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 MARCH 31, 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 May 1, 1999
----- -----------------------------
Common Stock $ .001 par value 10,577,893
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>
<S> <C> <C>
March 31, 1999 December 31, 1998
---------------------------------------------
ASSETS (Unaudited) *(Audited)
Current assets:
Cash and cash equivalents $1,702 $5,207
Investments 7,110 5,048
Accounts receivable, net 1,113 1,605
Inventory 2,399 2,550
Due from related party 836 836
Other 358 210
---------------------------------------------
Total current assets 13,518 15,456
---------------------------------------------
Property and equipment, net 2,342 2,503
Patents and trademarks, net 11,970 12,190
Goodwill, net 1,936 1,979
Deferred tax asset, net 4,140 4,140
Other assets 101 101
---------------------------------------------
Total assets $ 34,007 $36,369
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 598 $ 390
Accrued expenses 248 323
---------------------------------------------
Total current liabilities 846 713
---------------------------------------------
Other liabilities 168 169
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--13,800
and 14,700 at 3/31/99 and 12/31/98 12,595 13,131
Common stock, $.001 par value:
Authorized shares--100,000,000;
Issued and outstanding shares--
10,570,893 and 10,006,316 at
3/31/99 and 12/31/98 11 10
Additional paid-in capital 41,242 40,697
Accumulated deficit (20,855) (18,351)
---------------------------------------------
Total stockholders' equity 32,993 35,487
---------------------------------------------
Total liabilities and stockholders' equity $ 34,007 $36,369
=============================================
</TABLE>
(*) 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.
<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>
<S> <C> <C>
Three Months Ended
March 31,
------------------------------------
1999 1998
------------------------------------
Net product sales $ 1,386 $ 1,631
Cost of product sales 814 764
------------------------------------
Gross profit 572 867
R&D contract revenue 155 105
Operating expenses:
Selling, general and administrative 2,328 2,048
Research and development 549 744
Depreciation and amortization 472 453
------------------------------------
3,349 3,245
------------------------------------
Loss from operations (2,622) (2,273)
Other income (expense):
Interest income 149 113
Interest expense (3) (6)
------------------------------------
Net loss (2,476) (2,166)
------------------------------------
Accrued preferred
redemption accretion
and dividends 399 --
------------------------------------
Loss attributable to common stock $ (2,875) $ (2,166)
====================================
Net loss per common share -
Basic and Diluted $ (.28) $ (.22)
====================================
Weighted average number of
common shares outstanding 10,399,144 10,015,036
====================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<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>
<S> <C> <C>
Three Months Ended March 31,
-------------------------------------------
1999 1998
-------------------------------------------
OPERATING ACTIVITIES
Net loss $ (2,476) $ (2,166)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 472 453
Deferred income taxes -- --
Changes in operating assets and liabilities:
Accounts receivable 492 131
Inventory 151 (824)
Accounts payable and accrued expenses 133 90
Other current assets (157) (75)
-------------------------------------------
Net cash used in operating activities (1,385) (2,391)
INVESTING ACTIVITIES
Purchase of property and equipment (14) (98)
Investment in patents and trademarks (34) 1
Purchase of investments (2,218) (1,108)
Proceeds from sale of investments 146 999
-------------------------------------------
Net cash used in investing activities (2,120) (206)
-------------------------------------------
Net increase (decrease) in cash and cash equivalents (3,505) (2,597)
Cash and cash equivalents at beginning of period 5,207 3,316
-------------------------------------------
Cash and cash equivalents at end of period $ 1,702 $ 719
===========================================
</TABLE>
See accompanying notes to the consolidated financial statements.
<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 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 that no reduction of the estimated
useful lives is warranted.
<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>
<S> <C> <C>
March 31, 1999 December 31, 1998
-----------------------------------------------------
Accounts receivable
Accounts receivable $ 1,202 $ 1,680
Allowance for doubtful accounts (89) (75)
-----------------------------------------------------
Accounts receivable, net $ 1,113 $ 1,605
=====================================================
Property and equipment
Furniture, fixtures and equipment $ 3,202 $ 3,191
Real property 217 217
Leasehold improvements 910 907
-----------------------------------------------------
4,329 4,315
Accumulated depreciation (1,987) (1,812)
-----------------------------------------------------
$ 2,342 $ 2,503
=====================================================
Patents and trademarks
Patents and trademarks $ 15,351 $ 15,317
Accumulated amortization (3,381) (3,127)
-----------------------------------------------------
$ 11,970 $ 12,190
=====================================================
Goodwill
Goodwill $ 2,494 $ 2,494
Accumulated amortization (558) (515)
-----------------------------------------------------
$ 1,936 $ 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, the Investor has converted
1,200 shares of Preferred Stock and received 643,818 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, President and Chief Executive
Officer's ("Chairman") family limited partnership ("Partnership") to a brokerage
house. Under the terms of the Company's agreement with the Partnership, 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 March 31, 1999). In February 1999, accrued
interest was paid and the note was extended an
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. RELATED PARTY TRANSACTION (Continued)
additional three months. The balance of funds advanced under the note is
approximately $747,000 at March 31, 1999 and is included in due from related
party in the balance sheet.
5. 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.
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 in connection with the second claim, but awarded no damages against Mr.
Aronowitz, individually, in connection with that 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 will 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.
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 March 31, 1999.
In November 1998, a purported shareholder class action lawsuit was
filed against the Company ("Class Action"). 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(TM) 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 March 31, 1999. On April 19, 1999, the Amended Consolidated Class Action
Complaint was served upon the Company. The Company intends to respond to this
Amended Complaint.
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6. SUBSEQUENT 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, providing 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 will be responsible for the Company's
strategic direction and day-to-day business operations while Jack L. Aronowitz
will remain President and Chairman of the Board of Directors. Mr. Aronowitz will
also continue as the Company's Chief Technical Officer and focus his full-time
efforts on the development and commercialization of TCPI's non-invasive TD
Glucose Monitoring System, the Company's new total and HDL cholesterol
monitoring products, and new product development.
<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
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
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
STRATEGIC DIRECTION AND COMPANY BACKGROUND (Continued)
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.
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-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 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
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FORWARD LOOKING STATEMENTS (Continued)
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.
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.
<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 first quarter of 1999 continued to
reflect the ongoing manufacturing scale-up, and expansion of facilities
necessary to expand existing products as well as introduce more than 20 new
diagnostic testing and screening products for infectious diseases, drug of abuse
and certain types of cancer which are planned for future distribution worldwide.
Product Sales. The Company's net product sales for the first quarter
ended March 31, 1999 were $1.4 million as compared to $1.6 million in the same
period a year earlier. During the first quarter of 1999, the Company experienced
significantly higher sales of its private label family planning products which
were offset by lesser sales of the Company's other diagnostic products.
Through April 1999, the Company has experienced higher year-to-date
product sales as compared to the same period of 1998 primarily due to overseas
marketing efforts related to TCPI's OEM family planning products. In addition,
the Company has in place an exclusive marketing and distribution relationship
for its HealthCheck(R) products in Mexico and is presently negotiating other
distribution programs throughout Latin America. Additional international
expansion opportunities are also moving forward with programs such as the
Company's recently completed marketing agreement to bring HealthCheck and other
TCPI diagnostic products to China and several other Asian markets.
Gross Profit. TCPI's gross profit on product sales for the first
quarter of 1999 was $572,000 as compared to $867,000 in the first quarter of
1998. Gross profit as a percent of net sales for the first three month period of
1999 moved lower to 41.2% from 53.2% achieved 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 the first quarter of 1999 was $2.3 million as compared to
$2.0 million in the same period 1998. This increase was primarily due to the
establishment of the Company's international sales and marketing office in
Milan, Italy, ongoing marketing programs, and engineering and 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 first quarter of 1999, the
Company's R&D expenses decreased to $549,000 as compared to $744,000 in the same
period a year ago due to the timing of certain R&D expenditures. The Company
continued to incur expenses related to the ongoing development and clinical
activity related to the Company's non-invasive TD Glucose(TM) 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 Company posted a net loss $2.5 million for the first
three months of 1999, which increased from a loss of $2.2 million in the same
period a year earlier. The net loss attributable to common stock was $2.9
million for the first quarter of 1999 and $2.2 million loss for the first
quarter of 1998. The increase in loss attributable to common stock was primarily
due to the accrued redemption accretion and accrued dividends of the preferred
stock as well as changes in gross profit.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
The Company had cash and investments of $8.8 million at March 31, 1999,
as compared to $10.3 million at December 31, 1998. Working capital at the end of
the first quarter of 1999 was $12.7 million, as compared to $14.7 million at
December 31, 1998. The Company had current assets of $13.5 million and
stockholders' equity of $33 million at March 31, 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 any such purchase will come from the Company's working capital.
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'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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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.
<PAGE>
PART II OTHER INFORMATION
ITEM 1. 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.
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.
<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 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. On April 19,
1999, the Amended Consolidated Class Action Complaint was served upon the
Company. The Company intends to respond to this Amended 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!" pursuant to statements which allegedly
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 5. OTHER INFORMATION
Subsequent Events
On May 7, 1999, the Company retained Janssen/Meyers Associates, L.P.
for investment banking and financial consulting services. Janssen/Meyers will
act as TCPI's investment banker and financial consultant, providing 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. Under the terms of this
three-year agreement, JMA will be compensated under an all-inclusive fee of
$5,000 per month and grant of 400,000 common stock purchase warrants. Each
warrant equals one share of the Company's common stock, par value $.001 per
share. The exercise price of the warrants shall be (a) 200,000 warrants at an
exercise price equal to the closing price of the Company's common stock on May
7, 1999, (b) 100,000 warrants at an exercise price of $2.00 per share, and (c)
100,000 warrants at an exercise price of $3.00 per share. Such warrants have an
expiration date of five years from the date of grant.
<PAGE>
PART II OTHER INFORMATION (Continued)
ITEM 5. OTHER INFORMATION (Continued)
Subsequent Events (Continued)
On May 11, 1999, Elliott Block, Ph.D. was appointed as the Company's
new Chief Executive Officer. Dr. Block will be responsible for the Company's
strategic direction and day-to-day business operations while Jack L. Aronowitz
will remain President and Chairman of the Board of Directors. Mr. Aronowitz will
also continue as the Company's Chief Technical Officer and focus his full-time
efforts on the development and commercialization of TCPI's non-invasive TD
Glucose(TM) Monitoring System, the Company's new Total and HDL Cholesterol
monitoring products, and new product development. Dr. Block has more than 28
years of senior level industry-related experience in the research, manufacturing
and international marketing of over-the-counter and clinical diagnostic testing
products, as well as the operation of licensed clinical laboratories.
<PAGE>
PART II OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit
Number Exhibit Description
- ------------------------------------------------------------------------------------
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 ******* 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
27 Herewith Financial Data Schedule.
* 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.
******* Incorporated by reference to the Company's Form 10-K filed for the year ended December 31, 1998
</TABLE>
(b) Reports On Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is being filed.
<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: May 14, 1999 By: /s/
-----------------------------------
Stuart R. Streger
Vice President and Chief Financial Officer
(Duly authorized officer and principal
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(The Company's Quarterly Report on Form 10-Q for the Period Ending
March 31, 1999)
</LEGEND>
<CIK> 0000924921
<NAME> STU STREGER
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