<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,207 $ 3,316
Investments 5,048 4,021
Accounts receivable, net 1,605 2,055
Inventory 2,550 1,852
Due from related party 836 -
Other 210 226
------------------------------------
Total current assets 15,456 11,470
Property and equipment, net 2,503 2,831
Patents and trademarks, net 12,190 12,912
Goodwill, net 1,979 2,151
Deferred tax asset, net 4,140 4,140
Other assets 101 93
------------------------------------
Total assets $ 36,369 $ 33,597
====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 390 $ 1,729
Accrued expenses 323 340
------------------------------------
Total current liabilities 713 2,069
Other liabilities 169 170
Stockholders' equity:
Preferred stock, $.001 par value:
authorized shares--25,000,000;
14,700 shares of Series A 6% cumulative
convertible issued and outstanding--
liquidation value of $15,249,000 13,131 -
Common stock, $.001 par value:
authorized shares--100,000,000;
Issued and outstanding
shares--10,006,316
in 1998 and 10,015,036 in 1997 10 10
Additional paid-in capital 40,697 39,807
Accumulated deficit (18,351) (8,459)
------------------------------------
Total stockholders' equity 35,487 31,358
------------------------------------
Total liabilities and stockholders' equity $36,369 $33,597
====================================
</TABLE>
See accompanying notes.
F-3
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<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 5,442 $ 6,194 $ 5,568
Cost of sales 3,054 3,417 3,706
------------------------------------------------------
Gross profit 2,388 2,777 1,862
Research and development contract revenue 585 423 1,280
Operating expenses:
Selling, general and administrative 8,809 6,575 4,079
Research and development 2,787 2,726 1,767
Depreciation and amortization 1,860 1,742 1,670
------------------------------------------------------
13,456 11,043 7,516
------------------------------------------------------
Loss from operations (10,483) (7,843) (4,374)
Other income (expense):
Interest income 672 731 529
Interest expense (16) (14) (208)
------------------------------------------------------
Loss before income tax benefit (9,827) (7,126) (4,053)
Income tax benefit - 2,637 1,503
------------------------------------------------------
Net loss (9,827) (4,489) (2,550)
Accrued dividends and accretion to
redemption value of convertible
preferred stock (1,030) - -
------------------------------------------------------
Net loss attributable to common stockholders $ (10,857) $ (4,489) $ (2,550)
======================================================
Basic and diluted net loss per common share $ (1.09) $ (.45) $ (.27)
======================================================
Weighted average number of common shares outstanding 9,996,951 9,992,066 9,290,476
======================================================
</TABLE>
See accompanying notes.
F-4
32 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------------------------------------------- Additional
Number of Number of Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 - $ - 8,117,880 $ 8 $ 17,583 $ (1, 438) $ 16,153
Comprehensive loss:
Net loss - - - - - (2,550) (2,550)
Other comprehensive
income, net of tax
Unrealized gains on
investments, net - - - - - 64 64
--------------
Comprehensive loss - - - - - - (2,486)
--------------
Shares issued, net of
costs of $1,103 - - 1,600,000 2 21,225 - 21,227
Shares issued upon
exercise of options and
warrants - - 190,754 - 380 - 380
Shares issued in
connection with
acquisition of
Health-Mark - - 15,000 - 195 - 195
Shares issued in lieu of
rent - - 15,000 - 225 - 225
--------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - - 9,938,634 10 39,608 (3,924) 35,694
Comprehensive loss:
Net loss - - - - - (4,489) (4,489)
Other comprehensive
loss, net of tax
Unrealized losses on
investments, net - - - - - (46) (46)
--------------
Comprehensive loss - - - - - - (4,535)
--------------
Shares issued upon
exercise of warrants - - 76,402 - 199 - 199
--------------------------------------------------------------------------------------------------
Balance at December 31, 1997 - - 10,015,036 10 39,807 (8,459) 31,358
Comprehensive loss:
Net loss - - - - - (9,827) (9,827)
Other comprehensive
loss, net of tax
Unrealized losses on
investments, net - - - - - (65) (65)
--------------
Comprehensive loss - - - - - - (9,892)
--------------
(continued on next page)
F-5
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<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (continued)
(Amounts in thousands, except share data)
Preferred Stock Common Stock
-------------------------------------------------------- Additional
Number of Number of Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------------------------------------------------------------------------------------------
Issuance of Series A
preferred stock, net of
issuance costs of $640 15,000 $ 12,409 - $ - $ 1,091 $ - $ 13,500
Issuance of 150,000
warrants with Series A
preferred stock - - - - 860 - 860
Accrued dividends on
Series A preferred stock
- 557 - - (557) - -
Accretion to redemption
value of Series A
preferred stock - 473 - - (473) - -
Purchase of common stock
- - (87,961) - (339) - (339)
Conversion of preferred
stock to common stock
(300) (308) 79,241 - 308 - -
------------------------------------------------------------------------------------------------
Balance at December 31, 1998 14,700 $ 13,131 10,006,316 $ 10 $ 40,697 $ (18,351) $ 35,487
================================================================================================
</TABLE>
See accompanying notes.
F-6
34 of 61
<PAGE>
<TABLE>
<CAPTION>
Technical Chemicals and Products, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in Thousands)
Year ended December 31
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (9,827) $(4,489) $(2,550)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation 484 399 354
Amortization 1,376 1,343 1,316
Deferred income taxes - (2,637) (1,503)
Changes in operating assets and liabilities:
Accounts receivable 450 123 (1,339)
Inventory (698) (812) (491)
Due from related party (836) - -
Other current assets 16 264 94
Accounts payable and accrued expenses (1,356) 409 472
------------------------------------------------------
Net cash used by operating activities (10,391) (5,400) (3,647)
Investing activities
Purchase of property and equipment (344) (697) (1,273)
(Increase) decrease in other assets (9) (4) 45
Purchase of investments (5,080) (2,000) (11,618)
Proceeds from sale of investments 3,988 9,626 1,100
Investment in patents and intangible assets (294) (15) (9)
------------------------------------------------------
Net cash (used in) provided by investing activities (1,739) 6,910 (11,755)
Financing activities
Net proceeds from issuance of common stock - - 21,227
Net proceeds from issuance of preferred stock 14,360 - -
Proceeds from stock options or warrants exercised - 199 380
Repayment of notes - - (5,189)
Repayment of notes payable to related parties - - (75)
Purchase of common stock (339) - -
------------------------------------------------------
Net cash provided by financing activities 14,021 199 16,343
------------------------------------------------------
Net increase in cash and cash equivalents 1,891 1,709 941
Cash and cash equivalents at beginning of year 3,316 1,607 666
------------------------------------------------------
Cash and cash equivalents at end of year $ 5,207 $ 3,316 $ 1,607
======================================================
Supplemental disclosure of cash activities
Cash paid during the year for interest $ 16 $ 14 $ 208
======================================================
</TABLE>
See accompanying notes.
F-7
35 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Organization
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 other point of care locations throughout the world. 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.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include Health-Mark
Diagnostic, L.L.C. (Health-Mark) and Health Test, Inc., which are both
wholly-owned subsidiaries. Significant intercompany transactions and accounts
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. The Company performs
reviews of the credit worthiness of its depository banks. The Company has not
experienced any losses on its deposits of cash and cash equivalents.
Investments
Investments are carried at fair market value based on quoted market prices, with
resulting unrealized holding gains and losses reported as a separate component
of other comprehensive income or loss. Realized gains and losses and declines in
value judged to be other-than-temporary are included in other operating income.
Interest and dividends on investments are included in interest income. The cost
of investments sold is based on the specific identification method.
Inventory
Inventory, consisting of raw materials, work in process 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. Routine maintenance and repairs which do not extend the
life of the assets are charged to expense as incurred and major renovations or
improvements are capitalized.
F-8
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<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. 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 Company periodically reviews its intangible assets to assess
recoverability and a charge will be recognized in the consolidated statement of
operations if a permanent impairment is determined to have occurred.
Recoverability of intangibles is determined based on undiscounted future
operating cash flows from the related business unit or activity. The amount of
impairment, if any, would be measured based on discounted future operating cash
flows using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangible assets will be affected if
estimated future operating cash flows are not achieved. The Company does not
believe that any impairment has occurred as of December 31, 1998, 1997 and 1996.
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 contract revenue is recognized when earned in
accordance with the provisions and milestone arrangements provided in
contractual arrangements.
Research and Development Costs
Research and development costs are expensed as incurred. Payments received for
research and development arrangements are recognized as research and development
contract revenue when earned.
Advertising Costs
Advertising costs included in selling, general and administrative expense are
expensed as incurred, and totaled approximately $521,000, $449,000, and $21,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Accounting for Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
primarily with an exercise price equal to the fair value of the shares on the
date of grant. The Company accounts for these stock option grants in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and accordingly, generally recognizes no compensation
expense for stock options granted at fair value. The Company recognizes
compensation expense for stock options granted with an exercise price below the
fair value of the shares on the date of grant.
The Company may also grant warrants for a fixed number of shares to independent
consultants and contractors primarily with an exercise price equal to the fair
market value of the shares on the date of grant. The Company accounts for these
warrant grants using the fair value method of Financial Accounting Standards
Board (FASB) Statement of Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. The fair value of these warrants is estimated at the
date of grant using a warrant pricing model and recognized as an expense.
F-9
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<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Dividends and Net Loss Per Common Share
Basic and diluted net loss per common share is calculated using the weighted
average number of common shares outstanding during the respective periods.
Potential common stock relating to options, warrants and convertible preferred
stock is not included in the computation of diluted net loss per common share in
1998, 1997 and 1996 as its effect is antidilutive. In 1998, net loss per common
share reflects the effect of accrued dividends related to the Series A
convertible preferred stock and accretion to the redemption value of the Series
A convertible preferred stock.
Recent Pronouncements
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 established new rules for the reporting and display of
comprehensive income and its components; however the adoption of SFAS No. 130
had no impact on the Company's net loss or stockholders' equity. SFAS No. 130
requires unrealized gains and losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in comprehensive income or loss. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
During 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is effective for fiscal years after June 15, 1999.
The Company will implement the provisions of SFAS No. 133 during 1999. As of
December 31, 1998, the Company is not party to any derivative instruments and
therefore management believes the adoption of SFAS No. 133 will not have a
material impact on the Company's financial statements.
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 amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
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. The market value of investments is
determined based upon quoted prices for the same or similar securities (see Note
5). Management believes that the other financial instruments approximate market
value because they were entered into during the current year and there have been
no significant changes in their status that would affect their market value.
F-10
38 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Details of Balance Sheet
Details of selected balance sheet accounts at December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Accounts receivable
Accounts receivable $1,680 $2,073
Allowance for doubtful accounts (75) (18)
------------------------------------
$1,605 $2,055
====================================
Inventories
Raw materials and supplies $1,828 $1,144
Work in process 234 185
Finished goods 488 523
------------------------------------
$2,550 $1,852
====================================
Property and equipment
Furniture, fixtures and equipment $3,191 $2,849
Real property 217 217
Leasehold improvements 907 904
------------------------------------
4,315 3,970
Accumulated depreciation (1,812) (1,139)
------------------------------------
$2,503 $2,831
====================================
Patents and trademarks
Patents and trademarks $15,317 $15,025
Accumulated amortization (3,127) (2,113)
------------------------------------
$12,190 $12,912
====================================
Goodwill
Goodwill $ 2,494 $ 2,494
Accumulated amortization (515) (343)
------------------------------------
$ 1,979 $ 2,151
====================================
</TABLE>
5. Investments
Investments consist of the following (in thousands):
<TABLE>
<CAPTION>
Gross
Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------
<S> <C> <C> <C>
December 31, 1998
U.S. Corporate bonds $3,973 $(36) $3,937
U.S. Government agency bond 1,107 4 1,111
------------------------------------------------------
$5,080 $(32) $5,048
======================================================
December 31, 1997
U.S. Government agency bonds $2,998 $ 19 $3,017
U.S. Corporate bond 990 14 1,004
------------------------------------------------------
$3,988 $ 33 $4,021
======================================================
</TABLE>
F-11
39 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
5. Investments (continued)
The contractual maturity of investments at December 31, 1998, is as follows (in
thousands):
<TABLE>
<CAPTION>
Fair
Cost Value
------------------------------------
<S> <C> <C>
Due within one year $3,973 $3,937
Due between one year and five years 1,107 1,111
------------------------------------
$5,080 $5,048
====================================
</TABLE>
6. Income Taxes
Historical
The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. 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.
The components of the income tax benefit for the years ended December 31 are as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred - (2,637) (1,503)
--------------------------------------------------
Total $ - $(2,637) $(1,503)
==================================================
</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
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------------------
<S> <C> <C>
Net operating losses $8,462 $4,800
Depreciation and amortization (44) (79)
Other 71 (8)
------------------------------------
Net deferred tax assets 8,489 4,713
Valuation allowance (4,349) (573)
------------------------------------
Net deferred taxes $4,140 $4,140
====================================
</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, including tax
planning strategies that are prudent and feasible that the Company would
implement, management has determined that a valuation allowance of approximately
$4,349,000 and $573,000 at December 31, 1998 and 1997, respectively, is
necessary to reduce the
F-12
40 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Income Taxes (continued)
Historical (continued)
deferred tax assets to the amount that will more likely than not be realized. At
December 31, 1998, the Company has available net operating loss carryforwards of
approximately $12,562,000 relating to years prior to 1998, which expire in the
years 2010 through 2012, and a net operating loss carryforward of approximately
$9,583,000 relating
to the year ended December 31, 1998 which expires in year 2018.
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>
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate (34.0)% (34.0)% (34.0)%
State and local income taxes, net of federal
tax benefit (4.2) (4.1) (4.2)
Nondeductible items .2 .1 .4
Change in valuation allowance 38.4 - -
Other (.4) 1.0 .8
--------------------------------------------------------
Total - % (37.0)% (37.0)%
========================================================
</TABLE>
The Company and its founding major stockholder (Major Stockholder) 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 Stockholder 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
1998, 1997 and 1996, the Major Stockholder earned approximately $161,000,
$148,000 and $114,000, respectively, pursuant to the License Agreement. During
1998, the Company advanced the Major Stockholder $250,000 under the License
Agreement, of which $89,000 in License Agreement advances are included in due
from related party in the balance sheet at December 31, 1998 because such
amounts have not been earned. No such advances were made in 1997 or 1996.
During August 1998, the Company's outside directors unanimously approved the
Company's guarantee for a period of up to 90 days of $750,000 of the collateral
obligations of the Major Stockholder's family limited partnership (Partnership)
to a brokerage house. Under the terms of the Company's agreement with the
Partnership, the brokerage house called on the Company's guarantee, the
Partnership then executed and delivered to the Company a promissory note
personally guaranteed by the Major Stockholder in an amount equal to the amount
of the guarantee. The note is a six month note payable on demand and bears
interest at the rate of interest charged by the brokerage house (7 3/4 % at
December 31, 1998). In February 1999, accrued interest was paid and the note was
extended an additional three months. The balance of funds advanced under the
note is approximately $747,000 at December 31, 1998 and is included in due from
related party in the balance sheet based on the Company's understanding that
such amounts will be repaid during 1999.
F-13
41 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Related Party Transactions
The Company and the Major Stockholder entered into an employment agreement
effective October 9, 1998, amending an employment agreement dated September 27,
1996, under which the Major Stockholder serves as president of the Company. The
terms provide for a salary of approximately $160,000 per year (with per year
raises equal to the greater of 5% or a cost of living adjustment as defined in
the agreement) as annual base compensation, plus an annual bonus equal to at
least 5% of the consolidated pretax income of the Company. During 1998, 1997 and
1996, the Major Stockholder received salaries of approximately $158,000,
$152,000, and $145,000, respectively.
In connection with the amendment of the employment agreement described above,
the provisions of the agreement defining events constituting a change in control
were modified.
In connection with a previous amendment of the employment agreement, the Company
issued its Major Stockholder an option to purchase 500,000 shares of common
stock at an exercise price of $15 per share.
8. Significant Customer
The Company has had a non-exclusive worldwide marketing and distribution
agreement with Boehringer Mannheim Italia for its family planning diagnostic
products since 1992. Following the acquisition of Boehringer Mannheim by Roche
Holdings AG, the Company established a new agreement during 1998 with Roche
Boehringer Mannheim Diagnostics whereby the Company directly supplies it's
finished and packaged family planning products to both corporate Roche
Boehringer Mannheim Diagnostics distributors and independent distributors around
the world.
A significant part of the Company's business was dependent upon this European
customer. During the years ended December 31, 1998, 1997 and 1996, this customer
accounted for approximately 33%, 50% and 56% of sales, respectively. As of
December 31, 1998 and 1997, accounts receivable from this customer were
approximately $630,000 and $1,265,000, respectively.
During the year ended December 31, 1998, a significant portion of the Company's
business was dependent on one North American customer, CVS Distribution, Inc.
During the year ended December 31, 1998, this company accounted for
approximately 24% of sales. As of December 31, 1998, accounts receivable from
this customer were approximately $160,000.
9. Commitments and Contingencies
Leases
The Company leases its operating facilities under operating leases expiring in
June 1999 and October 2003. Rent expense under operating leases for the years
ended December 31, 1998, 1997 and 1996 was approximately $660,000, $618,000 and
$582,000, respectively.
F-14
42 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Commitments and Contingencies (continued)
Leases (continued)
At December 31, 1998, future minimum rentals, subject to cost-of-living
adjustments, are approximately as follows (in thousands):
1999 $ 483
2000 282
2001 282
2002 282
2003 236
-----------------
$1,565
=================
Litigation
In December 1998, a jury returned a verdict against the Company, the Major
Stockholder, and other unrelated corporate and individual defendants (the
Lawsuit). In its verdict, the jury found that the Major Stockholder had
misappropriated trade secrets and awarded damages of $500,000 against the Major
Stockholder, individually. Additionally, the jury found that both the Company
and the Major Stockholder intentionally interfered with the plaintiffs' business
relationships. The jury awarded approximately $328,000 in damages against the
Company in connection with the second claim, but awarded no damages against the
Major Stockholder, individually, in connection with that claim. In January 1999,
a judgment against the Company and the Major Stockholder was entered by the
trial court in accordance with the verdict.
In January 1999, the Company filed a Notice of Appeal seeking to have the
verdicts against both the Company and the Major Stockholder set aside. In the
event that the Major Stockholder is ultimately required to pay the damages to
the plaintiffs, the Company will indemnify the Major Stockholder to the extent
permitted by law. The Company has obtained an appeal bond staying enforcement of
the judgment against the Company and the Major Stockholder until
such time as the Appellate Court issues its ruling.
Management believes, after consultation with both in-house and outside counsel,
that the Company is likely to prevail on its appeal to set aside the damages
awarded and a new trial will be granted by the Appellate Court. The liability,
if any, that may result from a new trial cannot be reasonably estimated at this
time and therefore no accrual for loss has been recorded in the financial
statements as of December 31, 1998.
In November 1998, a purported shareholder class action lawsuit was filed against
the Company. Eight additional complaints were subsequently filed in the same
court. These claims were filed on behalf of a purported class of persons who
purchased the Company's stock between November 27, 1995 and October 6, 1998. The
complaints allege, among other things, that the Company and certain officers and
directors artificially inflated the Company's stock price by issuing false and
misleading statements related primarily to the development, clinical testing and
viability of the Company's TD Glucose Monitoring System. The claims do not
specify the damages resulting from the alleged conduct. These cases were
consolidated in March 1999. The Company believes the claims lack merit and plans
to contest the allegations vigorously. At this time, it is not possible to
estimate the ultimate loss, if any, related to these claims and therefore no
accrual for loss has been recorded at December 31, 1998.
F-15
43 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Litigation (continued)
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.
10. Stockholders' Equity
In May 1998, the Company adopted Amended and Restated Articles of Incorporation
designating 16,200 shares of the authorized preferred stock as Series A
Convertible Preferred Stock (Preferred Stock) with a stated value of $1,000 per
share.
On May 18, 1998, the Company issued to a single institutional investor 15,000
shares of Preferred Stock and warrants to purchase 150,000 shares of the
Company's common stock and received proceeds of $14,360,000, net of offering
costs of $640,000. The conversion price of the Preferred Stock was established
at 92% of the market price of the common stock on the conversion date up to a
maximum of $11.89 per share, with the possible exception described in the
following paragraph. The warrants are exercisable at $11.89 per share. The
Preferred Stock will automatically convert at the completion of, and the
warrants can be converted at any time during the five year period that commenced
on May 18, 1998. The Preferred Stock earns dividends at the rate of 6% per year
which accumulate and increase the redemption value of the Preferred Stock.
If, on the conversion date, the closing price of the common stock is below
$9.51, then the conversion price equals 115% of the market price at that time.
In this situation, the Company has the right, but not an obligation, to redeem
the Preferred Stock for cash in an amount equal to the value of the common stock
on the conversion date which otherwise would have been issued to the holders of
the Preferred Stock. The Company also has the right, but not an obligation, to
convert the Preferred Stock into Convertible Notes Payable (the Notes) which
would modify the conversion terms, bear interest at 10%, and mature three years
from the date of issue. The holder of the Notes can convert them at any time
during the three year period to maturity or can hold them to maturity and redeem
them for a cash payment equal to the principal amount plus accrued interest.
The financing was arranged by placement agents who received a fee of
approximately $488,000 and a nontransferable option to purchase up to 1,200
shares of Preferred Stock upon the same terms and conditions as the
institutional investor and expiring on December 31, 1998. The placement agents
did not exercise this option.
The Preferred Stock was recorded at $12,409,000, net of the value of the
conversion feature of $1,731,000, and the warrants were recorded at $860,000,
which represents the estimated fair value at the date of issuance. The Preferred
Stock will accrete up to the ultimate redemption value through periodic charges
to retained earnings, or in the case of an accumulated deficit, additional
paid-in capital. For the year ended December 31, 1998, the Company recorded
accretion of $473,000.
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, cash or additional
shares will be issued to provide $225,000 of compensation for the three year
lease. The fair value of the common stock issued was recorded as an other
current asset and amortized over the lease term.
F-16
44 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Stockholders' Equity (continued)
In conjunction with the 1995 initial public offering, the Company issued 220,000
warrants with an exercise price of $2.60 and a term of four years to the
representative of the underwriters. As of December 31, 1998, 181,156 warrants
were exercised and 38,844 were outstanding which expire in February 2000. The
fair market value of the warrants was recorded as a reduction of the proceeds
from the issuance of common stock.
During 1996, the Company amended its Incentive Stock Option Plan (the Plan) to
reserve 800,000 shares of common stock for issuance to employees or outside
directors (Participant) of the Company. The exercise price of any stock option
granted under the Plan to an eligible Participant 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 no later than seven years from the date of the grant, but the
vesting period is discretionary. The vesting periods for the options outstanding
under the Plan at December 31, 1998 range from one to five years from the date
of grant.
The following table summarizes information relative to the Company's options
granted under the Plan:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise Price
------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996 20,000 $14.44
Granted 92,500 15.00
------------------------------------
Outstanding at December 31, 1996 112,500 14.90
Granted 160,500 9.73
Canceled (24,000) 15.00
------------------------------------
Outstanding at December 31, 1997 249,000 11.56
Granted 126,600 7.25
Canceled (13,600) 12.70
------------------------------------
Outstanding at December 31, 1998 362,000 $10.01
====================================
Exercisable at December 31, 1998 170,998 $10.80
====================================
Weighted-average fair value of options
granted under the Plan during 1998 $ 3.07
==================
</TABLE>
F-17
45 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Stockholders' Equity (continued)
The Company has also granted options (not under the Plan) as incentives to
executives 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
Options Exercise Price
------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996 86,000 $ 1.25
Granted 652,000 14.61
Exercised (86,000) 1.25
------------------------------------
Outstanding at December 31, 1996 652,000 14.61
Granted 6,000 12.40
Canceled (30,000) 15.00
------------------------------------
Outstanding at December 31, 1997 628,000 14.57
Granted 4,000 10.38
Canceled (74,000) 13.03
------------------------------------
Outstanding at December 31, 1998 558,000 $14.75
====================================
Exercisable at December 31, 1998 554,000 $14.78
====================================
Weighted-average fair value of options
granted (not under the Plan) during 1998 $ 4.17
==================
</TABLE>
Options not issued under the Company's stock option plan are subject to various
vesting provisions and have expiration terms ranging from five to ten years.
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 SFAS 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 loss and loss 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
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 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 ranging from three to
five years.
F-18
46 of 61
<PAGE>
Technical Chemicals and Products, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Stockholders' Equity (continued)
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 (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $(10,318) $(4,876) $(2,819)
Accrued dividends on and accretion to
redemption value of convertible
preferred stock (1,030) - -
------------------------------------------------------
Pro forma net loss attributable to common
stockholders $(11,348) $(4,876) $(2,819)
Pro forma net loss per common share $ (1.14) $ (.49) $ (.30)
</TABLE>
The weighted-average remaining contractual life of options is 6.8 years.
Shares of common stock reserved for future issuance at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
Options 1,358,000
Warrants 188,844
------------------
1,546,844
==================
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
F-19
47 of 61
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
- ---- --- --------
Jack L. Aronowitz............................. 59 President, Chief Executive Officer and Chairman of
the Board of Directors
Noel Buterbaugh(1)(2)(3)....................... 66 Director
Martin Gurkin, Ph.D............................ 66 Director (Retired as Senior Vice President and
Chief Operating Officer effective March 5, 1999)
Kathryn R. Harrigan, M.B.A., D.B.A.(1)(2)(3)... 47 Director
Clayton Rautbord(1)(2)(3)...................... 71 Director
Stanley M. Reimer, Ph.D. (1)(2)(3)............. 69 Director
Jay E. Eckhaus................................. 54 Vice President and General Counsel
Robert M. Morrow............................... 61 Vice President of Sales and Marketing
Stuart R. Streger, C.P.A....................... 48 Vice President of Finance and Chief Financial Officer
</TABLE>
- ---------------------------
(1) Member of the Company's Audit Committee
(2) Member of the Company's Compensation and Stock Option Committee
(3) Member of the Company's Board Organization and Governance Committee
JACK L. ARONOWITZ, the founder of the Company, has been President and
Chairman of the Board of Directors since January 1992 and Chief Executive
Officer since January 1996. Prior to founding the Company, Mr. Aronowitz served
as Executive Vice President, Technical Director and Director of Operations of
TechniMed Corporation ("Technimed") 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.
NOEL BUTERBAUGH has been a Director of the Company since April 1998. He
has 45-plus years of experience in biotechnology and medical technology. Mr.
Buterbaugh is President and Chief Executive Officer of BioWhittaker, Inc.,
("BioWhittaker") which was acquired by Cambrex Corporation (NYSE: CMB) in 1997.
He has been with BioWhittaker since the early 1950s and became its President in
1979. BioWhittaker is a major supplier of cell cultures and related scientific
products to the biotechnology industry and the leading supplier worldwide of
these biological products to the medical and clinical diagnostics industry. He
holds a Bachelor of Science degree in Business Administration from American
University in Washington, D.C. In addition to his corporate responsibilities,
Mr. Buterbaugh presently is a Director for the Maryland Health Care Development
Corporation and Director for the High Technology Council of Maryland. His
previous outside service included posts as a Director of the Health Industry
Manufacturers Association (HIMA) and Chairman of the HIMA Science and Technology
Steering Committee, as well as a member of the U.S. Department of Commerce
Technical Advisory Committee on Biotechnology (BIOTAC).
48 of 61
<PAGE>
MARTIN GURKIN, Ph.D. has been Senior Vice President, Chief Operating
Officer and a Director of the Company since January 1996. As of March 5, 1999,
Dr. Gurkin retired as Senior Vice President and Chief Operating Officer. 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.
KATHRYN R. HARRIGAN, M.B.A., D.B.A., has been a Director of the Company
since 1996. Dr. 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 (AMEX: CMB), a company engaged in
the international specialty chemicals business. She is also a Director of Johns
Manville Corp. (NYSE: JM), an international building and filtration company, as
well as a Director or advisor of various other privately-held companies.
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 to 1974. In addition
to TCPI's Board of Directors, Mr. Rautbord also serves on the Board of Directors
of Albany Bank and Trust Company in Chicago.
STANLEY M. REIMER, Ph.D. has been a Director of the Company since
September 1998. Dr. Reimer has more than 30 years of diverse experience in the
healthcare industry, including basic and applied research and technical,
clinical and public health management. Since 1988, Dr. Reimer has been President
of Laboratory Management Associates, which provides direction and consultation
to the clinical laboratory and healthcare industry. He also served as Assistant
Commissioner of Health and Director of the Public Health Laboratories for the
City of New York from 1991 to 1996. In addition, Dr. Reimer previously was Vice
President and General Manager of Allied Clinical Laboratories from 1985 to 1988,
and Vice President and Area Manager with Bio-Science Laboratories from 1971 to
1985. Dr. Reimer holds Bachelor of Science degrees in chemistry and physiology
from Allegheny College and both his Master of Science degree and Ph.D. in
biochemistry from Rutgers University. His research and teaching affiliations
included Academy of Senior Professionals at Eckerd College; Harvard Medical
School; Beth Israel Hospital (Boston, MA); National Heart Institute; Downstate
Medical Center (Brooklyn, NY); Long Island University; and Woods Hole Marine
Biology Laboratories. He also holds Laboratory Director's Licenses in Florida
and New York State.
JAY E. ECKHAUS has been Vice President and General Counsel since March
1998. Mr. Eckhaus has more than 25 years of corporate and commercial legal
experience gained with one of the premiere consumer product companies in the
United States as well as the domestic operation of a prominent multinational
European technology company and in private practice. From 1973 to 1989, he held
various senior level positions at General Foods Corporation, including vice
president and chief counsel of its baking operations as well as assignments in
both domestic and international food operations. He also served as vice
president, general counsel and secretary for the U.S. operations of Alfa-Laval
AB, a leading European technology company. Since 1990, Mr. Eckhaus has been
practicing corporate and commercial law. He received his Juris Doctorate Degree
from The Ohio State University and his Bachelor of Science Degree in Business
Administration from Bowling Green State University.
ROBERT MORROW joined the Company as Vice President of Sales and
Marketing in February 1999. Mr. Morrow directs the Company's sales and marketing
program in North America for all TCPI diagnostic products used by consumers and
healthcare professionals. Mr. Morrow has more than 33 years of senior-level
corporate management experience across various industries which include:
over-the-counter diagnostics, prescription pharmaceuticals, medical devices,
food products and services and hospitality with a strong emphasis on sales and
marketing. Most recently he was President and Acting Chief Executive Officer
with Thames Pharmacal Co. Since 1982, Mr. Morrow has served in numerous
executive assignments with Nutmeg Consultants which include: Vice President and
General Manager of TurboChef, Inc.; Executive Vice President, Chief Operating
49 of 61
<PAGE>
Officer and Director of Veriden Corporation; President, Chief Executive Officer,
Co-Founder and Director of Kushi Macrobiotics Corp.; President and Chief
Operating Officer for Culinar Sales Corp.; President and Chief Operating Officer
for RIM Industries, Inc.; Executive Vice President and Chief Operating Officer
for Savoy Industries, Inc.; and Senior Vice President and General Manager of
Hicks & Greist Advertising Agency. In addition, from 1974 to 1982, Mr. Morrow
was Group Vice President of Marketing and Development/Food Group of
International Telephone & Telegraph Corp. and he also served as Director of
Marketing and Sales for Revlon, Inc. and Almay Cosmetics Co. He completed the
Master of Business Administration program at Long Island University and holds a
Bachelor of Science degree in Chemistry and Marketing Research from The Ohio
State University.
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 production 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.
There is no family relationship between any executive officer or
director of the Company.
50 of 61
<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
1999.
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 AND PRODUCTS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 1998
<TABLE>
<CAPTION>
Additions
-----------------------------------
Balance at Charged to Charged to
Beginning of Costs and Other Accounts Deductions - Balance at End
Description Period Expenses - Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Allowance for doubtful accounts $ 18,000 $ 198,000 $ - $ 141,000(1) $ 75,000
Tax Valuation Allowance 572,801 3,776,524 - - 4,349,325
----------------------------------------------------------------------------------------
Total $ 590,801 $ 3,974,524 $ - $ 141,000(1) $ 4,424,325
========================================================================================
Year Ended December 31, 1997:
Allowance for doubtful accounts $ 18,000 - $ - $ - $ 18,000
Tax Valuation Allowance 572,801 - - - 572,801
----------------------------------------------------------------------------------------
Total $ 590,801 - $ - $ - $ 590,801
========================================================================================
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
========================================================================================
</TABLE>
(1) Uncollected accounts written off, net of recoveries.
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.
51 of 61
<PAGE>
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------ -------------------
<S> <C> <C>
3.1 ***** Amended and Restated Articles of Incorporation of the Company.
3.2 ***** Amended and Restated Bylaws of the Company.
3.3 **** Articles of Amendment to the Articles of Incorporation of the Company.
4.1 ***** See Exhibits 3.3 above for provisions of the Amended and Restated Articles of Incorporation of the
Company and the Amended and Restated Bylaws of the Company defining the rights of holders of Common
Stock of the Company.
4.2 *** Form of Common Stock Certificate of the Company.
10.2 ***** Amended and Restated 1992 Incentive Stock Option Plan.
10.3 ***** Cancellation and Exclusive License Agreement between Jack Aronowitz and the Company dated January
31, 1996.
10.4 ***** Stock Option Agreement between the Company and Martin Gurkin, Stuart R. Streger, Colin Morris,
Kathryn Harrigan, Clayton Rautbord and Stephen Dresnick.
10.6 ** Lease - Pompano Beach, Florida.
10.6.1 Filed
Herewith Business Lease Extension - Pompano Beach, Florida.
10.6.2 ***** Main Lease - Menlo Park, California; Sublease - Menlo Park.
10.6.3 ***** Assignment and Assumption of Sublease and Landlord's Consent Thereto between Menlo Business Park,
Patrician Associates, Inc., Flora, Inc. Pharma Patch PLC and Technical Chemicals and Products, Inc.
10.8 *** Warrant Agreement between the Company and Jack L. Aronowitz.
10.8.1 * Amended Employment Agreement dated October 9, 1998 between the Company and Jack L. Aronowitz.
10.9 * Employment Agreement dated October 9, 1998 between the Company and Jay E. Eckhaus.
10.10 * Employment Agreement dated October 9, 1998 between the Company and Stuart R. Streger.
10.14 ***** Letter Agreement between the Company and Redstone Securities, Inc. dated January 15, 1996.
10.15 ****** Stock Option Agreement with Martin Gurkin dated November 1996.
10.16 ***** Letter Agreement with Flora, Inc. dated February 5, 1996.
Filed
21 Herewith Subsidiaries of the Company.
Filed
23 Herewith Consent of Ernst & Young LLP.
Filed
27 Herewith Financial Data Schedule.
52 of 61
<PAGE>
* Incorporated by reference to exhibits 10.2, 10.3 and 10.4 of the Company's Form 10-Q filed on
November 12, 1998.
** Incorporated by reference to the exhibit of the same number in the Company's Registration Statement
on Form SB-2 filed on October 28, 1994 (No. 33-85756).
*** Incorporated by reference to the exhibit of the same number in Amendment No. 4 to the Company's
Registration Statement on Form S-1 filed on April 23, 1996 (No. 333-1272).
**** Incorporated by reference to exhibit 3.1 of Form 8-K filed on May 21, 1998.
***** Incorporated by reference to the exhibit of the same number in the Company's Registration Statement
on Form S-1 filed on February 12, 1996 (No. 333-1272).
****** Incorporated by reference to the exhibit of the same number in Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed on March 20, 1996.
</TABLE>
B. No reports on Form 8-K have been filed by the Company during the
last quarter of 1998.
53 of 61
<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 29, 1999
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/SIGNED/ President, Chief Executive March 29, 1999
- ------------------------------------ Officer and Chairman of the
Jack L. Aronowitz Board (Principal Executive
Officer)
/SIGNED/ Vice President, Chief Financial March 29, 1999
- ------------------------------------
Stuart R. Streger Officer (Principal Financial
Officer and Principal Accounting
Officer)
/SIGNED/ Director March 29, 1999
- ------------------------------------
Martin Gurkin
/SIGNED/ Director March 29, 1999
- ------------------------------------
Kathryn R. Harrigan
/SIGNED/ Director March 29, 1999
- ------------------------------------
Noel Buterbaugh
/SIGNED/ Director March 29, 1999
- ------------------------------------
Clayton Rautbord
/SIGNED/ Director March 29, 1999
- ------------------------------------
Stanley M. Reimer, Ph.D.
</TABLE>
54 of 61
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Index to Exhibit
- ------ -----------------
<S> <C> <C>
3.1 ***** Amended and Restated Articles of Incorporation of the Company.
3.2 ***** Amended and Restated Bylaws of the Company.
3.3 **** Articles of Amendment to the Articles of Incorporation of the Company.
4.1 ***** See Exhibits 3.3 above for provisions of the Amended and Restated Articles of Incorporation of the
Company and the Amended and Restated Bylaws of the Company defining the rights of holders of Common
Stock of the Company.
4.2 *** Form of Common Stock Certificate of the Company.
10.2 ***** Amended and Restated 1992 Incentive Stock Option Plan.
10.3 ***** Cancellation and Exclusive License Agreement between Jack Aronowitz and the Company dated January
31, 1996.
10.4 ***** Stock Option Agreement between the Company and Martin Gurkin, Stuart R. Streger, Colin Morris,
Kathryn Harrigan, Clayton Rautbord and Stephen Dresnick.
10.6 ** Lease - Pompano Beach, Florida.
10.6.1 Filed
Herewith Business Lease Extension - Pompano Beach, Florida.
10.6.2 ***** Main Lease - Menlo Park, California; Sublease - Menlo Park.
10.6.3 ***** Assignment and Assumption of Sublease and Landlord's Consent Thereto between Menlo Business Park,
Patrician Associates, Inc., Flora, Inc. Pharma Patch PLC and Technical Chemicals and Products, Inc.
10.8 *** Warrant Agreement between the Company and Jack L. Aronowitz.
10.8.1 * Amended Employment Agreement dated October 9, 1998 between the Company and Jack L. Aronowitz.
10.9 * Employment Agreement dated October 9, 1998 between the Company and Jay E. Eckhaus.
10.10 * Employment Agreement dated October 9, 1998 between the Company and Stuart R. Streger.
10.14 ***** Letter Agreement between the Company and Redstone Securities, Inc. dated January 15, 1996.
10.15 ****** Stock Option Agreement with Martin Gurkin dated November 1996.
10.16 ***** Letter Agreement with Flora, Inc. dated February 5, 1996.
Filed
21 Herewith Subsidiaries of the Company.
Filed
23 Herewith Consent of Ernst & Young LLP.
Filed
27 Herewith Financial Data Schedule.
55 of 61
<PAGE>
* Incorporated by reference to exhibits 10.2, 10.3 and 10.4 of the Company's Form 10-Q filed on
November 12, 1998.
** Incorporated by reference to the exhibit of the same number in the Company's Registration Statement
on Form SB-2 filed on October 28, 1994 (No. 33-85756).
*** Incorporated by reference to the exhibit of the same number in Amendment No. 4 to the Company's
Registration Statement on Form S-1 filed on April 23, 1996 (No. 333-1272).
**** Incorporated by reference to exhibit 3.1 of Form 8-K filed on May 21, 1998.
***** Incorporated by reference to the exhibit of the same number in the Company's Registration Statement
on Form S-1 filed on February 12, 1996 (No. 333-1272).
****** Incorporated by reference to the exhibit of the same number in Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed on March 20, 1996.
56 of 61
</TABLE>
McNab COMMERCE CENTER ASSOCIATES
2005 Cypress Creek Road, Suite 210
Ft. Lauderdale, FL 33309
December 15, 1998
Stuart Streger, Vice President/CFO
Technical Chemicals and Products, Inc.
3341 S.W. 15 Street
Pompano Beach, FL 33069
RE: 3341-3361 S.W. 15 Street, Pompano Beach, FL 33069
Dear Mr. Streger:
This letter is to confirm our understanding as follows:
1. We agree that the term of the Original Lease dated October 14, 1992 and
amended on April 10, 1996 and June 10, 1996 for the above referenced
premises is hereby extended until October 31, 2003.
2. You are hereby extending your current lease through October 31, 2003
with one three-year option to further extend the lease at the same
terms and conditions as in the current lease.
3. You will notify us by October 31, 2002 if you intend to vacate by
October 31, 2003. In the event that no notification is given, then, in
that event, it will be considered that the option to extend is
exercised.
We further agree that you will lease an additional 5,140 square foot space
adjoining the referenced space beginning January 1, 1999. Address 3285 S.W. 15
Street, Pompano Beach, FL. Rent due for the additional space will be pro-rated
from the date of availability by TCPI.
The initial monthly base rent for the combined spaces, which you are now
leasing, will be: Rent $17,933.46 plus your share of the additional rent and
plus applicable taxes.
Your share of the additional rent shall be computed on 82% of the total expenses
for the entire building.
In the event that we are unable to deliver possession of the space for any
reason whatsoever, the rental reserved to be paid herein for the space shall be
abated pending the making of the space available. The validity or terms of the
lease shall not be affected by such an event.
You agree to accept the space in as-is condition, subject to a walk thru after
the current tenant leaves the space within three business days. Only substantial
changes from the walk thru, which occured on 12/16/98, will be addressed.
cont'd.
57 of 61
<PAGE>
TCPI
Stuart Streger
Lease Terms
Page 2 of 2
All other terms and conditions of the lease apply to this space as well as all
terms and conditions of the lease remaining in full force and effect for the
referenced space.
Please indicate your acceptance in the space provided below.
Very truly yours,
Mc NAB COMMERCE CENTER
ASSOCIATES
- ------------------------------------
WITNESSED:
- ------------------------------------
Print:
------------------------
- ------------------------------------ Print
----------------------------
AGREED AND ACCEPTED:
TECHNICAL CHEMICALS AND PRODUCTS, INC.
- ------------------------------------
Date:
-------------------------
WITNESSED:
- ------------------------------------
Print:
------------------------
- ------------------------------------ Print
----------------------------
58 of 61
Subsidiaries of
Technical Chemicals and Products, Inc.
Subsidiary Name State Of Organization
- ---------------------------------------- --------------------------------------
Health-Mark Diagnostics, L.L.C. Delaware
Health Test, Inc. Florida
Technical Electronics Corporation Florida
59 of 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 and No. 333-57067 and Form S-8 No. 333-50797) of Technical
Chemicals and Products, Inc. and in the related Prospectus of our report dated
March 3, 1999, with respect to the consolidated financial statements and
schedule of Technical Chemicals and Products, Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Miami, Florida
March 29, 1999
60 of 61
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(The Company's Annual Report on Form 10K for the Period Ending
December 31, 1998)
</LEGEND>
<S> <C>
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0
13,131
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