SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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)
(954) 979-0400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO 12(g) OF THE ACT:
Common Stock ($.001 par value)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
The aggregate market value of Common Stock held by non-affiliates as of
May 11, 2000 was approximately $26,204,658 (based upon the closing sale price of
$1.0625 per share on the Nasdaq National Market on May 11, 2000).
As of May 11, 2000, 29,541,258 shares of the Registrant's $.001 par
value Common Stock were outstanding.
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
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands, except share data)
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,078 $ 1,447
Investments 1,336 2,540
Accounts receivable, net 865 1,163
Inventory 1,971 2,036
Due from related parties 656 686
Other 528 486
-------- --------
Total current assets 6,434 8,358
-------- --------
Property and equipment, net 1,870 2,096
Patents and trademarks, net 11,005 11,256
Goodwill, net 1,764 1,807
Other assets 210 71
-------- --------
Total assets $ 21,283 $ 23,588
======== ========
Liabilities, redeemable preferred stock and common
stockholders' equity
Current liabilities:
Accounts payable $ 873 $ 988
Accrued expenses 1,529 1,360
-------- --------
Total current liabilities 2,402 2,348
-------- --------
Deferred revenue 812 812
Redeemable preferred stock, $.001 par value:
Authorized shares--25,000,000;
Series A 6% Convertible Preferred Stock:
issued and outstanding shares--2,700 and 11,300
at March 31, 2000 and December 31, 1999 3,005 12,457
Common stock, $.001 par value:
Authorized shares--100,000,000;
issued and outstanding shares--29,541,258
and 14,541,544 at March 31, 2000 and
December 31, 1999 30 15
Additional paid-in capital 51,287 41,638
Accumulated deficit (36,253) (33,682)
-------- --------
Total common stockholders' equity 15,064 7,971
-------- --------
Total liabilities, redeemable preferred stock and common
stockholders' equity $ 21,283 $ 23,588
======== ========
</TABLE>
*The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date. See accompanying notes to the condensed
consolidated financial statements.
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)
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
Net sales $ 1,187 $ 1,386
Cost of product sales 709 814
------------ ------------
Gross profit 478 572
R&D contract revenue -- 155
Operating expenses:
Selling, general and administrative 1,624 1,923
Litigation 722 405
Research and development 290 549
Depreciation and amortization 441 472
------------ ------------
3,077 3,349
------------ ------------
Loss from operations (2,599) (2,622)
Other income (expense):
Interest income 58 149
Interest expense -- (3)
------------ ------------
Net loss (2,541) (2,476)
Accrued preferred redemption
accretion and dividends 97 399
------------ ------------
Loss attributable to common stockholders $ (2,638) $ (2,875)
============ ============
Net loss per common share -
Basic and Diluted $ (.11) $ (.28)
============ ============
Weighted average number of
common shares outstanding 24,067,260 10,399,144
============ ============
See accompanying notes to the condensed consolidated financial statements.
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)
Three Months Ended March 31,
---------------------------
2000 1999
----------- --------------
OPERATING ACTIVITIES
Net loss $(2,541) $(2,476)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 441 472
Changes in operating assets and liabilities:
Accounts receivable 298 492
Inventory 65 151
Other current assets (42) (157)
Other assets and liabilities (139) --
Accounts payable and accrued expenses 262 133
------- -------
Net cash used in operating activities (1,656) (1,385)
INVESTING ACTIVITIES
Purchases of property & equipment (82) (14)
Proceeds from sale of equipment 165 --
Due from related party 30 --
Purchase of investments -- (2,218)
Proceeds from sale of investments 1,173 146
Investments in patents and trademarks (4) (34)
------- -------
Net cash provided by (used in) investing activities 1,282 (2,120)
FINANCING ACTIVITIES
Proceeds from stock options exercised 5 --
------- -------
Net cash provided by financing activities 5 --
------- -------
Net change in cash and cash equivalents (369) (3,505)
Cash and cash equivalents at beginning of period 1,447 5,207
------- -------
Cash and cash equivalents at end of period $ 1,078 $ 1,702
======= =======
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
(the "Financial Statements") of Technical Chemicals and Products, Inc. and
Subsidiaries (the "Company" or "TCPI") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements 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, 1999. 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.
5
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Details of selected balance sheet accounts are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 1,193 $ 1,481
Allowance for doubtful accounts (328) (318)
-------- --------
Accounts receivable, net $ 865 $ 1,163
======== ========
Property and equipment:
Furniture, fixtures and equipment $ 3,494 $ 3,766
Leasehold improvements 174 174
-------- --------
3,668 3,940
Accumulated depreciation and amortization (1,798) (1,844)
-------- --------
$ 1,870 $ 2,096
======== ========
Patents and trademarks:
Patents and trademarks $ 15,408 $ 15,403
Accumulated amortization (4,403) (4,147)
-------- --------
$ 11,005 $ 11,256
======== ========
Goodwill:
Goodwill $ 2,494 $ 2,494
Accumulated amortization (730) (687)
-------- --------
$ 1,764 $ 1,807
======== ========
</TABLE>
3. REDEEMABLE PREFERRED STOCK AND COMMON 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
12,300 shares of Preferred Stock and received 19,435,490 shares of the Company's
common stock. See the Company's Annual Report on Form 10-K for the years ended
December 31, 1999 and 1998 and the Company's Report on Form 8-K filed on May 21,
1998 for additional information related to this Preferred Stock transaction.
4. RELATED PARTY TRANSACTIONS
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 Mr. Aronowitz's family limited partnership
(Partnership) to a brokerage house. Under the terms of the Company's agreement
with the Partnership, the brokerage house called on the Company's guarantee; the
Partnership then executed and delivered to the Company a promissory note
personally guaranteed by Mr. Aronowitz in an amount equal to the amount of the
guarantee. The note was 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, 2000).
In February 1999, accrued interest was paid and the note was extended an
additional three months. After becoming due on May 26, 1999, interest was paid
and an additional extension of one year was authorized by the Board of
Directors. The balance of funds advanced under the note was approximately
$647,000 at March 31, 2000, and was included in due from related party in the
balance sheets. At the Board meeting on April 27, 2000, an additional extension
of eighteen months commencing on September 1, 2000 was authorized by the Board
of Directors, with payments of principal and interest due quarterly.
6
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. RELATED PARTY TRANSACTIONS (Continued)
The Company and Mr. Aronowitz are parties to an exclusive, worldwide
license agreement dated January 31, 1996 ("License Agreement") under which the
Company has the right to manufacture, promote, market and sell all medical,
pharmaceutical and health care products and devices created by Mr. Aronowitz on
or before the date of the License Agreement. The License Agreement is for a term
of twenty years with automatic renewals and requires annual fees equal to the
greater of (i) 3% of net collected sales revenues from products based upon
certain technology or (ii) $10,000, with an aggregate maximum limitation of
$10,000,000. The License Agreement replaces an earlier license agreement with
similar provisions. During 1999, 1998, 1997 and 1996, Mr. Aronowitz earned
approximately $149,000, $161,000, $148,000 and $114,000, respectively, pursuant
to the License Agreement. He waived all licensing fees due him for the years
ended December 31, 1995 and 1994. Mr. Aronowitz is also party to an employment
contract with the Company.
The Company made a loan to Dr. Block in the amount of $50,000 pursuant
to his Employment Agreement with the Company dated May 10, 1999, which shall be
deemed repaid with respect to 50% of the amount due and owing on each of the
first two anniversary dates of this agreement as long as Dr. Block remains an
employee of the Company or is not terminated for cause (as defined). The
principal amount of this loan bears interest at the London Interbank (LIBOR)
rate, as adjusted quarterly, with such principal and accrued interest due on
September 1, 2001, subject to such loan being deemed repaid as provided above.
As of March 31, 2000, the outstanding principal and interest is approximately
$52,000.
5. LEGAL PROCEEDINGS
The Company is subject to claims and suits arising in the ordinary
course of business. At this time, it is not possible to estimate the final
outcome of these legal matters or the ultimate loss or gain except as otherwise
stated, if any, related to these lawsuits, or if any such loss will have a
material adverse effect on the Company's results of operations or financial
position, except as otherwise stated.
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) - Case No. CACE 95-011256 - 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 and 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 other unrelated corporate and
individual defendants.
On January 29, 1999, TCPI and Mr. Aronowitz filed their appeal to the
Florida Fourth District Court of Appeal in West Palm Beach, Florida - Case No. 4
DCA 99-00423. On March 29, 2000, the court issued its opinion reversing the
judgment against Mr. Aronowitz for misappropriation of trade secrets. However,
the appellate court affirmed the judgment against TCPI for tortious interference
with a business relationship. The court's decision is not final until the
disposition of any timely filed motion for rehearing, which the Company has
filed as to the tortious interference claim against the Company. The Company
also plans to vigorously pursue any other available proceedings to have the
judgment relating to the tortious interference matter reversed or set aside.
7
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
TCPI has previously obtained appeal bonds staying enforcement of the
judgment against the Company and Mr. Aronowitz. Until such time as the appellate
court's decision is final, the Company will maintain the appeal bonds. If the
appellate court does not reverse its finding as to Mr. Aronowitz on
reconsideration or rehearing, the bond relating to the claims against Mr.
Aronowitz will no longer be required. Further, the Company believes that a bond
may be required to stay enforcement of the tortious interference judgment if the
Company seeks to set it aside. There can be no assurance that the appellate
court will not reverse its decision as to Mr. Aronowitz on reconsideration or
rehearing, that the Company will be successful in reversing or setting aside the
judgment as to the Company, or that the Company will be able to obtain any
necessary bond or otherwise to stay enforcement of the judgment against the
Company.
The liability, if any, that may result from this matter and efforts to
set the judgment aside cannot be reasonably estimated at this time and therefore
no accrual for loss has been recorded in the financial statements as of March
31, 2000.
Noninvasive Glucose Monitoring Technology. In November 1997, a lawsuit
was brought against the Company and Mr. Aronowitz in the United States District
Court for the Southern District of Florida, styled Americare Diagnostics, Inc.,
Joseph P. D'Angelo, et al. v. Technical Chemicals and Products, Inc., et al. -
Case No. 97-3654-CIV-JORDAN - relating to noninvasive glucose monitoring
technology in which the plaintiffs allege, 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 and Mr. Aronowitz have answered the
complaint and have filed counterclaims against the plaintiffs for declaratory
judgment that the patent-in-suit is invalid; patent misuse; patent prosecution
fraud; trade libel; slander of title; commercial disparagement; unfair
competition under the Lanham Act; tortious interference with a contract or
advantageous business relationship; and for injunctive relief. In December 1999,
the discovery phase of this lawsuit ended and the court is presently proceeding
with various pending motions. A trial date has not been set.
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 - Case No. 98-7334-CIV-DAVIS - 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 certification as a class
and an unspecified amount of damages, interest, costs and attorneys' fees. The
Company believes the allegations lack merit and plans to contest the allegations
vigorously. 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, as well as defendant's reply, have been served, but the
court has not yet ruled. Discovery has been stayed pending resolution of the
motion to dismiss. 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 as of March 31, 2000.
The Company maintains Directors and Officer's Liability Insurance;
however, there can be no assurance that such insurance coverage will be adequate
to fund the costs of a settlement, an award, if any, or attorneys' fees. The
Company's Articles of Incorporation provide for indemnification, to the fullest
extent permitted by law, of any person made party to an action by reason of the
fact that such person is an officer or director of the Company.
8
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
Lanham Act. On July 1, 1999, the Company and Mr. Aronowitz, seeking
damages and injunctive relief, filed suit against Joseph P. D'Angelo, Americare
Health Scan, Inc., Americare Biologicals, Inc., Medex, Inc., Teratech Corp.
d/b/a HIV Cybermall, Confidential Home Testing, The Creative Connection, Inc.,
Debra Lapierre and Stanley A. Lapides, in the United States District Court for
the Southern District of Florida - Case No. 99-1862-CIV-JORDAN. The suit alleges
violations of the Lanham Act, libel/defamation per-se, misappropriation of trade
secrets and confidential information, cancellation of the Federal trademark
"ANA-SAL," violations of the Florida Deceptive and Unfair Trade Practices Act,
and common law unfair competition. Certain defendants filed a motion to dismiss,
and on December 15, 1999, the court dismissed the count relating to unfair and
deceptive trade practices and unfair competition and struck certain allegations,
but found that the remaining counts stated causes of action. On January 4, 2000,
the Company and Mr. Aronowitz filed a Second Amended Complaint which omitted the
count dismissed by the court and the allegations that the court struck. The
Defendants Joseph P. D'Angelo, Americare Health Scan, Inc., and Americare
Biologicals, Inc. have alleged counterclaims of malicious prosecution and abuse
of process. The Company and Mr. Aronowitz filed a motion to dismiss these
counterclaims, and these defendants have since withdrawn those counterclaims. A
default has been entered against Medex, Inc., and the Defendants The Creative
Connection, Inc., and Debra Lapierre, have made a motion for a summary judgment.
This case is currently in the discovery phase which is scheduled to close on
June 30, 2000. A trial date is set for April of 2001.
Home Diagnostics Litigation. In November 1993, the Company and Jack L.
Aronowitz filed suit against Home Diagnostics, Inc. ("HDI"), for patent
infringement, among other claims, in the United States District Court for the
Southern District of Florida - Case No. 93-CIV-6999-DAVIS. The patents-in-suit
are U.S. Patent Nos. 4,744,192 (the "'192 Patent") and 4,877,580 (the "'580
Patent").
On September 3, 1996, the court entered judgment against the Company
and Mr. Aronowitz after a bench trial that was held in September 1995. On April
9, 1998, the U.S. Court of Appeals for the Federal Circuit affirmed in part and
reversed in part the lower court's decision and remanded the case to the
district court for further proceedings, including for a determination whether
Mr. Aronowitz owned the patents-in-suit at the time the action was commenced and
whether HDI infringed the `192 Patent. The appellate court found infringement of
the `580 Patent and remanded to the district court for a determination whether
the `580 Patent was within the scope of certain licensing agreements between
TechniMed Corporation, a prior assignee of the patents-in-suit, and HDI.
On remand, the district court denied a request by the Company and Mr.
Aronowitz to reopen the trial record and directed the parties to submit, based
on the existing record, proposed findings of fact and conclusions of law on the
issues that were remanded. Proposed findings of fact and conclusions of law have
been submitted, and on March 20, 2000, the court heard argument by the parties'
counsel on certain issues on remand. On May 1, 2000, the court issued certain
findings of fact and conclusions of law, finding that (i) Mr. Aronowitz owned
the patents-in-suit at the time the suit was commenced, and (ii) HDI did not
infringe the `192 patent. The Company is awaiting a ruling on the remaining
issues on remand, in particular, those relating to the `580 patent.
Defamation Action. On June 16, 1999, the Company and Jack L. Aronowitz
were sued by Joseph P. D'Angelo and related companies in the Circuit Court of
the 17th Judicial Circuit in and for Broward County, Florida - Case No.
99-010726-CACE-18 - alleging libel per quod, libel per se, slander, and false
light. The Company filed a motion for summary judgment, which the court granted
in part, dismissing Counts I and II for libel against the Company and Mr.
Aronowitz. Discovery in this matter is continuing, and no trial date has been
set yet.
9
<PAGE>
TECHNICAL CHEMICALS AND PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
Arbitration. On August 27, 1999, the U.S. District Court for the
Northen District of California - Case No. C-97-00525CAL - confirmed an
arbitration award against the Company in favor of Hooper & Associates, Inc. for
$197,807. Gary Hooper was the president and chief operating officer of Pharma
Patch, PLC. The Company acquired certain assets of Pharma Patch, PLC in November
1995. The arbitration award found that Mr. Hooper was entitled to that amount
pursuant to an employment agreement between Mr. Hooper and Pharma Patch, PLC. At
this time, a bond has been posted in this matter to stay enforcement of the
judgment which Hooper & Associates is seeking to enforce in Florida (Technical
Chemicals and Products, Inc. v. Hooper & Associates, Broward County Circuit
Court - Case No. 019847.) As a result, enforcement of the arbitration award has
been stayed by a Florida court. On May 11, 2000, the court heard arguments on
the continuation of the stay enforcement. The court has ordered limited
discovery and a continuation of the stay until at least June 10, 2000.
Separately, the Company is pursuing certain claims against Mr. Hooper related to
other matters. At this time, it is not possible to estimate the ultimate loss,
if any, related to the resolution of these matters and therefore no accrual for
loss has been recorded as of March 31, 2000.
Judgment In Hazardous Waste Lawsuit. On January 31, 2000, the United
States District Court for the Southern District of Florida - Case No.
98-6201-CIV - entered a judgment against the Company and its President, Jack L.
Aronowitz, in connection with a lawsuit brought by the United States of America
on behalf of the Environment Protection Agency under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, relating to the
clean-up of a facility that during 1985 through 1992 contained alleged hazardous
substances. The Company occupied this facility during part of 1992. The judgment
holds the defendants, jointly and severally, liable for $401,177, representing
their share of site clean-up costs, plus post-judgment interest as allowed by
law. On April 24, 2000, the parties reached a tentative settlement in the amount
of $650,000 payable over an 21-month period with approximately $110,000 payable
on June 1, 2000 and quarterly payments made thereafter on the balance plus
interest at the rate of 5.3% per year. The Company expects the United States
will enter into a formal agreement memorializing this settlement, however, there
can be no assurance that the United States will enter into such an agreement.
The Company's Articles of Incorporation provide for indemnification, to the
fullest extent permitted by law, of any person made party to an action by reason
of the fact that such person is an officer or director of the Company.
The Company has not yet determined whether to pursue an appeal of the
court's ruling, but has filed a notice of appeal on or about March 31, 2000 to
protect its right to pursue such an appeal. If the Company were to appeal the
court's ruling, the Company may be required to post an appeal bond in order to
stay execution of the judgment. There can be no assurances that an appeal, if
taken, would be successful, or the posting of an appeal bond or enforcement of
the judgment would not have a material adverse impact on the Company's liquidity
and capital resources. Management believes that payment of this judgment and
related expenses is probable and has estimated that the ultimate loss related to
the resolution of this matter will be approximately $650,000 and, accordingly,
has recorded an accrual for loss equal to this amount as of March 31, 2000.
6. SUBSEQUENT EVENTS
On May 8, 2000, the Company announced that it entered into a
subscription agreement with Swartz Private Equity, LLC of Roswell, Georgia for
the purchase of up to a $25 million in common stock under a private equity line.
The equity line provides the Company the ability to issue Swartz common stock
and warrants periodically in amounts up to $2 million per draw, subject to prior
effectiveness of a registration statement and subject to certain market
conditions. Pricing for each common stock sale is based on current market prices
at the time of each draw of the equity line. The term of this investment
agreement is for a 36-month period from the time of effective registration with
the Securities and Exchange Commission. The new capital will be used for working
capital, strategic alliances (including joint ventures, acquisitions and
mergers), plant, equipment and machinery, including capital expenditures, and
general corporate purposes.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY BACKGROUND
Technical Chemicals and Products, Inc. (the "Company" or "TCPI")
manufactures point-of-care medical diagnostic products for use at home, in
physician offices, and other healthcare locations and markets them worldwide
through multiple distribution channels under its own HealthCheck(R) brand as
well as OEM (original equipment manufacture) and private label programs.
TCPI's key diagnostic products on the market and in development include
its HealthCheck(R) brand of at home testing and screening products, noninvasive
TD Glucose(TM) Monitoring System for diabetics to monitor glucose levels,
HealthCheck Total and HDL Cholesterol Home Screening Tests, professional use
TriMeter(TM) system for analytical monitoring of Total and HDL Cholesterol and
blood glucose from a finger-stick, Drug of Abuse screening tests available in
TCPI's branded ScanGuard(TM) and private label One-Step slide, strip or
multi-test cassette formats, and over-the counter and professional pregnancy and
fertility family planning products in multiple formats - including TCPI's
accurate and easy to use One Step-One Minute Pregnancy Test(TM).
Many of TCPI's diagnostic products incorporate its patented and
proprietary membrane-based technology platform. The Company also owns a
patent-protected and proprietary portfolio of transdermal and dermal drug
delivery technologies and skin permeation enhancers. TCPI presently holds 26
U.S. and foreign patents, and has 61 domestic and foreign patent applications
pending.
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, the resolution of pending litigation, 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 and timing of additional equity
investments, mergers, acquisitions or other strategic transactions, 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 significantly from those predicted
or assumed include, but are not limited to: the satisfactory completion of
clinical trials demonstrating efficacy of the TD GlucoseTM Monitoring System;
FDA and foreign regulatory 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 its business plans; engineering development; lead
time for delivery of equipment; the Company's dependence on outside parties such
as its key customers, suppliers, licensing and alliance
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FORWARD LOOKING STATEMENTS (Continued)
partners; competition from major pharmaceutical, medical and diagnostic
companies; risks and expense of government regulation and effects of changes in
regulation (including risks associated with obtaining requisite FDA and other
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 and maintaining
patents and other protections of intellectual property; risks associated with
uncertainty of litigation and appeals, and the payment of judgments not reversed
on appeal or otherwise; the Company's limited cash reserves and sources of
liquidity; uncertainties regarding timing and effectiveness of registration
statements; uncertainties in availability of expansion capital in the future and
other risks associated with capital markets, including funding of ongoing
operations, risks associated with the Company's ability to negotiate and obtain
additional financing, equity investments or strategic transactions on favorable
terms or at all, 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. Moreover, the Company may not be
able to successfully develop and market new products, enter into strategic
alliances or implement any or all of its operating strategy unless it is able to
generate additional liquidity and working capital.
For a complete description of the Company's business, products and
liquidity, see the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
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<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 2000 continued to
reflect the incurrence of significant losses connected with the ongoing research
and development activities, and marketing associated with worldwide distribution
of our existing and future products. The impact of these losses upon the
Company's liquidity and financial resources are more fully discussed below.
Net Sales. The Company's net sales for the first quarter of 2000 were
approximately $1.2 million as compared to approximately $1.4 million reported in
the first quarter a year earlier. Sales of the Company's HealthCheck(R) home
diagnostic products during the first quarter of 2000 increased by more than 38%
due to the ongoing penetration of the retail pharmacy marketplace and also
online sales which began during January 2000. Sales of the Company's specialty
chemicals and biological buffers also increased substantially over the
comparable quarter a year ago. These gains were more than offset by a
significant decrease in sales of TCPI's worldwide OEM (original equipment
manufacture), domestic private label family planning pregnancy and fertility
tests, and sales of drug of abuse screening tests as compared to the first
quarter of 1999. Tighter inventory management by the Company's international
distributor occurred during the first quarter of 2000 and resulted in reduced
shipments as compared to the prior year quarter. In the U.S., the year-to-year
quarterly decline in private label sales reflected a significant initial
stocking order for a major new customer that occurred during the first quarter
of 1999 as compared to ongoing sales to that customer in the first quarter of
2000.
Gross Profit. The Company's gross profit from net sales for the first
three months of 2000 was $478,000 as compared to $572,000 in the same period of
1999. Gross profit, expressed as a percent of net sales, for the first quarter
of 2000 and 1999 was relatively unchanged at 40.3% and 41.3%, respectively. The
decline in gross profit corresponded to the reduction in net sales for the first
quarter of 2000.
Operating Expenses. The Company's total operating expenses for the
first quarter of 2000 decreased by 8.1% to approximately $3.1 million from
approximately $3.3 million in the prior year. The mix of selling, general and
administrative; litigation; and research and development expenses are as
follows:
Selling, General and Administrative. Selling, general and
administrative (SG&A) expenses declined by 15.5% to approximately $1.6 million
in the first quarter of 2000 from SG&A expenses of approximately $1.9 million
incurred during the first quarter of 1999. This decrease was accomplished
through ongoing cost containment programs.
Litigation. Litigation expenses for the first quarter of 2000 were
$722,000 as compared to $405,000 incurred in the same quarter a year earlier.
This increase reflected higher comparable expenses incurred during the current
year quarter related to the ongoing defense of certain legal matters as well as
an additional approximately $150,000 to recognize the settlement of certain
litigation.
Research and Development. During the first quarter of 2000, the
Company's R&D efforts continued to focus primarily on the ongoing development of
the Company's TD Glucose monitoring technology as well as its development of
cholesterol testing products. In addition, the first quarter of the current year
did not contain any R&D expenses related to transdermal drug delivery
technologies. These activities were suspended in mid-1999 with the closing of
the California facility. The result was a reduction of quarterly R&D expenses to
$290,000 from $549,000 in the prior year.
Net Loss. The Company's net loss for the first quarter ended March 31,
2000 was relatively unchanged at approximately $2.5 million from a comparable
net loss in the same quarter a year earlier. The Company's net loss attributable
to common stockholders declined to approximately $2.6 million in the first
quarter of 2000 from a net loss attributable to common stockholders of
approximately $2.9 million in the first quarter of 1999. This improvement was
due to a significant reduction in the accrued dividend and accretion to
redemption value related to the 1998 issuance of
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
redeemable convertible preferred stock in which $97,000 was recognized in the
first quarter of 2000 as compared to $339,000 in the first quarter of 1999.
While the accretion was completed as of December 31, 1999, dividends on
outstanding redeemable preferred stock continue to accrue. Additionally, the
Company's net loss per share, basic and diluted, for the first quarter of 2000
was reduced to $.11 per share as compared to a net loss per share, basic and
diluted, of $.28 per share for the first quarter of 1999 due primarily to an
increase in the average number of common shares outstanding.
FINANCIAL CONDITION
The Company had cash and investments of approximately $2.4 million at
March 31, 2000 as compared to approximately $4.0 million at December 31, 1999.
Working capital at March 31, 2000 was approximately $4.0 million as compared to
approximately $6.0 million at December 31, 1999. The Company had current assets
of approximately $6.4 million and stockholders' equity of approximately $18.1
million at March 31, 2000. This compares to current assets of approximately $8.4
million and stockholders' equity of approximately $20.4 million at December 31,
1999. These decreases in working capital and current assets were due primarily
to the Company's use of cash to fund its operations.
The Company expects to continue to draw upon its working capital and
plans to utilize such funds to purchase production equipment, complete clinical
trials and regulatory submissions relating to the TD Glucose Monitoring System
and Total and HDL cholesterol monitoring products, develop new diagnostic
products, conduct clinical trials, continue its investment in marketing and
facility expansion, and continue its day-to-day business.
On May 8, 2000, the Company announced that it entered into a
subscription agreement with Swartz Private Equity, LLC of Roswell, Georgia for
the purchase of up to a $25 million in common stock under a private equity line.
The equity line provides the Company the ability to issue Swartz common stock
and warrants periodically in amounts up to $2 million per draw, subject to prior
effectiveness of a registration statement and subject to certain market
conditions. Pricing for each common stock sale is based on current market prices
at the time of each draw of the equity line. The term of this investment
agreement is for a 36-month period from the time of effective registration with
the Securities and Exchange Commission. The new capital will be used for working
capital, strategic alliances (including joint ventures, acquisitions and
mergers), plant, equipment and machinery, including capital expenditures, and
general corporate purposes. The Company has not yet sold any stock pursuant to
this agreement, and due to conditions contained in the agreement, there can be
no assurance that the Company will be able to sell stock in sufficient amounts
or at all, to satisfy its financial needs.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $1.7 million in
the first quarter of 2000 as compared to approximately $1.4 million in the same
quarter a year earlier. This difference is due to a greater net loss as compared
to the year ago period as well as a shift in comparable prior year period
operating assets and liabilities that reflected higher accounts payable and
accrued expenses of $262,000 as compared to $133,000 in the prior year quarter
and also a change in other assets and liabilities in the current year quarter of
$139,000 as compared to none recognized a year earlier.
No significant net cash amounts were provided by financing activities
in the first quarter of 2000 or the first quarter of 1999.
During 1999 and 2000, the Company has sustained significant operating
losses that have resulted in substantial consumption of its cash reserves. The
Company believes it will continue to incur net losses and have negative cash
flow
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
in the immediate future. Based on the current rate of losses and cash flow, the
Company plans to reduce its operating losses, contain expenses, increase sales
of its products, or sell certain assets.
While the Company has entered into an agreement with Swartz Private
Equity, LLC for the purchase of up to $25 million in common stock under a
private equity line, this transaction is subject to certain terms and market
conditions, including effective registration with the Securities and Exchange
Commission. If the Company is unable to successfully obtain funds under this
agreement due to unfavorable market conditions or the Company's inability to
achieve effective registration on a timely basis or at all, or otherwise obtain
additional capital from other sources on satisfactory terms, or significantly
reduce its operating losses, the Company would have to consider selling some or
all of its technologies, reduce or terminate completely its research and
development activities, or reduce or discontinue some or all of its operations,
or lastly, apply for protection from its creditors under the federal bankruptcy
laws.
In addition, as described elsewhere in this Form 10-Q under "Legal
Proceedings," the Company has pending judgments in various legal proceedings,
some of which are currently secured by bonds collateralized by existing working
capital. If TCPI was required to satisfy all or a significant portion of these
judgments on a basis faster than presently anticipated, the Company's present
liquidity condition would be further negatively impacted.
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.
The Company's long-term ability to meet its liquidity requirements and
to continue operations will depend on (i) its ability to raise additional
capital, (ii) the successful completion of clinical trials and receipt of
governmental approvals to begin manufacturing and selling its new products, and
(iii) the ability of the Company to sell its new products at a profit. The
Company's future working capital requirements may vary materially from those now
planned depending on numerous factors, including:
(1) the outcome of clinical testing of products under development
(including the TD Glucose Monitoring System and the Total and
HDL cholesterol monitoring products), delays or changes in
government required testing and clearance or approval
procedures and the Company's ability to receive FDA clearance
or approval for the marketing of its products under
development;
(2) competitive and technological advances that may require the
Company to modify the design of its products under
development;
(3) the Company's ability to successfully resolve pending
litigation; and
(4) manufacturing costs for the Company's current and future
products.
In 1998, the Company issued 15,000 shares of its Series A Convertible
Redeemable Preferred Stock (the "Preferred Stock"). The Preferred Stock is
convertible into the Company's common stock at an exchange ratio based on the
market price of the Company's Common Stock. Under certain circumstances, the
Preferred Stock is redeemable at the option of the holders. To date, the holder
of the Preferred Stock converted 12,300 shares of Preferred Stock into
19,435,490 shares of Common Stock, and presently has 2,700 shares of its
Preferred Stock outstanding. Based upon the terms of the Preferred Stock, as of
May 9, 2000 the outstanding shares of Preferred Stock would be convertible into
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
2,879,000 shares of Common Stock. For additional information related to this
Preferred Stock transaction, see the Company's Annual Reports on Form 10-K for
the years ended December 31, 1999 and 1998, respectively, and the Company's
Report on Form 8-K filed on May 21, 1998.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
At March 31, 2000, the Company had only cash equivalents and high
grade, short-term securities, which are not typically subject to material market
risk. The Company has no outstanding loans. A hypothetical 10% change in
interest rates would have an immaterial impact on the fair value of these
instruments.
YEAR 2000
The term "Year 2000 issue" is a general term used to describe the
various problems that may have resulted from the improper processing of dates
and date-sensitive calculations by computers and other machinery as the year
2000 was reached. These problems generally arise from the fact that most of the
world's computer hardware and software has 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, 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. Costs related to the Company's actions to become Year 2000 compliant
were funded through cash from operating activities. The total estimated costs
related to Year 2000 compliance efforts were approximately $60,000, of which
$55,000 was expensed and $5,000 capitalized.
The Company did not experience any Year 2000 computer related
difficulties. However, due to the general uncertainty with respect to the Year
2000 issue, there can be no assurance that all Year 2000 issues have been
foreseen and corrected, or that no future material disruption of the Company's
business will occur directly or indirectly as it relates to the Year 2000
compliance status of the Company's key vendors and customers or a general
failure of external local, national or international systems (including power,
communications, postal or transportation systems) necessary for the ordinary
conduct of business.
While the Company has developed 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.
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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: October 31, 2000 By: /s/ Walter V. Usinowicz, Jr.
----------------------------------------
Walter V. Usinowicz, Jr.
Vice President and Chief Financial Officer
(Duly authorized officer and principal
accounting officer)
