SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-25406
-------
TECHNICAL CHEMICALS AND PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0308922
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3341 S.W. 15th Street, Pompano Beach, Florida 33069
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (954) 979-0400
--------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Class Outstanding As Of August 12, 1999
----- ---------------------------------
Common Stock $ .001 par value 11,089,804
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------------------------
ASSETS (Unaudited) *(Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,948 $ 5,207
Investments 4,662 5,048
Accounts receivable, net 2,129 1,605
Inventory 2,401 2,550
Due from related party 755 836
Other 267 210
---------------------------------------------
Total current assets 12,162 15,456
---------------------------------------------
Property and equipment, net 2,336 2,503
Patents and trademarks, net 11,749 12,190
Goodwill, net 1,893 1,979
Deferred tax asset, net 4,140 4,140
Other assets 87 101
---------------------------------------------
Total assets $ 32,367 $ 36,369
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 365 $ 390
Accrued expenses 261 323
---------------------------------------------
Total current liabilities 626 713
---------------------------------------------
Other liabilities 168 169
Deferred income 812 --
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares--25,000,000;
Series A 6% Convertible Preferred stock,
$.001 par value:
Issued and outstanding shares--13,650
and 14,700 at 6/30/99 and 12/31/98 12,833 13,131
Common stock, $.001 par value:
Authorized shares--100,000,000;
Issued and outstanding shares--
10,694,235 and 10,006,316 at
6/30/99 and 12/31/98 11 10
Additional paid-in capital 41,004 40,697
Accumulated deficit (23,087) (18,351)
---------------------------------------------
Total stockholders' equity 30,761 35,487
---------------------------------------------
Total liabilities and stockholders' equity $ 32,367 $ 36,369
=============================================
*The Balance Sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
See accompanying notes to the consolidated financial statements.
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
Net product sales $ 1,289 $ 1,155 $ 2,675 $ 2,786
Cost of product sales 733 546 1,547 1,310
------------------------------------ ------------------------------------
Gross profit 556 609 1,128 1,476
R&D contract revenue 316 52 471 157
Operating expenses:
Selling, general and administrative 2,073 2,065 4,401 4,113
Research and development 660 698 1,209 1,442
Depreciation and amortization 482 456 954 909
------------------------------------ ------------------------------------
3,215 3,219 6,564 6,464
------------------------------------ ------------------------------------
Loss from operations (2,343) (2,558) (4,965) (4,831)
Other income (expense):
Interest income 79 131 228 244
Interest expense (4) (2) (7) (8)
------------------------------------ ------------------------------------
Net loss (2,268) (2,429) (4,744) (4,595)
------------------------------------ ------------------------------------
Accrued preferred
redemption accretion and dividends 396 196 795 196
------------------------------------ ------------------------------------
Loss attributable to common stock $ (2,664) $ (2,625) $ (5,539) $ (4,791)
==================================== ====================================
Net loss per common share -
Basic and Diluted $ (.25) $ (.26) $ (.53) $ (.48)
==================================== ====================================
Weighted average number of
common shares outstanding 10,636,626 10,015,036 10,518,541 10,015,036
==================================== ====================================
See accompanying notes to the consolidated financial statements.
</TABLE>
3
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------
1999 1998
-------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,744) $ (4,595)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 954 909
Changes in operating assets and liabilities:
Accounts receivable (524) 633
Inventory 149 (1,026)
Accounts payable and accrued expenses (87) (1,246)
Deferred income 812 --
Other current assets 82 (107)
-------------------------------------------
Net cash used in operating activities (3,358) (5,432)
INVESTING ACTIVITIES
Purchase of property and equipment (193) (188)
Investment in patents and trademarks (68) 1
Purchase of investments (3,688) (1,108)
Proceeds from sale of investments 4,048 3,990
-------------------------------------------
Net cash provided by investing activities 99 2,695
FINANCING ACTIVITIES
Net proceeds from issuance of Preferred Stock -- 14,429
-------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,259) 11,692
Cash and cash equivalents at beginning of period 5,207 3,316
-------------------------------------------
Cash and cash equivalents at end of period $ 1,948 $ 15,008
===========================================
See accompanying notes to the consolidated financial statements.
</TABLE>
4
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements (the
"Financial Statements") of Technical Chemicals and Products, Inc. and
Subsidiaries (the "Company" or "TCPI") are unaudited, and in the opinion of
management, include all normal and recurring adjustments which are necessary for
a fair presentation. The Financial Statements should be read in conjunction with
more complete disclosures contained in the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. The results of operations for interim periods
are not necessarily indicative of the results of operations for the entire year.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes". Deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
INVENTORIES
Inventories, consisting of raw materials and finished goods, are valued
at the lower of cost (computed on the first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
The cost of maintenance and repairs are charged to operations as incurred.
Significant renewals and betterments are capitalized and depreciated over their
estimated useful lives.
INTANGIBLE ASSETS
Purchased patents and trademarks are amortized using the straight-line
method over a composite life of 15 years based on the shorter of their legal
life or estimated useful life of the individual patents and trademarks, which
range from 11 to 17 years. Goodwill is amortized using the straight-line method
over 15 years. The Company periodically reviews its intangible assets to assess
recoverability and a charge will be recognized in the consolidated statement of
operations if a permanent impairment is determined to have occurred.
Recoverability of intangibles is determined based on undiscounted future
operating cash flows from the related business unit or activity. The amount of
impairment, if any, would be measured based on discounted future operating cash
flows using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of intangible assets will be affected if
estimated future operating cash flows are not achieved. The Company does not
believe that any impairment has occurred and, as a result, no reduction of the
estimated useful lives is warranted.
5
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. DETAILS OF BALANCE SHEET
Details of selected balance sheet accounts are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-----------------------------------------------------
<S> <C> <C>
Accounts receivable
Accounts receivable $ 2,186 $ 1,680
Allowance for doubtful accounts (57) (75)
-----------------------------------------------------
Accounts receivable, net $ 2,129 $ 1,605
=====================================================
Property and equipment
Furniture, fixtures and equipment $ 3,379 $ 3,191
Real property 217 217
Leasehold improvements 912 907
-----------------------------------------------------
4,508 4,315
Accumulated depreciation (2,172) (1,812)
-----------------------------------------------------
$ 2,336 $ 2,503
=====================================================
Patents and trademarks
Patents and trademarks $ 15,384 $ 15,317
Accumulated amortization (3,635) (3,127)
-----------------------------------------------------
$ 11,749 $ 12,190
=====================================================
Goodwill
Goodwill $ 2,494 $ 2,494
Accumulated amortization (601) (515)
-----------------------------------------------------
$ 1,893 $ 1,979
=====================================================
</TABLE>
3. STOCKHOLDERS' EQUITY
In May 1998, the Company completed a private placement of 15,000 shares
of Series A Convertible Preferred Stock (the "Preferred Stock") to a single
institutional investor (the "Investor"). To date, through August 4, 1999, the
Investor has converted 1,800 shares of Preferred Stock and received 1,155,729
shares of the Company's common stock. See the Company's Report on Form 10-K for
the year ended December 31, 1998 and the Company's Report on Form 8-K filed on
May 21, 1998 for additional information related to the Preferred Stock
transaction.
4. RELATED PARTY TRANSACTION
During August 1998, the Company's outside directors unanimously
approved the Company's guarantee for a period of up to 90 days of $750,000 of
the collateral obligations of the Company's Chairman and President's
("Chairman") family limited partnership ("Partnership") to a brokerage house.
Under the terms of the Company's agreement with the Partnership, the brokerage
house called on the Company's guarantee, the Partnership then executed and
delivered to the Company a promissory note personally guaranteed by Mr.
Aronowitz in an amount equal to the amount of the guarantee. The note is a six
month note payable on demand and bears interest at the rate of interest charged
by the brokerage house (7 3/4 % at June 30, 1999). In February 1999, accrued
interest was paid and the note was extended an additional three
6
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. RELATED PARTY TRANSACTION (Continued)
months. On June 18, 1999, the due date of the outstanding principal amount due
of the note was extended until May 28, 2000. To date, the Chairman has repaid
$100,000 of the principal amount of the note along with all accrued interest,
resulting in a balance of the principal amount advanced under the note of
approximately $647,000 at June 30, 1999, which is included in due from related
party in the balance sheet.
5. OTHER EVENTS
On May 7, 1999, the Company entered into an agreement to retain
Janssen/Meyers Associates, L.P. for investment banking and financial consulting
services. Janssen/Meyers will act as TCPI's investment banker and financial
consultant, provide advice on matters relating to the financial markets in
general as well as corporate finance, including possible equity or debt
offerings and potential mergers, acquisitions and other strategic transactions.
On May 11, 1999, Elliott Block, Ph.D. was appointed as the Company's
new Chief Executive Officer. Dr. Block is responsible for the Company's
strategic direction and day-to-day business operations. Jack L. Aronowitz
remains President and Chairman of the Board of Directors and also continues as
the Company's Chief Technical Officer where he will focus his full-time efforts
on the development and commercialization efforts of TCPI's non-invasive TD
Glucose Monitoring System, the Company's new Total and HDL Cholesterol
monitoring products, and new product development.
6. LEGAL PROCEEDINGS
Management believes, after consultation with counsel, that the
allegations against the Company included in the lawsuits described herein are
without merit and the Company is vigorously defending each of the allegations.
The Company also is subject to claims and suits arising in the ordinary course
of business. 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
In December 1998, a jury returned a verdict against TCPI, the Company's
Chairman of the Board, Jack L. Aronowitz, and other unrelated corporate and
individual defendants (the Lawsuit). In its verdict, the jury found that Mr.
Aronowitz had misappropriated trade secrets and awarded damages of $500,000
against him, individually. Additionally, the jury found that both the Company
and Mr. Aronowitz intentionally interfered with the plaintiffs' business
relationships. The jury awarded approximately $328,000 in damages against the
Company, but awarded no damages against Mr. Aronowitz, individually, in
connection with this second claim. In January 1999, a judgment against the
Company and Mr. Aronowitz was entered by the trial court in accordance with the
verdict.
In January 1999, the Company filed a Notice of Appeal seeking to have
the verdicts against both the Company and Mr. Aronowitz set aside. In the event
that Mr. Aronowitz is ultimately required to pay the damages to the plaintiffs,
the Company is required to indemnify Mr. Aronowitz to the extent permitted by
law. The Company has obtained an appeal bond staying enforcement of the judgment
against the Company and Mr. Aronowitz until such time as the Appellate Court
issues its ruling.
7
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6. LEGAL PROCEEDINGS (Continued)
Management believes, after consultation with 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 June 30, 1999.
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
related to non-invasive glucose monitoring technology in which the plaintiffs
(Americare Diagnostics, Inc. and Joseph P. D'Angelo) 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. The Company has counter claims pending
against the plaintiffs for libel and slander related to TCPI's non-invasive
glucose monitoring technology.
On September 23, 1998, the Company's motion to dismiss six of the nine
counts of the patent infringement lawsuit was granted. The order dismissed all
of the counts alleging misappropriation of trade secrets, breach of fiduciary
duty, breach of confidential relations, breach of trust, unfair competition and
conversion. Prior to the court rendering its decision and order to dismiss, on
September 8, 1998, the plaintiffs filed an amended Complaint that 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. At present, the discovery phase of this lawsuit is being
conducted and anticipated to be completed later this summer.
Shareholder Class Action
In November 1998, a purported shareholder class action lawsuit ("Class
Action") was 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. Eight
additional complaints were subsequently filed and consolidated into one action
in March 1999. These claims were filed on behalf of a purported class of persons
who purchased the Company's common stock between November 27, 1995 and October
6, 1998. In general, plaintiffs allege that defendants made untrue and
misleading statements 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 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 June 30, 1999. On April 19,
1999, an Amended Consolidated Class Action Complaint was served upon the
Company. In response, on June 18, 1999, the Company filed a motion to dismiss
the Amended Consolidated Class Action Complaint. Plaintiff's response to this
motion has been served and defendants have until August 16, 1999 to serve their
reply. Discovery has been stayed pending resolution of the motion to dismiss.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
STRATEGIC DIRECTION AND COMPANY BACKGROUND
Technical Chemicals and Products, Inc. (the "Company" or "TCPI") is in
the process of completing a transition toward 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
research and development ("R&D") 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
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 where product sales and/or
registration has begun in approximately 27 foreign countries. 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
STRATEGIC DIRECTION AND COMPANY BACKGROUND (Continued)
On July 27, 1998, the Company formed Technical Electronics Corporation,
a Joint Venture between TCPI and privately held MicroWeiss Electronics of
Babylon, New York in which TCPI holds an 80% equity ownership in the joint
venture with Micro Weiss Electronics holding the remaining 20%. The Company
retains all rights, title, and interest, including patent rights, to the
technology for its meter devices. Technical Electronics Corporation will develop
and manufacture electronic measuring devices for TCPI's non-invasive TD Glucose
Monitoring System, Total and HDL cholesterol testing meter, and other diagnostic
monitoring products being developed by TCPI.
FORWARD LOOKING STATEMENTS
Information in this Form 10-Q, including any information incorporated
by reference herein, includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, and is subject to the safe-harbor created by
such sections. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements.
Statements regarding development and FDA clearance of 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, the
possibility of additional equity investments, merger, acquisition or other
strategic transaction, 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; FDA clearance 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
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FORWARD LOOKING STATEMENTS (Continued)
(including risks associated with obtaining requisite governmental approvals for
the Company's products); the limited experience of the Company in manufacturing
and marketing products; uncertainties connected with product liability exposure
and insurance; risks associated with domestic and international growth and
expansion; risks associated with international operations (including risk
associated with international economies, currencies and business conditions);
risks associated with obtaining patents and other protections on intellectual
property; results of litigation and appeals; the Company's limited cash reserves
and sources of liquidity; uncertainties in availability of expansion capital in
the future and other risks associated with capital markets, as well as those
listed in the Company's other press releases and in its other filings with the
Securities and Exchange Commission. The Company may determine to discontinue or
delay the development of any or all of its products under development at any
time.
For a complete description of the Company's products and business, see
Part I, Item 1 of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
The Company's operations during the second quarter and first six months
of 1999 continued to reflect the ongoing manufacturing scale-up, research and
development, and marketing necessary to expand existing product sales as well as
introduce new diagnostic testing and screening products for infectious diseases,
drugs of abuse and certain types of cancer that are planned for future
distribution worldwide.
Product Sales. The Company's net product sales for the second quarter
ended June 30, 1999 increased by 12% to $1.29 million as compared to $1.16
million in the same period a year earlier. Total revenue (net product sales and
R&D contract revenue) for the second quarter of 1999 increased by 33% to $1.6
million. Net product sales for the first six months of 1999 were $2.7 million as
compared to $2.8 million for the same period a year earlier. Total revenue for
the six-month period of 1999 increased by 7% to more than $3.1 million. The
increase in quarterly and six month total revenue was achieved due to
significantly higher international sales of the Company's OEM family planning
products and R&D contract revenue related to transdermal and dermal
technologies.
In addition, the Company has recorded $812,500 in deferred income from
the licensing fee paid by LVMH Moet Hennessy Louis Vuitton, Inc. for the
exclusive worldwide right to use TCPI's patented SR-38TM skin permeation
enhancer for cosmetic uses and the exclusive worldwide right and license to use
the SR-38 Trademark in connection with cosmetic uses. Under terms of this
10-year exclusive licensing and supply agreement, LVMH and certain members of
the LVMH Group of companies paid TCPI an up-front license fee and will purchase
a minimum quantity of SR-38 over the next three years. Revenue to TCPI during
the first three years of this agreement is anticipated to be in excess of $3.0
million. LVMH may also order additional quantities of SR-38 from time-to-time in
accordance with the terms and conditions of the agreement. Such deferred income
will be recognized over time.
Gross Profit. TCPI's gross profit on product sales for the second
quarter of 1999 was $556,000 as compared to $609,000 in the second quarter of
1998 and was $1.1 million for the first six months of 1999 versus $1.5 million
in the same period a year earlier. Gross profit as a percent of net sales for
the quarterly period moved lower to 43% from 53% and similarly declined for the
six month period to 42% from 53% in the prior year period due to a shift in the
mix of products sold.
Selling, General and Administrative. Selling general and administrative
("SG&A") expenses for both the second quarter of 1999 and 1998 remained level at
$2.1 million, while SG&A expenses for the first six months of 1999 increased to
$4.4 million from $4.1 million in the same period of 1998. This increase was
primarily due to the establishment of the Company's international sales and
marketing office in Milan, Italy during the first quarter of the current year,
as well as ongoing marketing programs, and the engineering phase of the
manufacturing scale-up related to the TD Glucose Patches.
Research and Development. The Company continued to advance its various
diagnostic testing products and transdermal drug delivery technologies through
development towards commercialization. For the second quarter and first six
months of 1999, R&D expenses decreased slightly to $660,000 and $1.2 million,
respectively, from the comparative periods a year ago due to the timing of
certain R&D expenditures as well as pre-closure activities related to the July
1999 closing of TCPI's transdermal R&D facility in Menlo Park, California. These
activities are being continued at the Company's headquarters in Pompano Beach,
Florida. The Company continued to incur expenses related to the ongoing
development and clinical activity
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
related to its noninvasive TD GlucoseTM Monitoring System and its new Total and
HDL cholesterol monitoring products. The future level of R&D expenditures will
depend on, among other things, the outcome of clinical testing of products under
development (including the TD Glucose Monitoring System and Total and HDL
cholesterol monitoring products), delays or changes in government required
testing and approval procedures, technological and competitive developments and
strategic marketing decisions.
Net Loss. The net loss for the second quarter of 1999 declined by 7% to
less than $2.3 million from the $2.4 million net loss incurred in the second
quarter of 1998. The net loss for the first six months of 1999 increased to $4.7
million from $4.6 million in the same period a year earlier. The net loss
attributable to common stock for the second quarter of 1999 increased by $39,000
to $2.7 million over the comparable amount for the same quarter a year earlier.
The net loss attributable to common stock for the first six months of 1999 was
$5.5 million as compared to $4.8 million in the prior year period. The increase
in the net loss and loss attributable to common stock was primarily due to a
higher accrued redemption accretion and accrued dividends of the preferred stock
as well as changes in gross profit due to a shift in product mix.
FINANCIAL CONDITION
The Company had cash and investments of $6.6 million at June 30, 1999,
as compared to $10.3 million at December 31, 1998. Working capital at the end of
the second quarter of 1999 was $11.5 million, as compared to $14.7 million at
December 31, 1998. The Company had current assets of $12.2 million and
stockholders' equity of $30.8 million at June 30, 1999. This compares to current
assets of $15.5 million and stockholders' equity of $35.5 million at December
31, 1998.
The Company expects to continue to draw upon its working capital to
purchase production equipment, complete clinical trials and regulatory
submissions relating to the TD Glucose Monitoring System and Total and HDL
cholesterol monitoring products, engage in research and development related to
transdermal drug delivery technology, develop new diagnostic products, conduct
clinical trials, continue its investment in marketing and facility expansion,
and continue its day-to-day business. In addition, on July 28, 1998, TCPI's
Board of Directors authorized a stock repurchase program to buy-back up to 10
percent of the Company's outstanding common stock. Purchases of common stock by
the Company may be made from time-to-time in the open market and/or through
privately negotiated transactions at prevailing market prices depending on
market conditions. To date, the Company has repurchased 87,961 shares. The funds
used for such purchase to date came from the Company's working capital. Funds
for future purchases, if any, will also come from the Company's working capital.
LIQUIDITY AND CAPITAL RESOURCES
Throughout 1998 and into 1999, the Company has continued to sustain
operating losses that 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, among other things, 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
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
generate sufficient revenues from product sales to sustain its operations and
cover expenses related to its growth. There is no assurance that the Company
will generate sufficient cash to fund operations and the necessary cash
requirements thereof. The Company continues to seek additional financing;
however, there can be no assurance that the Company will be able to fund all of
its cash requirements and operating losses or that any additional financing will
be available to the Company on acceptable terms or at all.
The Company's future working capital and capital expenditure
requirements may vary materially from those now planned depending on numerous
factors, including additional manufacturing scale-up costs for the Company's
current and future products, possible future acquisitions, the focus and
direction of the Company's research and development programs, competitive and
technological advances, future strategic alliances and relationships with
marketing partners, the FDA regulatory process, the regulatory process in
foreign countries, and the Company's marketing and distribution strategy. If the
Company's growth exceeds its plans, additional working capital may be needed.
YEAR 2000
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000s" from dates in the "1900s". These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
The Company, its division and operating subsidiaries, has implemented 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 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.
In addition, the Company is in the process of conducting a survey of
its key vendors and customers as to their readiness for the Year 2000 issue.
Until such responses are made, if at all, it is not possible to determine what
material impact, if any, the Year 2000 computer issue may have on the Company's
business, operations or financial condition. In the event that any of the
Company's key vendors and customers do not successfully achieve Year 2000
compliance for their own operations in a timely manner, the Company's business
or operations could be adversely affected. The magnitude of any adverse effect
cannot be quantified at this time because of variables such as the type and
importance of key vendors and customers, the unknown level and duration of
noncompliance by these key vendors and customers (and their key vendors and
customers), the possible effect on the Company's operations and TCPI's ability
to respond to any non-compliance.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
YEAR 2000 (Continued)
The Company believes that its biggest risks related to the Year 2000
issue are associated with potential key vendors and customers as well as a
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 continue to assess the risks
presented by the Year 2000 problem, however, TCPI does not believe that there
are contingency plans it can implement to mitigate the risk of a general failure
of external local, national or international systems. The Company is in the
process of developing a contingency plan that would allow for the supply of
materials and services from alternate key vendors as well as inventory of
necessary materials sufficient in the event a disruption occurs as a result of
the Year 2000 issue. These contingency plans are subject to uncertainties. The
Company cannot guarantee that any estimate of the level, impact or duration of
Year 2000 non-compliance by key vendors and customers will be accurate, or that
the Company's own contingency plans will be sufficient to mitigate these risks.
Costs related to the Company's actions to become Year 2000 compliant
are funded through cash from operating activities. The estimated costs related
to becoming Year 2000 compliant will be approximately $60,000 and through June
30, 1999, the Company has expended approximately $48,000 in connection with the
Year 2000 issue. The Company believes the costs related to updating or replacing
existing computer systems in order to become Year 2000 compliant will not be
material. However, in view of the uncertainties relating to the Year 2000
compliant status of the Company's key vendors and customers, the Company cannot
guarantee that the cost of dealing with the Year 2000 issue will be consistent
with the foregoing estimates or that the Year 2000 issue will not materially
adversely affect TCPI's future operations.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Management believes, after consultation with counsel, that the
allegations against the Company included in the lawsuits described herein are
without merit and the Company is defending each of the allegations vigorously.
The Company also is subject to claims and suits arising in the ordinary course
of business. 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 District Court of Appeal in West Palm Beach, Florida. In the event
that Mr. Aronowitz is ultimately required to pay damages to the plaintiffs, the
Company is required to 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 counterclaims
for libel and slander related to TCPI's non-invasive glucose monitoring
technology.
On September 23, 1998, the Company's motion to dismiss six of the nine
counts of the patent infringement lawsuit was granted. The order dismissed all
of the counts alleging misappropriation of trade secrets, breach of fiduciary
duty, breach of confidential relations, breach of trust, unfair competition and
conversion. Prior to the court rendering its decision and order to dismiss, on
September 8, 1998, the plaintiffs filed an amended Complaint which contained
some of the same counts based on substantially the same facts as in the original
Complaint. TCPI's motion to dismiss the amended Complaint is presently pending
before the court. At present, the discovery phase of this lawsuit is being
conducted and anticipated to be completed later this summer.
16
<PAGE>
PART II OTHER INFORMATION (Continued)
ITEM 1. LEGAL PROCEEDINGS (Continued)
Shareholder Class Action
During November 1998 through January 1999, several lawsuits were filed
in the United States District Court for the Southern District of Florida against
the Company and its Chairman 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. In general, plaintiffs allege that defendants made
untrue and misleading statements 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 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 June 30, 1999.
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.
ITEM 5. OTHER INFORMATION
Subsequent Events
Closure of Facility
Following the expiration of a facility lease in Menlo Park, California,
effective July 1999, the Company closed its transdermal research and development
facility and relocated the activities of its Pharmetrix Division to the
Company's corporate headquarters in Pompano Beach, Florida. In doing so, the
Company will maintain associated patents and continue development efforts of its
transdermal drug delivery technologies and skin permeation enhancers. TCPI is
presently in discussions with several pharmaceutical companies relating to the
strategic development of the Pharmetrix patent and product portfolios. The
Company will also complete ongoing contract development projects. During 1998,
the Company spent in excess of $2.1 million to operate this R&D center.
17
<PAGE>
PART II OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports On Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is being filed.
(c) Annual Shareholder's Meeting
Pursuant to notice duly provided, the Company's Annual
Shareholder's Meeting was held on June18, 1999 in Ft. Lauderdale,
Florida. The only item of business was the election of two (2)
Class I directors. The Inspector of Elections established that a
quorum was reached and a tabulation of the voting resulted in said
directors being re-elected by 9,715,725 votes For and 179,116
votes Abstained.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TECHNICAL CHEMICALS AND PRODUCTS, INC.
Date: August 16, 1999 By: /s/ Stuart R. Streger
------------------------------------------
Stuart R. Streger
Vice President and Chief Financial Officer
(Duly authorized officer and principal
accounting officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 924921
<NAME> STU STREGER
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,948
<SECURITIES> 4,662
<RECEIVABLES> 2,186
<ALLOWANCES> 57
<INVENTORY> 2,401
<CURRENT-ASSETS> 12,162
<PP&E> 4,508
<DEPRECIATION> 2,172
<TOTAL-ASSETS> 32,367
<CURRENT-LIABILITIES> 626
<BONDS> 0
0
12,833
<COMMON> 11
<OTHER-SE> 17,917
<TOTAL-LIABILITY-AND-EQUITY> 32,367
<SALES> 2,675
<TOTAL-REVENUES> 3,146
<CGS> 1,547
<TOTAL-COSTS> 1,547
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (4,774)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,774)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,539)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
