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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 SEPTEMBER 30, 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
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TCPI, 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
November 13, 2000 was approximately $9,900,603 (based upon the closing sale
price of $0.344 per share on the Nasdaq National Market on November 13, 2000).
As of November 14, 2000, 33,650,675 shares of the Registrant's $.001
par value Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one):
YES NO X
---- ----
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TCPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 2000 December 31,1999*
---------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 715 $ 1,447
Investments -- 2,540
Accounts receivable, net 592 1,163
Inventory 2,181 2,036
Due from related parties 736 686
Other 1,419 486
------------------------------------------
Total current assets 5,643 8,358
------------------------------------------
Property and equipment, net 1,843 2,096
Patents and trademarks, net 10,640 11,256
Goodwill, net 1,678 1,807
Deferred financing costs 2,000 --
Other assets 17 71
------------------------------------------
Total assets $ 21,821 $ 23,588
==========================================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,635 $ 988
Accrued expenses 1,644 1,360
------------------------------------------
Total current liabilities 4,279 2,348
Deferred revenue 812 812
Other liabilities 215 --
Convertible debentures 557 --
Redeemable preferred stock, $.001 par value:
Authorized shares--25,000,000;
Series A 6% Redeemable Convertible Preferred Stock,
issued and outstanding shares--1,400 and 11,350
at September 30, 2000 and December 31, 1999 1,601 12,457
Commitments and contingencies -- --
Stockholder's equity:
Common stock, $.001 par value:
Authorized shares--100,000,000; issued and outstanding
shares--31,878,909 and 14,541,544 at September 30,
2000 and December 31, 1999 32 15
Additional paid-in capital 54,778 41,638
Accumulated deficit (40,453) (33,682)
------------------------------------------
Total common stockholders' equity 14,357 7,971
------------------------------------------
Total liabilities, redeemable preferred stock and common
stockholders' equity $ 21,821 $ 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)
TCPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
2000 1999 2000 1999
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,002 $ 1,267 $ 3,314 $ 3,942
Cost of product sales 575 750 1,898 2,297
---------------------------------- -------------------------------
Gross profit 427 517 1,416 1,645
R&D contract revenue 200 -- 200 471
Operating expenses:
Selling, general and administrative 1,781 2,021 4,877 5,585
Litigation 396 764 1,523 1,601
Research and development 180 214 689 1,423
Depreciation and amortization 428 430 1,297 1,384
---------------------------------- -------------------------------
2,785 3,429 8,386 9,993
---------------------------------- -------------------------------
Loss from operations (2,158) (2,912) (6,770) (7,877)
Other income (expense):
Investment income 37 117 59 345
Interest expense (83) (4) (85) (11)
---------------------------------- -------------------------------
Net loss (2,204) (2,799) (6,796) (7,543)
Accrued preferred redemption
accretion and dividends 26 330 163 1,125
---------------------------------- -------------------------------
Loss attributable to common stockholders $ (2,230) $ (3,129) $ (6,959) $ (8,668)
================================== ===============================
Net loss per common share -
Basic and diluted $ (.07) $ (.28) $ (.25) $ (.81)
================================== ===============================
Weighted average number of
common shares outstanding 30,792,916 11,099,557 28,227,204 10,714,341
================================== ===============================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
TCPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
2000 1999
---------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,796) $ (7,543)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,297 1,384
Changes in operating assets and liabilities:
Accounts receivable 571 503
Inventory (145) (76)
Other current assets (933) (179)
Other assets and liabilities 230 --
Accounts payable and accrued expenses 2,161 808
Deferred revenue -- 812
---------------------------------------
Net cash used in operating activities (3,615) (4,291)
INVESTING ACTIVITIES
Purchases of property & equipment (314) (88)
Proceeds from sale of equipment 165 --
Due from related party (50) --
Purchase of investments -- (5,010)
Proceeds from sale of investments 2,563 7,569
Investments in patents and trademarks (150) (75)
---------------------------------------
Net cash provided by investing activities 2,214 2,396
FINANCING ACTIVITIES
Proceeds from convertible debentures 664 --
Proceeds from stock options exercised 5 --
---------------------------------------
Net cash provided by financing activities 669 --
---------------------------------------
Net decrease in cash and cash equivalents (732) (1,895)
Cash and cash equivalents at beginning of period 1,447 5,207
---------------------------------------
Cash and cash equivalents at end of period $ 715 $ 3,312
=======================================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
TCPI, 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 TCPI, 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 required 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 that 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.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Details of selected balance sheet accounts are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-----------------------------------------------------
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 925 $ 1,481
Allowance for doubtful accounts (333) (318)
-----------------------------------------------------
Accounts receivable, net $ 592 $ 1,163
=====================================================
Property and equipment:
Furniture, fixtures and equipment $ 3,727 $ 3,766
Leasehold improvements 174 174
-----------------------------------------------------
3,901 3,940
Accumulated depreciation (2,058) (1,844)
-----------------------------------------------------
$ 1,843 $ 2,096
=====================================================
Patents and trademarks:
Patents and trademarks $ 15,553 $ 15,403
Accumulated amortization (4,913) (4,147)
-----------------------------------------------------
$ 10,640 $ 11,256
=====================================================
Goodwill:
Goodwill $ 2,494 $ 2,494
Accumulated amortization (816) (687)
-----------------------------------------------------
$ 1,678 $ 1,807
=====================================================
</TABLE>
3. REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY, AND
CONVERTIBLE DEBENTURES
In May 1998, the Company completed a private placement of 15,000 shares
of Series A Redeemable Convertible Preferred Stock (the "Preferred Stock") to a
single institutional investor (the "Investor"). To date, the Investor has
converted 14,200 shares of Preferred Stock into 23,194,907 shares of the
Company's common stock, and presently has 800 shares of the Company's Preferred
Stock outstanding. 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.
5
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY, AND
CONVERTIBLE DEBENTURES (Continued)
In May 2000, the Company entered into a subscription agreement with
Swartz Private Equity, LLC of Roswell, Georgia ("Swartz") for the purchase of up
to $25 million in common stock under a private equity line. The equity line
provides the Company the ability to issue to 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 limitations based on
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 November 3, 2000, which
is the date the registration statement covering the resale of common stock by
Swartz was declared effective by the Securities and Exchange Commission. At this
time, no shares of common stock have been issued or sold to Swartz under the
investment agreement. The Company intends to use the proceeds for working
capital, strategic alliances (including joint ventures, acquisitions and
mergers), plant, equipment and machinery, including capital expenditures, and
general corporate purposes.
In connection with the subscription agreement, on April 19, 2000, the
Company issued to Swartz a warrant to purchase 312,500 shares of the Company's
common stock, exercisable for a period of five years from March 17, 2000, with
an initial exercise price equal to $1.9063, which was the lowest closing bid
price for the five trading days before March 17, 2000. On April 19, 2000, the
Company issued an additional warrant to Swartz to purchase 312,500 shares of the
Company's common stock, exercisable for a period of five years from March 17,
2000, with an initial exercise price equal to $0.9375, which was the lowest
closing bid price for the five trading days immediately before the closing date
of May 3, 2000. The Company estimated the fair value of these warrants to be
approximately $1,041,000 using the Black-Scholes option valuation model. The
fair value of the warrants is included as a component of deferred financing
costs in the balance sheet at September 30, 2000 and will be charged against the
proceeds of stock issuances under the subscription agreement.
On August 28, 2000, the Company entered into a securities purchase
agreements with investors arranged through the May Davis Group ("MDG"), as
placement agent. Under this agreement, the Company sold to the investors
$696,000 of TCPI's 6% convertible debentures due August 28, 2005 and $235,000 of
TCPI's 6% convertible debentures due September 21, 2005. The debentures are
convertible into shares of the Company's common stock at any time after 120 days
from the closing dates of August 28, 2000 and September 21, 2000, respectively,
at the lesser of $1.05 per share or 80% of the average closing bid prices of the
Company's common stock during the 5 trading days immediately preceding the
conversion. Also, in connection with the issuance of the 6% convertible
debentures to the investors, the Company issued to the investors warrants to
purchase 372,400 shares of TCPI's common stock, which is equal to 20% of the
number of shares of TCPI's common stock that would have been issuable upon
conversion of the convertible debentures as of the closing dates. The Company
estimated the fair market value of these warrants to be approximately $168,000
using the Black-Scholes option valuation model. The Company allocated the
portion of the proceeds of the debentures to the warrants to additional paid in
capital based on the relative fair value of the warrants and the debentures at
the time of issuance. The resulting discount is being amortized over the term of
the debentures. In addition, the debentures were recorded net of the intrinsic
value of their beneficial conversion feature of approximately $269,000. For each
debenture issuance, the intrinsic value of the related beneficial conversion
feature will be accreted to interest expense over the 120 day period from the
time of issuance until the earliest time when the debentures become eligible to
be converted into shares of the Company's common stock. The warrants have an
exercise price of $1.50 and a term of three years.
On September 5, 2000, the Company entered into credit line agreement
with GMF Holdings, arranged through MDG, as placement agent. Under the GMF
credit line agreement, the Company has the option to sell, or "put," up to $10
million of TCPI's 6% convertible debentures to GMF, subject to a formula based
on stock price and trading volume, over a three year period. The Company cannot
sell any debentures to GMF until it registers for resale the shares issuable
upon conversion of the debentures. The Company has not yet registered these
shares, and therefore, the Company is unable to access the GMF credit line at
this time. The debentures are convertible into shares of TCPI's
6
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY, AND
CONVERTIBLE DEBENTURES (Continued)
common stock at the lesser of $1.40 per share or 90% of the lowest closing bid
price of TCPI's common stock during the 20 trading days immediately preceding
the conversion.
In providing the Company with the convertible debenture transaction and
credit line, compensation to MDG is linked to both transactions. MDG received
cash compensation equal to 10% of the principal amount of convertible debentures
issued to date under the securities purchase agreement and a five-year warrant
to purchase 1,000,000 shares of TCPI's common stock at $1.50 per share. The
Company has the right to force conversion of the MDG warrant if the closing
price of our common stock is $3.00 or higher for ten consecutive trading days.
Upon conversion of the warrants held by the debenture holders and MDG, the
Company would receive additional capital. Additionally, in consideration for
closing the convertible debenture transaction and arranging the credit line, the
Company will issue to MDG 350,000 shares of TCPI's common stock. The Company
estimated the fair market value of the warrants issued to MDG to be
approximately $410,000 using the Black-Scholes option valuation model. The fair
market value of the warrants issued to MDG, the fair market value of the
Company's common stock issued to MDG, and the cash compensation paid to MDG are
included as components of deferred financing costs in the balance sheet and are
being amortized over the five year life of the agreements.
Under a registration rights agreement, TCPI is obligated to register
for resale the shares issuable upon conversion of the convertible debentures and
upon exercise of the warrants. The Company is also obligated to register for
resale the shares issuable upon exercise of the MDG warrant and the shares of
common stock the Company issued to MDG. The conversion price of the debentures
and warrants decreases and the Company incurs penalties if it does not file the
registration statement covering the resale of these shares, and the SEC does not
declare the registration statement effective, by certain dates.
For a complete description of the Swartz and the MDG funding
transactions, see the Company's Registration Statement on Form S-2, and
amendments thereto, as filed with the Securities and Exchange Commission.
4. RELATED PARTY TRANSACTIONS
On August 28, 1998, the Company extended a loan to Mr. Aronowitz'
family limited partnership (Jack L. Aronowitz is the Company's former Chairman)
in the principal amount of $750,000 with an annual interest rate of 7 3/4%
whereupon this obligation was personally guaranteed by Mr. Aronowitz
("Guaranty"). On September 12, 2000, the Board of Directors of the Company voted
to terminate the employment of Jack L. Aronowitz pursuant to the termination
without cause provision of Mr. Aronowitz' Employment Agreement dated September
27, 1996 ("Employment Agreement"). Simultaneously, the Board voted to remove Mr.
Aronowitz as Chairman, President and Chief Technical Officer of the Company. Mr.
Aronowitz remains a Director of the Company. On October 25, 2000, the loan was
called due by the Company and accelerated to its full amount for non-payment of
a scheduled payment. As of October 27, 2000, the balance of the loan guaranteed
by Mr. Aronowitz was $713,237.11. On November 9, 2000, the Company commenced
litigation against the family limited partnership seeking a judgment for the
total amount due on the loan together with attorneys fees. The net amount due
Mr. Aronowitz over the two-year period under the termination without cause
provision of his Employment Agreement (after deductions for taxes) of
approximately $268,000 as well as any other amounts due Mr. Aronowitz from the
Company are being applied periodically to the reduction of Mr. Aronowitz'
Guaranty obligation to the Company. On October 19, 2000, Mr. Aronowitz brought
litigation against the Company, its directors, and its general counsel relating
to his separation from employment and his license agreement with TCPI (See Note
5).
The Company made a loan to Dr. Block (the Company's President and Chief
Executive Officer) 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
7
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. RELATED PARTY TRANSACTIONS (Continued)
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
September 30, 2000, the outstanding principal and interest is $26,460.
5. LEGAL PROCEEDINGS
The Company is subject to claims and suits arising in the ordinary
course of business. At this time, except as otherwise indicated, 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. For the third
quarter and nine-month periods ended September 30, 2000, such litigation
expenses decreased from the comparable periods of the prior year.
HIV Saliva Collector Technology. A lawsuit was brought against TCPI 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 the Company did not misappropriate the plaintiffs' trade secrets, but found
that Mr. Aronowitz had intentionally misappropriated these 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 the Company 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, the Company and Mr. Aronowitz filed an 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 the Company for
tortious interference with a business relationship. The court subsequently
denied motions by the parties for rehearing, and on or about June 16, 2000,
issued its mandate on the appeal to the trial court.
TCPI has previously obtained appeal bonds staying enforcement of the
judgment against the Company and Mr. Aronowitz. As a result of the reversal of
the judgment against Mr. Aronowitz, that bond is no longer required and
collateral securing the bond has been released to TCPI. The Company believes
that the bond presently in place with respect to TCPI may be required to remain
in place to stay enforcement of the tortious interference judgment. On October
26, 2000, the court denied TCPI's motion to vacate the tortious interference
judgment. The Company intends to appeal this ruling. TCPI has requested the
court to stay enforcement of judgment pending appeal. There can be no assurance
that the Company will be successful in vacating the judgment on appeal or
staying enforcement of the judgment.
The Company cannot reasonably estimate the liability, if any, at this
time that may result from this matter and efforts to set the judgment aside and
therefore the Company has not recorded an accrual for loss in the financial
statements as of September 30, 2000.
8
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
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. TCPI 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. On November 8, 2000, the Company and Mr. Aronowitz
filed a motion for summary judgement dismissing all the claims of certain
plaintiffs and imposition of attorneys fees and costs. 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-DIMITROULEAS - against the Company
and Mr. Aronowitz on behalf of various shareholders 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 TCPI and Mr.
Aronowitz 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(TM) Monitoring System. The plaintiffs are seeking
certification as a class on an unspecified amount of damages, interest, costs
and attorneys' fees. 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. On July 3, 2000, the court dismissed all claims against Mr. Aronowitz
and the Company, but granted plaintiffs leave to amend their complaint on or
before July 24, 2000. On July 24, 2000, plaintiffs filed a second amended
complaint, to which the Company has not yet responded. On August 25, 2000, the
Company filed a motion to dismiss the Second Amended Complaint. On September 25,
2000, plaintiffs filed an opposition to a motion to dismiss. The court has not
yet ruled on the motion to dismiss. The Company believes the allegations lack
merit and plan to contest the allegations vigorously. At this time, the Company
cannot reasonably estimate the ultimate loss, if any, related to these claims
and therefore the Company has not recorded an accrual for loss as of September
30, 2000.
TCPI maintains Directors and Officer's Liability Insurance. However,
there can be no assurance that this insurance coverage will be adequate to fund
the costs of a settlement, an award, if any, or attorneys' fees. Demands have
been made upon the Company which far exceed the amount of this coverage. TCPI'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.
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 under Florida law 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.
9
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
Aronowitz have filed a motion to dismiss these counterclaims, and these
defendants have since withdrawn those counterclaims. The court entered a default
judgment against Medex, Inc. The Company and Mr. Aronowitz have reached a
conditional settlement with The Creative Connection, Inc., and Debra Lapierre.
This case is currently in the discovery phase. A trial date is set for April of
2001.
Home Diagnostics Litigation. In November 1993, the Company and Mr.
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 Company commenced the
action 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. The parties submitted proposed findings of fact and
conclusions of law, 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 Mr. 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 has filed a motion for summary judgment, which the court
granted in part, dismissing Counts I and II for libel against TCPI and Mr.
Aronowitz. Discovery in this matter is continuing, and no trial date has been
set yet.
Hooper Litigation. On August 27, 1999, the U.S. District Court for the
Northern 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. TCPI acquired certain assets of Pharma Patch, PLC in November 1995.
The arbitration award found that Mr. Hooper was entitled to that amount under 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.)
TCPI has filed a suit against Mr. Hooper in the United States District
Court for the Southern District of Florida - Case No. 99-7452 CIV-MOORE, which
claims that Mr. Hooper perpetrated a fraud on the Company by making fraudulent
representations to the Company in connection with TCPI's acquisition of certain
assets of the co-defendants Pharma Patch, PLC and PP Holdings, LTD. Mr. Hooper
has filed a motion to dismiss for lack of personal jurisdiction, which is now
pending before the court.
As a result, enforcement of the arbitration award has been stayed by a Florida
court. On July 5, 2000, the state court continued the stay of enforcement of the
award during the pendency of the Company's claims against Mr. Hooper and Hooper
& Associates, Inc. in the federal action. At this time, the Company does not
believe it is possible to estimate
10
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
the ultimate loss, if any, related to the resolution of these matters and
therefore the Company has not recorded any accrual for loss as of September 30,
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 TCPI and Mr. Aronowitz, in connection
with a lawsuit brought by the United States of America on behalf of the
Environmental Protection Agency under the Comprehensive Environmental Response
Compensation and Liability Act of 1983, 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
October 6, 2000, TCPI reached a settlement with the United States in the amount
of $650,000 payable over a 21-month period beginning in October 2000 with the
first payment due within 30 days of execution of the formal settlement agreement
and quarterly payments made thereafter on the balance plus interest at the rate
of 5.3% per year. Under the terms of this agreement, the Company made its first
payment of $112,963 on October 13, 2000. TCPI's amended and restated articles of
incorporation provide for indemnification, under certain circumstances, to the
fullest extent permitted by law, of persons made party to an action by reason of
the fact that such person is an officer or director of the Company. TCPI
recorded an accrual for loss equal to $650,000 as of March 31, 2000.
Unilever Patent Litigation. In 1994, TCPI and six other parties
initiated an opposition action in the European Patent Office in Munich, Germany,
against European Patent No. 291,194 (the "European Patent"), presently owned by
Unilever N.V. In European Opposition Case No. T0681/98, the Company and the
other parties opposed the patent in its entirety on the grounds that it lacked
novelty and inventiveness.
In March 1998, the European Patent Office Opposition Board found in
favor of Unilever, and TCPI and five of the other parties filed an appeal. Upon
substantial appellate oral proceedings held on January 26-27, 2000 and numerous
auxiliary requests, the Opposition Board maintained the European Patent, as
amended. However, this ruling is subject to adaptation of the specifications
contained in the amended patent and approval by the Opposition Board. Unilever
is presently awaiting invitation from the Opposition Board to submit its
proposed adaptations to the specification of the European Patent, after which
TCPI and the other parties intend to vigorously contest such action.
On January 26, 2000, the Company, Roche Diagnostics GmbH, a German
company, Roche Diagnostics S.p.A., an Italian company, and Hestia Pharma GmbH, a
German distributor wholly-owned by Roche Diagnostics, filed a declaratory
judgment action relating to Italy and Germany in the District Court of Torino,
Italy. The Company asked the court to find that (1) the European Patent granted
to Unilever is invalid, and (2) the EVATEST(R) product manufactured, distributed
and sold by TCPI and the other plaintiffs do not infringe the European Patent
(the "Italian Action"). An oral hearing scheduled for July 19, 2000 to discuss
the court's jurisdiction to hear the action was adjourned to November 15, 2000.
TCPI manufactures the EVATEST(R) test devices.
On February 3, 2000, Unilever filed a patent infringement action in the
Administrative Court of Munich, Germany against Hestia Pharma GmbH and four of
its officers alleging infringement of the European Patent that is the subject of
the Italian Action. On April 27, 2000, Unilever amended its complaint to allege
infringement of European Patent Application No. 93108764.7. In this action,
Unilever has asked that Hestia Pharma GmbH refrain from commercializing, using,
importing or possessing analytical test devices which comprise features of
Unilever's patent claims.
On April 20, 2000, Unilever filed a patent infringement action in the
Administrative Court of Munich, Germany against TCPI and Roche Diagnostics GmbH
(together with the February 3, 2000 action, the "German Actions") alleging
infringement of the patent involved in the Italian Action and European Patent
Application No. 93108764.7. In this action, Unilever has asked that TCPI and
Roche Diagnostics GmbH refrain from offering, having offered,
11
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
commercializing, having commercialized, using, having used, importing, having
imported or possessing analytical test devices that fall under the claims of
Unilever's patent and patent application.
The Company has agreed to indemnify Roche Diagnostics and its
affiliates and their respective officers against all damages, back royalties,
costs, attorneys' fees and the like arising from or related to any and all
patent infringement actions. Management intends to vigorously prosecute the
Company's claims against the Unilever patent in the Italian Action and
vigorously defend the claims asserted by Unilever in the German Actions. TCPI
has, as the manufacturer of these products, previously provided the same
indemnity to Roche Diagnostics. A majority of TCPI's sales in Europe relate to
products covered by the patents that are the subject of the Italian Action and
the German Actions. Consequently, a loss in this litigation may have a material
adverse effect on the Company's results of operations and financial condition.
Litigation with Former Chairman and Certain Family Limited
Partnerships. On September 12, 2000, the Board of Directors of the Company voted
to terminate the employment of Jack L. Aronowitz pursuant to the termination
without cause provision of Mr. Aronowitz' Employment Agreement dated September
27, 1996 ("Employment Agreement"). Simultaneously, the Board voted to remove Mr.
Aronowitz as Chairman, President and Chief Technical Officer of the Company. Mr.
Aronowitz remains a Director of the Company.
On September 13, 2000, a Letter of Intent was executed by the Company
and Mr. Aronowitz that provided, among other things, that Mr. Aronowitz'
signature on the Letter of Intent was deemed his resignation and retirement from
the Company as Chairman, President, and Chief Technical Officer. In addition,
the Letter of Intent was subject to the execution of a definitive Agreement as
to the terms and conditions of Mr. Aronowitz' separation from the Company, which
was to be signed by no later than September 20, 2000. No such definitive
Agreement was entered into by September 20, 2000.
Subsequent to the execution of the Letter of Intent, Mr. Aronowitz made
certain demands on the Company that were beyond the scope of the Letter of
Intent; including a demand that payments be made to him related to the Company's
noninvasive TD Glucose(TM) Monitoring System and other technology. The Company
rejected Mr. Aronowitz' demand.
On October 19, 2000, the Company was served with a Summons and
Complaint in an action commenced by Mr. Aronowitz in the Circuit Court of the
17th Judicial Circuit in and for Broward County, Florida - Case No. 00017365.
The named defendants are the Company, its directors (with the exclusion of Mr.
Aronowitz) and the Company's general counsel. The Company believes the claims
contained in this complaint are without merit and will vigorously defend itself
in this lawsuit. An unfavorable outcome of this litigation would have a material
adverse impact on the Company, including possible inability to sell the
Company's TD Glucose Monitoring System. Mr. Aronowitz is seeking unspecified
damages. The Company has until December 4, 2000 to respond to the Complaint.
The 13 counts in Mr. Aronowitz' Complaint are (1) rescission of a
Cancellation and Exclusive License Agreement dated January 31, 1996 ("License
Agreement"), (2) breach of contract with respect to the Letter of Intent, (3)
anticipatory breach of contract with respect to the License Agreement and a
previous license agreement, (4) breach of the duty of good faith and fair
dealing, which Mr. Aronowitz claims is owed to him, with respect to the Letter
of Intent and the License Agreement (5) alleged fraud in the inducement in the
signing by Mr. Aronowitz of the Letter of Intent and License Agreement, (6)
fraud in the inducement against the individual directors and officer defendants
as in count 5, (7) promissory estoppel against the Company, (8) promissory
estoppel against the individual directors and officer defendants, (9) unjust
enrichment against the Company, (10) tortious interference with contract against
the individual
12
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
directors and officer defendants, (11) breach of fiduciary duty against the
individual directors and officer defendants, (12) Florida Racketeer Influenced
and Corrupt Organizations Act count against the individual directors and officer
defendants and (13) common law conspiracy against the individual directors and
officer defendants.
On November 9, 2000, the Company commenced an action in the United
States District Court, Southern District of Florida - Case No.00-7656-CIV -
against the Aronowitz Delaware 2 Family Limited Partnership, a Delaware limited
partnership and successor to the maker of a negotiable promissory note dated
August 28, 1998 in the amount $750,000. Mr. Aronowitz is a limited partner in
the defendant family partnership and the guarantor of the note. The action was
commenced after a scheduled payment on the loan was not made by the family
limited partnership, and the principal amount of the loan was accelerated. The
Company is seeking the balance due on the loan, approximately $713,000 together
with attorneys fees.
The net amount due Mr. Aronowitz under the termination without cause
provision of his Employment Agreement (after deductions for taxes) as well as
any other amounts due Mr. Aronowitz from the Company are being applied to the
reduction of Mr. Aronowitz' Guaranty obligation to the Company.
On November 13, 2000, the Company commenced an action in the United
States District, Court, Southern District of Florida - Case No. 00-7675-CIV -
against a family limited partnership which is the current Licensor of the
Cancellation and Exclusive License Agreement ("License Agreement") executed
January 31, 1996 by Mr. Aronowitz. Mr. Aronowitz is a limited partner of one of
the defendants. The action includes the Company's claims (1) for a declaratory
judgment that the Licensor has no right, title or interest, in and to the
technology of the Company's TD Glucose Monitoring System and that the Licensor
has no rights to receive royalty payments on the sale or license by the Company
of such technology, and (2) that the License Agreement terminates on the
expiration dates of each of the licensed patents. In addition to the above
claims, the Company is seeking its attorneys fees.
Mr. Aronowitz beneficially owns or controls approximately 13% of the
outstanding shares of TCPI's common stock.
6. OTHER INFORMATION
Change in Board of Directors and Management
On September 12, 2000, the Company's Board of Directors elected Martin
Gurkin, Ph.D. as Chairman of the Board, succeeding Jack L. Aronowitz. In
addition, the board appointed Elliott Block, Ph.D., the Company's Chief
Executive Officer, to also become President. Also on this date, the Board of
Directors of the Company voted to terminate the employment of Jack L. Aronowitz
pursuant to the termination without cause provision of Mr. Aronowitz' Employment
Agreement dated September 27, 1996 ("Employment Agreement"). Simultaneously, the
Board voted to remove Mr. Aronowitz as Chairman, President and Chief Technical
Officer of the Company. He remains a Director of the Company. Mr. Aronowitz has
litigation pending against the Company, its directors, and its general counsel
relating to his separation from employment and his license agreement with TCPI.
Delisting of the Company's Securities
On September 28, 2000, the Company filed an appeal and requested a
hearing in connection with the Nasdaq staff's decision of June 28, 2000 to
delist TCPI's Common Stock from the Nasdaq National Market for not maintaining
the $1.00 per share minimum bid requirement. A hearing was held on October 20,
2000 before the Nasdaq Listing Qualifications Panel. No determination has been
made at this time. Pending completion of the review process, TCPI will continue
to be listed on the Nasdaq National Market.
13
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
6. OTHER INFORMATION (Continued)
Independent of the results of the hearing, the Company will remain a
reporting company under the Securities and Exchange Commission rules. In the
event the appeal process is unsuccessful, TCPI expects that its Common Stock
would be traded on the Nasdaq OTC Bulletin Board under its current trading
symbol. The OTC Bulletin Board is a regulated electronic quotation service that
displays real-time quotes and last-sale price and volume information in
over-the-counter (OTC) equity securities.
The Company's amended Articles of Incorporation provide that, in the
event of the failure of the Company's common stock to be listed for trading on
the Nasdaq National Market or the Nasdaq SmallCap Market for ten consecutive
trading days, the holders of the Company's Series A Preferred Stock may claim
the option to require the Company to repurchase their shares.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY BACKGROUND
TCPI develops, manufactures and distributes point-of-care medical
diagnostic products for use at home, in physician offices, and other healthcare
locations that it serves through domestic and international channels. In
addition, the Company owns a patent-protected proprietary portfolio of
transdermal and dermal drug delivery technologies and skin permeation enhancers.
The Company also manufactures high purity specialty biochemicals.
The Company manufactures and markets in the United States and
internationally medical diagnostic testing products that utilize membrane-based
technology. Diagnostic products sold in the U.S. have received 510(k) marketing
clearance from the United States Food and Drug Administration. The balance of
the Company's diagnostic products are from time-to-time in various stages of
development, clinical and regulatory review in the U.S. and overseas, or
intended for export outside the U.S. TCPI presently holds 26 U.S. and foreign
patents, and has 61 domestic and foreign patent applications pending.
The Company currently markets various medical diagnostic products.
These products utilize rapid testing procedures to detect and/or quantify
substances in urine or blood. TCPI's diagnostic portfolio presently includes
testing and screening products for:
- Family planning (pregnancy detection and ovulation timing);
- Cholesterol monitoring, screening for diabetes, detection of
urinary tract infection and detection of kidney and bladder
disease,
- Infectious diseases; and
- Drugs of abuse.
TCPI's transdermal/dermal portfolio includes technologies in the areas
of smoking addiction reduction, hormone replacement therapy, and cardiovascular
disease, as well as commercialization of skin permeation enhancers. The Company
also has certain key products in various stages of development that include:
- Noninvasive TD Glucose(TM)Monitoring System for diabetics;
- TCPI's new Total and HDL Cholesterol screening and monitoring
products for over-the-counter use and professional use; and
- HealthCheck(R) and private-label brands of over-the-counter
diagnostic screening tests for at-home use by consumers.
TCPI markets diagnostic products worldwide through multiple
distribution channels that include:
- Original equipment manufacture ("OEM") marketing relationships with
pharmaceutical and diagnostic companies for product use on a
professional and/or over-the-counter basis;
- Over-the-counter sales of TCPI's proprietary HealthCheck(R)and
private-label brands for consumer use on an over-the-counter basis;
and
- Internet sales via the Company's web site, www.health-check.com.
In the OEM sector, a significant portion of the Company's family
planning products for pregnancy and fertility are currently marketed by Roche
Diagnostics GmbH ("Roche") for international distribution under their
trademarks. However, on May 20, 2000 the Company entered into an asset purchase
agreement with Roche for the acquisition of certain trademarks and business
assets relating to the pregnancy and ovulation business of Roche. For additional
information and the current status of this action, see Liquidity and Capital
Resources contained in Management's Discussion And Analysis of Financial
Condition And Results of Operations. If the Company successfully completes this
acquisition, TCPI will be responsible for the worldwide marketing and
distribution of these products. In this regard, starting on July 1st, TCPI
assumed responsibility for directing the marketing and advertising efforts
related to these OTC
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY BACKGROUND (Continued)
products in South America and the Company's wholly-owned Argentinean subsidiary
is seeking leased facilities for a new distribution/warehouse/marketing center
in Buenos Aires. In addition, during the past few months, new European
distributors have taken over marketing efforts of these products in Germany and
Italy that resulted in orders for product that has already been and are being
shipped to properly stock pharmacies and provide local inventory.
The OEM sector also includes marketing of TCPI's screening tests for
drugs of abuse and infectious diseases by other OEM customers for distribution
in the U.S. and/or international markets based on regulatory clearance.
In addition, in January 1999, TCPI opened an international sales and
marketing office in Milan, Italy to expand distribution of the Company's
diagnostic products outside of North America. International expansion of the
Company's diagnostic products is ongoing. Product marketing and/or registration
with local health officials is underway in a number of foreign countries.
The Company's HealthCheck(R) and private-label diagnostic products are
currently available in more than 17,000 pharmacies, supermarkets and mass
merchandise retail stores throughout the United States and Canada as well as
community pharmacies that are supplied directly by the leading drug wholesale
distributors. TCPI also private labels its family planning products for 7 drug,
discount and supermarket chains.
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, healthcare market directions, future acceptance of the Company's
products, possible recommendations of healthcare 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 conduct and
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; the Company's ability to finance and complete the
acquisition of certain assets of Roche Diagnostics GmbH, 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 healthcare 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 partners; competition from major
pharmaceutical, medical and diagnostic companies; risks and
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FORWARD LOOKING STATEMENTS (Continued)
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, including the satisfaction of terms and conditions relating to
funding, and timing and receipt of proceeds from any funding; 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, complete planned acquisitions, 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.
RESULTS OF OPERATIONS
For the three and nine-month periods ended September 30, 2000, the
Company's operations experienced lower losses over the comparable periods of the
prior year. The Company's loss attributable to common stockholders for the third
quarter ended September 30, 2000 was $2,230,000 or 29% less than that of the
same quarter a year ago. For the nine months ended September 30, 2000, the net
loss attributable to common stockholders was $6,959,000 and represented a 20%
improvement over the same period of the prior year.
Net Sales. The Company's net sales for the three months ended September
30, 2000 were $1,002,000, a 21% decrease from the $1,267,000 reported in the
same period a year earlier. Net product sales for the first nine months of 2000
were $3,314,000 as compared to $3,942,000 for the same period last year,
representing a 16% decrease. In the third quarter of the current year product
sales declined by varying degrees across all product categories as compared to
the same quarter a year ago. Product sales for the nine-month period ended
September 30, 2000 reflected gains for the Company's HealthCheck(R) home testing
products and also for its biological buffers. However, these advances were
offset by substantially lower sales of urine screening products, tests for
infectious diseases and drug of abuse screening, and a decline in OEM worldwide
family planning (pregnancy and ovulation) testing products. While sales of the
Company's core OEM worldwide family planning testing products through TCPI's
largest international distributor continued to be below prior year levels, sales
through these channels in the third quarter ended September 30, 2000 were
approximately 5% less than the same quarter a year earlier. In comparison, sales
through these channels in the second quarter ended June 30, 2000 were
approximately 31% less than the same quarter a year earlier. In this regard, the
Company continues its efforts related to the planned acquisition of
international distribution channels and associated family planning (pregnancy
and ovulation) product trademarks from Roche Diagnostics GmbH. For the nine
months ended September 30, 2000, total revenues were adversely impacted by the
absence of R & D Contract Revenue previously generated by the Company's research
and development facility in California that was closed as a cost containment
measure in mid-1999. Total revenue for the nine-month period ended September 30,
2000 was $3,514,000 and represented a decline of $899,000 over the nine-month
period of the previous year, of which 47% was due to this discontinuance.
Despite this revenue shortfall through the first nine-months of 2000, TCPI
earlier reported that it received $3.3 million in orders accompanied by cash
deposits for the Company's patented SR-38(TM) skin permeation enhancer for
anticipated delivery in the fourth quarter of this year to LVMH Moet Hennessy
Louis Vuitton, Inc. ("LVMH").
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Gross Profit. TCPI's gross profit on product sales for the three months
ended September 30, 2000 was $427,000 as compared to $517,000 in the same
quarter a year ago and was $1,416,000 for the nine months ended September 30,
2000 versus $1,645,000 in the corresponding period a year earlier. The declines
were in line with lower net sales. Gross profit as a percent of net sales for
the third quarter and nine months ended September 30, 2000 improved to 43% from
41% and improved to 43% from 42%, respectively.
Operating Expenses. The Company's total operating expenses for the
three month and nine-month period ended September 30, 2000 continued to trend
lower than the respective year ago periods as well as the previous quarter and
six months ended June 30, 2000. Total operating expenses for the third quarter
of 2000 decreased by 19% to $2,785,000 from $3,429,000 in the same quarter a
year ago and similarly declined by 16% to $8,386,000 for the nine months of the
current year from $9,993,000 for the first nine months of 1999. The mix of
selling, general and administrative; litigation; and research and development
expenses is as follows:
Selling, General and Administrative. Selling, general and
administrative ("SG&A") expenses for the quarter ended September 30, 2000
declined by 12% to $1,781,000 as compared to total SG&A of $2,021,000 included
in the third quarter of 1999. For the nine months ended September 30, 2000, SG&A
expenses declined by 13% to $4,877,000 from $5,585,000 in the same period a year
ago. The declines are due primarily to ongoing cost containment efforts as well
as lower sales and marketing expenses.
Litigation. Litigation expenses for the quarter ended September 30,
2000 decreased sharply by 48% to $396,000 as compared to $764,000 for the same
quarter a year ago and also declined for the first nine months of 2000 to
$1,523,000 from $1,601,000 in the same period of 1999. The current period
decreases reflect the mix of expenses associated with the ongoing defense of
certain legal matters as well as the termination or settlement of certain other
legal matters.
Research and Development. The Company has centered its focus upon the
ongoing development of its TD Glucose monitoring technology and its development
of cholesterol testing products. While total research and development expenses
declined in the third quarter and nine-month periods of the current year, this
decrease in spending reflected the closure of the California facility in
mid-1999. Net of this decrease, research and development expenses increased by
33% for the nine months ended September 30, 2000 compared to the levels for the
same period a year ago.
Net Loss. The Company's net loss attributable to common stockholders
for the quarter ended September 30, 2000 declined by 29% to $2,230,000 from the
$3,129,000 net loss attributable to common stockholders incurred in the third
quarter of 1999. The net loss attributable to common stockholders for the first
nine months of 2000 decreased by 20% to $6,959,000 from $8,668,000 in the same
period a year earlier. The respective decreases were primarily achieved by the
substantial reduction in the Company's operating expenses as well as sharply
lower accrued redemption accretion and accrued dividends of the redeemable
preferred stock issued in 1998 of which $26,000 was recognized in the quarter
ended September 30, 2000 as compared to $330,000 in the same quarter a year
earlier and $163,000 recognized in the nine month period ended September 30,
2000 as compared to $1,125,000 in the same nine-month period 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 quarter ended September 30, 2000 was
$0.07 per share as compared to a net loss of $0.28 per share for the third
quarter of 1999. This significant reduction was due to a combination of lower
operating costs and lower accrued redemption accretion and accrued dividends as
well as an increase in the average number of common shares outstanding.
18
<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 $715,000 at September 30, 2000,
as compared to $3,987,000 at December 31, 1999. Working capital at September 30,
2000 was $1,364,000, as compared to $6,010,000 at December 31, 1999. The Company
had current assets of $5,643,000 at September 30, 2000. The Company had
stockholders' equity of $14,357,000 at September 30, 2000. These levels compare
to current assets of $8,358,000 and stockholders' equity of $7,971,000 at
December 31, 1999.
The Company expects to continue to draw upon its working capital to
meet its immediate needs and plans to utilize financing activities to purchase
production equipment, conduct 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, facilities and equipment, and continue its
day-to-day business.
On May 8, 2000, the Company announced that it entered into a
subscription agreement with Swartz for the purchase of up to $25 million in
common stock under a private equity line. The equity line provides the Company
the ability to issue to 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 limitations based on 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 November 3, 2000, which was the date the registration statement
covering the resale of common stock by Swartz was declared effective by the
Securities and Exchange Commission. The Company intends to use the proceeds 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.
In connection with the subscription agreement, on April 19, 2000, the
Company issued to Swartz a warrant to purchase 312,500 shares of the Company's
common stock, exercisable for a period of five years from March 17, 2000, with
an initial exercise price equal to $1.9063, which was the lowest closing bid
price for the five trading days before March 17, 2000. On April 19, 2000, the
Company issued an additional warrant to Swartz to purchase 312,500 shares of the
Company's common stock, exercisable for a period of five years from March 17,
2000, with an initial exercise price equal to $0.9375, which was the lowest
closing bid price for the five trading days immediately before the closing date
of May 3, 2000. The Company estimated the fair value of these warrants to be
approximately $1,041,000 using the Black-Scholes option valuation model. The
fair value of the warrants is included as a component of deferred financing
costs in the balance sheet at September 30, 2000.
On August 28, 2000, the Company entered into a securities purchase
agreements with investors arranged through MDG, as placement agent. Under this
agreement, the Company sold to the investors $696,000 of TCP's 6% convertible
debentures due August 28, 2005 and $235,000 of TCPI's 6% convertible debentures
due September 21, 2005. The debentures are convertible into shares of our common
stock at any time after 120 days from the closing dates of August 28, 2000 and
September 21, 2000, respectively, at the lesser of $1.05 per share or 80% of the
average closing bid prices of our common stock during the 5 trading days
immediately preceding the conversion. Also, in connection with the issuance of
the 6% convertible debentures to the investors, the Company issued to the
investors warrants to purchase 372,400 shares of TCPI's common stock, which is
equal to 20% of the number of shares of TCPI's common stock that would have been
issuable upon conversion of the convertible debentures as of the closing dates.
The warrants have an exercise price of $1.50 and a term of three years.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION (Continued)
On September 5, 2000, the Company entered into credit line agreement
with GMF Holdings, arranged through MDG, as placement agent. Under the GMF
credit line agreement, the Company has the option to sell, or "put," up to $10
million of TCPI's 6% convertible debentures to GMF, subject to a formula based
on stock price and trading volume, over a three year period. The Company cannot
sell any debentures to GMF until it registers for resale the shares issuable
upon conversion of the debentures. The Company has not yet registered these
shares, and therefore, the Company is unable to access the GMF credit line at
this time. The debentures are convertible into shares of TCPI's common stock at
the lesser of $1.40 per share or 90% of the lowest closing bid price of TCPI's
common stock during the 20 trading days immediately preceding the conversion.
In providing the Company with the convertible debenture transaction and
credit line, compensation to MDG is linked to both transactions. MDG will
receive cash compensation equal to 10% of the principal amount of convertible
debentures issued under the securities purchase agreement and a five-year
warrant to purchase 2,000,000 shares of TCPI's common stock at $1.50 per share.
The Company has the right to force conversion of the MDG warrant if the closing
price of the Company's common stock is $3.00 or higher for ten consecutive
trading days. Upon conversion of the warrants held by the debenture holders and
MDG, the Company would receive additional capital. Additionally, in
consideration for closing the convertible debenture transaction and arranging
the credit line, the Company will issue to MDG 750,000 shares of TCPI's common
stock.
Under a registration rights agreement, TCPI is obligated to register
for resale the shares issuable upon conversion of the convertible debentures and
upon exercise of the warrants. The Company is also obligated to register for
resale the shares issuable upon exercise of the MDG warrant and the shares of
common stock the Company issued to MDG. The conversion price of the debentures
and warrants decreases and the Company incurs penalties if it does not file the
registration statement covering the resale of these shares, and the SEC does not
declare the registration statement effective, by certain dates.
For a complete description of the Swartz and MDG funding transactions,
see the Company's Registration Statement on Form S-2, and amendments thereto, as
filed with the SEC.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $3,615,000 for the nine
months ended September 30, 2000 as compared to $4,291,000 in the same period a
year earlier. This improvement is primarily due to a reduction in the net loss
for the first nine months of 2000, continued improved turnover of accounts
receivable and tighter management of the Company's cash resources that resulted
in higher accounts payable. Partially offsetting these generations of cash was
an increase in other current assets that included the down-payment to Roche
Diagnostics GmbH related to the planned acquisition of assets as well as other
deposits associated with raw materials for customer purchases. The offset also
reflected a decrease in deferred revenue of $812,000 for the first nine months
of 2000 as compared to the same nine-month period of 1999.
Net cash provided by investing activities was $2,214,000 for the nine
months ended September 30, 2000 as compared to $2,396,000 for the same
nine-month period of 1999. This decrease of $182,000 was primarily due to
greater purchases of property and equipment in the first nine months of 2000 as
compared to the same period of 1999.
Net cash provided by financing activities increased to $669,000 for the
nine months ended September 30, 2000 from zero for the nine months ended
September 30, 1999 due primarily to proceeds from the issuance of convertible
debentures.
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
20
<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 will not be able to continue its operations unless it secures additional
financing, reduces its operating losses, contains expenses, increases sales of
its products, or sell certain assets. There can be no assurance that the Company
will succeed in such efforts. In addition, if there is no change in the current
market price and trading volume of the Company's common stock, it will not
realize the maximum allowable amount of $2 million per draw under the terms of
the subscription agreement with Swartz.
While the Company has entered into an agreement with Swartz for the
purchase of up to $25 million in common stock under a private equity line, and
an agreement with May Davis Group for the purchase of up to $10 million in
common stock under a private credit line, these transactions are 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 these agreements due to unfavorable market conditions or the
Company's inability to achieve effective registration on a timely basis or at
all, or maintain the effectiveness of its current registration statement, 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 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 were required to satisfy all or a significant portion of these
judgments on a basis faster than anticipated at present, 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.
The Company's ability to meet its liquidity requirements and to
continue operations will depend on (i) its ability to raise additional capital,
(ii) the successful conduct 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;
(4) manufacturing costs for the Company's current and future products; and
(5) costs associated with completing the Company's acquisition of certain
assets of Roche Diagnostics.
On June 28, 2000, the Company received correspondence from the Nasdaq
National Market regarding the continued listing of the Company's common stock on
that market such that TCPI's stock may be delisted from trading on or about
September 28, 2000 if the minimum bid price of the Company's common stock does
not equal or exceed $1.00 for a minimum of ten consecutive trading days. On
October 20, 2000, a hearing was held before the Nasdaq Listing
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Qualifications Committee in relation to the continued listing of the Company's
common stock on the Nasdaq National Market. At this time, there has been no
resolution in this matter. In light of this, there can be no assurance that the
Nasdaq National Market will not delist the Company's common stock. Independent
of the results of the hearing, the Company will remain a reporting company under
the Securities and Exchange Commission rules. In the event the appeal process is
unsuccessful, TCPI expects that its Common Stock would be traded on the Nasdaq
OTC Bulletin Board under its current trading symbol. The OTC Bulletin Board is a
regulated electronic quotation service that displays real-time quotes and
last-sale price and volume information in over-the-counter (OTC) equity
securities.
Delisting of the Company's common stock may have an adverse impact on
the market price and liquidity of the Company's securities, and may subject the
Company's stock to the "penny stock rules" contained in Section 15(g) of the
Securities Exchange Act of 1934 and the rules promulgated thereunder. In
addition, the Company's amended Articles of Incorporation provide that, in the
event of the failure of the Company's common stock to be listed for trading on
the Nasdaq National Market or the Nasdaq SmallCap Market for ten consecutive
trading days, the holders of the Company's Series A Preferred Stock may claim
the option to require the Company to repurchase their shares. If such a
redemption is validly exercised and the purchase price for the shares is not
paid within five business days of notice of nonpayment, the Series A holders at
their option may claim the right, in lieu of receiving the mandatory redemption
amount, to require the Company to issue a number of shares of common stock equal
to the mandatory redemption amount divided by the conversion price then in
effect for the Series A shares. If the holders of the Series A shares become
entitled to exercise mandatory redemption and ultimately exercise that right,
such redemption could have a material and adverse impact on the Company's
liquidity and financial position, including its ability to continue research and
development and commercialization efforts, or, if the holders claim the right to
receive shares in lieu of the mandatory redemption amount, could result in the
issuance of a significant number of shares of common stock and dilution of the
existing common shareholders. Based upon the terms of the Preferred Stock, as of
November 14, 2000 the 800 outstanding shares of Preferred Stock would be
convertible into 2,781,824 shares of Common Stock. See the Company's Form 8-K
dated May 21, 1998 for the terms of the Company's Series A Redeemable Preferred
shares.
In addition, the Company's Subscription Agreement with Swartz provides
that the right of the Company to deliver a put notice and the obligation of
Swartz to purchase put shares is conditioned on the Company's common stock being
listed for and trading on the Nasdaq National Market, the Nasdaq SmallCap
Market, the OTC Bulletin Board, the American Stock Exchange, or the New York
Stock Exchange. Similarly, the Company's Credit Line agreement with the MDG
provides that the right of the Company to deliver a put notice and the
obligation of MDG to purchase the Company's 6% convertible debentures is
conditioned on the Company's common stock being listed for and trading on the
Nasdaq National Market, the Nasdaq SmallCap Market, the OTC Bulletin Board, the
American Stock Exchange, or the New York Stock Exchange. The Company believes it
would be eligible for listing on the OTC Bulletin Board. In the event that the
Company's common stock is delisted from the Nasdaq National Market, there can be
no assurance that the Company will be able to list its shares for trading on any
of the alternative markets provided for in the respective Swartz or MDG
agreements. In that event, the Company may be unable to put shares to Swartz or
sell its 6% convertible debentures to MDG to raise capital (and may be required
to make non-usage payments to Swartz), which is likely to have a material
adverse impact on the Company's liquidity and financial position, including its
ability to continue research and development and commercialization efforts. For
additional information about the Swartz Subscription Agreement see the exhibits
to the Company's Form 10-Q for the quarter ended March 31, 2000. For additional
information about the MDG Investment Agreement see the exhibits to Amendment
Number 2 of the Company's Registration Statement of Form S-2 as filed with the
Securities and Exchange Commission on October 18, 2000.
With respect to the acquisition of assets from Roche Diagnostics, there
can be no assurance that the Company will obtain the necessary funds it is
seeking through financing activities in the capital markets, funds generated in
the ordinary course of business, and funds generated by the acquired operations
after the local closings. Since the funds available under the Company's private
equity line with Swartz and the Company's private credit line with MDG are
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
subject to the future market price and volume of trading of TCPI's common stock,
the Company may be unable to obtain sufficient funds pursuant to the Swartz or
MDG transactions on a timely basis, or at all. The Company does not currently
have sufficient funds to make the second and final payments due under the asset
purchase agreement. The agreement called for a second down payment of $3 million
by September 17, 2000. The balance of $3,500,000 is payable in installments
before the closing of each local asset purchase agreement in Germany, Uruguay,
Switzerland, Spain, Italy and Argentina. Of this $3,500,000 balance, $750,000
was due as early as August 1, 2000 in connection with the closings in Germany,
Spain and Switzerland, and $500,000 as early as September 1, 2000 in connection
with the closing in Italy. The remaining balance would be due in connection with
the closings in Uruguay and Argentina, which must occur by December 31, 2001.
The majority of the assets the Company will be acquiring are located in
Argentina. The local closings are conditioned on compliance with
country-specific regulatory authorization and product registration by local
health and regulatory authorities. To date, no closings have occurred and the
Company has not made any additional payments to Roche. Because of this failure
to make additional payments, the Company is currently in breach of the
agreement. However, the Company is in discussions with Roche concerning a new
date for payments, but there can be no assurance that these efforts will be
successful. Absent a change in current market conditions that would allow the
Company to draw down more funds from the Swartz equity line, and, once
available, the GMF credit line, the Company does not currently anticipate using
these funds to acquire the assets from Roche diagnostics. If the Company does
not make the required payments, the Company will forfeit the $500,000 down
payment. The failure to complete the acquisition of assets from Roche
Diagnostics will have a material adverse effect on the financial condition of
the Company since Roche may sell the assets to one of the Company's competitors
who may decide not to sell the Company's products, which would result in a
material decrease in revenues, thereby adversely affecting the Company's
operating results.
In 1998, the Company issued 15,000 shares of its Series A Convertible
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 Investor has converted
14,200 shares of Preferred Stock into 23,194,907 shares of Common Stock, and
presently has 800 shares of the Company's Preferred Stock outstanding. Based
upon the terms of the Preferred Stock, as of November 14, 2000 the outstanding
shares of Preferred Stock would be convertible into 2,781,824 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 September 30, 2000, the Company had only cash and cash equivalents
and no investments. The Company had no outstanding loans. As a result, a
hypothetical 10% change in interest rates would have no impact on the fair value
of these assets.
23
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to claims and suits arising in the ordinary
course of business. At this time, except as otherwise indicated, 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. For the year ended
December 31, 1999 and the first six months of 2000, the Company incurred
substantially increased litigation expenses compared to earlier periods. For the
third quarter and nine-month periods ended September 30, 2000, such litigation
expenses decreased from the comparable periods of the prior year.
HIV Saliva Collector Technology. A lawsuit was brought against TCPI 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 the Company did not misappropriate the plaintiffs' trade secrets, but found
that Mr. Aronowitz had intentionally misappropriated these 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 the Company 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, the Company and Mr. Aronowitz filed an 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 the Company for
tortious interference with a business relationship. The court subsequently
denied motions by the parties for rehearing, and on or about June 16, 2000,
issued its mandate on the appeal to the trial court.
TCPI has previously obtained appeal bonds staying enforcement of the
judgment against the Company and Mr. Aronowitz. As a result of the reversal of
the judgment against Mr. Aronowitz, that bond is no longer required and
collateral securing the bond has been released to TCPI. The Company believes
that the bond presently in place with respect to TCPI may be required to remain
in place to stay enforcement of the tortious interference judgment. On October
26, 2000, the court denied TCPI's motion to vacate the tortious interference
judgment. The Company intends to appeal this ruling. TCPI has requested the
court to stay enforcement of judgement pending appeal. There can be no assurance
that the Company will be successful in vacating the judgment on appeal or
staying enforcement of the judgment.
The Company cannot reasonably estimate the liability, if any, at this
time that may result from this matter and efforts to set the judgment aside and
therefore the Company has not recorded an accrual for loss in the financial
statements as of September 30, 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. TCPI 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
24
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (Continued)
December 1999, the discovery phase of this lawsuit ended and the court is
presently proceeding with various pending motions. On November 8, 2000, the
Company and Mr. Aronowitz filed a motion for summary judgement dismissing all
the claims of certain plaintiffs and imposition of attorneys fees and costs. 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-DIMITROULEAS - against the Company
and Mr. Aronowitz on behalf of various shareholders 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 TCPI and Mr.
Aronowitz 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(TM) Monitoring System. The plaintiffs are seeking
certification as a class on an unspecified amount of damages, interest, costs
and attorneys' fees. 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. On July 3, 2000, the court dismissed all claims against Mr. Aronowitz
and the Company, but granted plaintiffs leave to amend their complaint on or
before July 24, 2000. On July 24, 2000, plaintiffs filed a second amended
complaint, to which the Company has not yet responded. On August 25, 2000, the
Company filed a motion to dismiss the Second Amended Complaint. On September 25,
2000, plaintiffs filed an opposition to a motion to dismiss. The court has not
yet ruled on the motion to dismiss. The Company believes the allegations lack
merit and plan to contest the allegations vigorously. At this time, the Company
cannot reasonably estimate the ultimate loss, if any, related to these claims
and therefore the Company has not recorded an accrual for loss as of September
30, 2000.
TCPI maintains Directors and Officer's Liability Insurance. However,
there can be no assurance that this insurance coverage will be adequate to fund
the costs of a settlement, an award, if any, or attorneys' fees. Demands have
been made upon the Company which far exceed the amount of this coverage. TCPI'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.
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 under Florida law 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 have filed a
motion to dismiss these counterclaims, and these defendants have since withdrawn
those counterclaims. The court entered a default judgment against Medex, Inc.
The Company and Mr. Aronowitz have reached a conditional settlement with The
Creative Connection, Inc., and Debra Lapierre. This case is currently in the
discovery phase. A trial date is set for April of 2001.
Home Diagnostics Litigation. In November 1993, the Company and Mr.
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").
25
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (Continued)
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 Company commenced the
action 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. The parties submitted proposed findings of fact and
conclusions of law, 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 Mr. 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 has filed a motion for summary judgment, which the court
granted in part, dismissing Counts I and II for libel against TCPI and Mr.
Aronowitz. Discovery in this matter is continuing, and no trial date has been
set yet.
Hooper Litigation. On August 27, 1999, the U.S. District Court for the
Northern 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. TCPI acquired certain assets of Pharma Patch, PLC in November 1995.
The arbitration award found that Mr. Hooper was entitled to that amount under 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.)
TCPI has filed a suit against Mr. Hooper in the United States District
Court for the Southern District of Florida - Case No. 99-7452 CIV-MOORE, which
claims that Mr. Hooper perpetrated a fraud on the Company by making fraudulent
representations to the Company in connection with TCPI's acquisition of certain
assets of the co-defendants Pharma Patch, PLC and PP Holdings, LTD. Mr. Hooper
has filed a motion to dismiss for lack of personal jurisdiction, which is now
pending before the court.
As a result, enforcement of the arbitration award has been stayed by a
Florida court. On July 5, 2000, the state court continued the stay of
enforcement of the award during the pendency of the Company's claims against Mr.
Hooper and Hooper & Associates, Inc. in the federal action. At this time, the
Company does not believe it is possible to estimate the ultimate loss, if any,
related to the resolution of these matters and therefore the Company has not
recorded any accrual for loss as of September 30, 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 TCPI and Mr. Aronowitz, in connection
with a lawsuit brought by the United States of America on behalf of the
Environmental Protection Agency under the Comprehensive Environmental Response
Compensation and Liability Act of 1983, 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
October 6, 2000, TCPI reached a settlement with the United States in the amount
of $650,000 payable over a 21-month period beginning in October 2000 with the
first payment due within 30 days of execution of the formal settlement agreement
and quarterly payments made thereafter on
26
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (Continued)
the balance plus interest at the rate of 5.3% per year. Under the terms of this
agreement, the Company made its first payment of $112,963 on October 13, 2000.
TCPI's amended and restated articles of incorporation provide for
indemnification, under certain circumstances, to the fullest extent permitted by
law, of persons made party to an action by reason of the fact that such person
is an officer or director of the Company. TCPI recorded an accrual for loss
equal to $650,000 as of March 31, 2000.
Unilever Patent Litigation. In 1994, TCPI and six other parties
initiated an opposition action in the European Patent Office in Munich, Germany,
against European Patent No. 291,194 (the "European Patent"), presently owned by
Unilever N.V. In European Opposition Case No. T0681/98, the Company and the
other parties opposed the patent in its entirety on the grounds that it lacked
novelty and inventiveness.
In March 1998, the European Patent Office Opposition Board found in
favor of Unilever, and TCPI and five of the other parties filed an appeal. Upon
substantial appellate oral proceedings held on January 26-27, 2000 and numerous
auxiliary requests, the Opposition Board maintained the European Patent, as
amended. However, this ruling is subject to adaptation of the specifications
contained in the amended patent and approval by the Opposition Board. Unilever
is presently awaiting invitation from the Opposition Board to submit its
proposed adaptations to the specification of the European Patent, after which
TCPI and the other parties intend to vigorously contest such action.
On January 26, 2000, the Company, Roche Diagnostics GmbH, a German
company, Roche Diagnostics S.p.A., an Italian company, and Hestia Pharma GmbH, a
German distributor wholly-owned by Roche Diagnostics, filed a declaratory
judgment action relating to Italy and Germany in the District Court of Torino,
Italy. The Company asked the court to find that (1) the European Patent granted
to Unilever is invalid, and (2) the EVATEST(R) product manufactured, distributed
and sold by TCPI and the other plaintiffs do not infringe the European Patent
(the "Italian Action"). An oral hearing scheduled for July 19, 2000 to discuss
the court's jurisdiction to hear the action was adjourned to November 15, 2000.
TCPI manufactures the EVATEST(R) test devices.
On February 3, 2000, Unilever filed a patent infringement action in the
Administrative Court of Munich, Germany against Hestia Pharma GmbH and four of
its officers alleging infringement of the European Patent that is the subject of
the Italian Action. On April 27, 2000, Unilever amended its complaint to allege
infringement of European Patent Application No. 93108764.7. In this action,
Unilever has asked that Hestia Pharma GmbH refrain from commercializing, using,
importing or possessing analytical test devices which comprise features of
Unilever's patent claims.
On April 20, 2000, Unilever filed a patent infringement action in the
Administrative Court of Munich, Germany against TCPI and Roche Diagnostics GmbH
(together with the February 3, 2000 action, the "German Actions") alleging
infringement of the patent involved in the Italian Action and European Patent
Application No. 93108764.7. In this action, Unilever has asked that TCPI and
Roche Diagnostics GmbH refrain from offering, having offered, commercializing,
having commercialized, using, having used, importing, having imported or
possessing analytical test devices that fall under the claims of Unilever's
patent and patent application.
The Company has agreed to indemnify Roche Diagnostics and its
affiliates and their respective officers against all damages, back royalties,
costs, attorneys' fees and the like arising from or related to any and all
patent infringement actions. Management intends to vigorously prosecute the
Company's claims against the Unilever patent in the Italian Action and
vigorously defend the claims asserted by Unilever in the German Actions. TCPI
has, as the manufacturer of these products, previously provided the same
indemnity to Roche Diagnostics. A majority of TCPI's sales in Europe relate to
products covered by the patents that are the subject of the Italian Action and
the German Actions. Consequently, a loss in this litigation may have a material
adverse effect on the Company's results of operations and financial condition.
27
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (Continued)
Litigation with Former Chairman and Certain Family Limited
Partnerships. On September 12, 2000, the Board of Directors of the Company voted
to terminate the employment of Jack L. Aronowitz pursuant to the termination
without cause provision of Mr. Aronowitz' Employment Agreement dated September
27, 1996 ("Employment Agreement"). Simultaneously, the Board voted to remove Mr.
Aronowitz as Chairman, President and Chief Technical Officer of the Company. Mr.
Aronowitz remains a Director of the Company.
On September 13, 2000, a Letter of Intent was executed by the Company
and Mr. Aronowitz that provided, among other things, that Mr. Aronowitz'
signature on the Letter of Intent was deemed his resignation and retirement from
the Company as Chairman, President, and Chief Technical Officer. In addition,
the Letter of Intent was subject to the execution of a definitive Agreement as
to the terms and conditions of Mr. Aronowitz' separation from the Company, which
was to be signed by no later than September 20, 2000. No such definitive
Agreement was entered into by September 20, 2000.
Subsequent to the execution of the Letter of Intent, Mr. Aronowitz made
certain demands on the Company that were beyond the scope of the Letter of
Intent; including a demand that payments be made to him related to the Company's
noninvasive TD Glucose(TM) Monitoring System and other technology. The Company
rejected Mr. Aronowitz' demand.
On October 19, 2000, the Company was served with a Summons and
Complaint in an action commenced by Mr. Aronowitz in the Circuit Court of the
17th Judicial Circuit in and for Broward County, Florida - Case No. 00017365.
The named defendants are the Company, its directors (with the exclusion of Mr.
Aronowitz) and the Company's general counsel. The Company believes the claims
contained in this complaint are without merit and will vigorously defend itself
in this lawsuit. An unfavorable outcome of this litigation would have a material
adverse impact on the Company, including possible inability to sell the
Company's TD Glucose Monitoring System. Mr. Aronowitz is seeking unspecified
damages. The Company has until December 4, 2000 to respond to the Complaint.
The 13 counts in Mr. Aronowitz' Complaint are (1) rescission of a
Cancellation and Exclusive License Agreement dated January 31, 1996 ("License
Agreement"), (2) breach of contract with respect to the Letter of Intent, (3)
anticipatory breach of contract with respect to the License Agreement and a
previous license agreement, (4) breach of the duty of good faith and fair
dealing, which Mr. Aronowitz claims is owed to him, with respect to the Letter
of Intent and the License Agreement (5) alleged fraud in the inducement in the
signing by Mr. Aronowitz of the Letter of Intent and License Agreement, (6)
fraud in the inducement against the individual directors and officer defendants
as in count 5, (7) promissory estoppel against the Company, (8) promissory
estoppel against the individual directors and officer defendants, (9) unjust
enrichment against the Company, (10) tortious interference with contract against
the individual directors and officer defendants, (11) breach of fiduciary duty
against the individual directors and officer defendants, (12) Florida Racketeer
Influenced and Corrupt Organizations Act count against the individual directors
and officer defendants and (13) common law conspiracy against the individual
directors and officer defendants.
On November 9, 2000, the Company commenced an action in the United
States District Court, Southern District of Florida - Case No.00-7656-CIV -
against the Aronowitz Delaware 2 Family Limited Partnership, a Delaware limited
partnership and successor to the maker of a negotiable promissory note dated
August 28, 1998 in the amount $750,000. Mr. Aronowitz is a limited partner in
the defendant family partnership and the guarantor of the note. The action was
commenced after a scheduled payment on the loan was not made by the family
limited partnership, and the principal amount of the loan was accelerated. The
Company is seeking the balance due on the loan, approximately $713,000 together
with attorneys fees.
The net amount due Mr. Aronowitz under the termination without cause
provision of his Employment Agreement (after deductions for taxes) as well as
any other amounts due Mr. Aronowitz from the Company are being applied
periodically to the reduction of Mr. Aronowitz' Guaranty obligation to the
Company.
28
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (Continued)
On November 13, 2000, the Company commenced an action in the United
States District, Court, Southern District of Florida - Case No. 00-7675-CIV -
against a family limited partnership which is the current Licensor of the
Cancellation and Exclusive License Agreement ("License Agreement") executed
January 31, 1996 by Mr. Aronowitz. Mr. Aronowitz is a limited partner of one of
the defendants. The action includes the Company's claims (1) for a declaratory
judgment that the Licensor has no right, title or interest, in and to the
technology of the Company's TD Glucose Monitoring System and that the Licensor
has no rights to receive royalty payments on the sale or license by the Company
of such technology, and (2) that the License Agreement terminates on the
expiration dates of each of the licensed patents. In addition to the above
claims, the Company is seeking its attorneys fees.
Mr. Aronowitz beneficially owns or controls approximately 13% of the
outstanding shares of TCPI's common stock.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the period from May 1, 2000 through September 30, 2000, the
Company issued, or will issue, securities in the transactions set forth below.
Each of these transactions was intended to be exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) thereunder based on being issued in a transaction not involving a public
offering.
On May 3, 2000, the Company entered into a subscription agreement with
Swartz for the purchase of up to $25 million in common stock under a private
equity line. Under the subscription agreement, the Company can sell, and Swartz
is required to purchase, up to $25 million of the Company's common stock to
Swartz, subject to a formula based on stock price and trading volume, over a
three-year period. Swartz will pay the Company the lesser of the market price
for each share, minus $.10, or 92% of the market price for each share at the
time the Company sells the shares to Swartz.
In connection with the subscription agreement, on April 19, 2000, the
Company issued to Swartz a warrant to purchase 312,500 shares of the Company's
common stock, exercisable for a period of five years from March 17, 2000, with
an initial exercise price equal to $1.9063. On April 19, 2000, the Company
issued an additional warrant to Swartz to purchase 312,500 shares of the
Company's common stock, exercisable for a period of five years from March 17,
2000, with an initial exercise price equal to $0.9375.
On August 28, 2000, the Company entered into a securities purchase
agreement with investors arranged through MDG, as placement agent. Under this
agreement, the Company sold to the investors $696,000 of TCP's 6% convertible
debentures due August 28, 2005 and $235,000 of TCPI's 6% convertible debentures
due September 21, 2005. The debentures are convertible into shares of the
Company's common stock at any time after 120 days from the closing dates of
August 28, 2000 and September 21, 2000, respectively, at the lesser of $1.05 per
share or 80% of the average closing bid prices of the Company's common stock
during the 5 trading days immediately preceding the conversion. Also, in
connection with the issuance of the 6% convertible debentures to the investors,
upon completion of this funding the Company will issue to the investors warrants
to purchase 600,000 shares of TCPI's common stock.
On September 5, 2000, the Company entered into credit line agreement
with GMF Holdings, arranged through MDG, as placement agent. Under the GMF
credit line agreement, the Company has the option to sell, or "put," and GMF is
required to purchase, up to $10 million of TCPI's 6% convertible debentures to
GMF, subject to a formula based on stock price and trading volume, over a three
year period. The debentures are convertible into shares of TCPI's common stock
at the lesser of $1.40 per share or 90% of the lowest closing bid price of
TCPI's common stock during the 20 trading days immediately preceding the
conversion.
29
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (Continued)
In connection with the convertible debenture transaction and credit
line, MDG received cash compensation equal to 10% of the principal amount of
convertible debentures issued under the securities purchase agreement and a
five-year warrant to purchase 2,000,000 shares of TCPI's common stock at $1.50
per share. Additionally, in consideration for closing the convertible debenture
transaction and arranging the credit line, the Company issued to MDG 750,000
shares of TCPI's common stock.
ITEM 5. OTHER INFORMATION
Change in Board of Directors and Management
On September 12, 2000, the Company's Board of Directors elected Martin
Gurkin, Ph.D. as Chairman of the Board, succeeding Jack L. Aronowitz. In
addition, the board appointed Elliott Block, Ph.D., the Company's Chief
Executive Officer, to also become President. Also on this date, the Board of
Directors of the Company voted to terminate the employment of Jack L. Aronowitz
pursuant to the termination without cause provision of Mr. Aronowitz' Employment
Agreement dated September 27, 1996 ("Employment Agreement"). Simultaneously, the
Board voted to remove Mr. Aronowitz as Chairman, President and Chief Technical
Officer of the Company. He remains a Director of the Company. Mr. Aronowitz has
litigation pending against the Company, its directors, and its general counsel
relating to his separation from employment and his license agreement with TCPI.
Delisting of the Company's Securities
On September 28, 2000, the Company filed an appeal and requested a
hearing in connection with the Nasdaq staff's decision of June 28, 2000 to
delist TCPI's Common Stock from the Nasdaq National Market for not maintaining
the $1.00 per share minimum bid requirement. A hearing was held on October 20,
2000 before the Nasdaq Listing Qualifications Panel. No determination has been
made at this time. Pending completion of the review process, TCPI will continue
to be listed on the Nasdaq National Market.
Independent of the results of the hearing, the Company will remain a
reporting company under the Securities and Exchange Commission rules. In the
event the appeal process is unsuccessful, TCPI expects that its Common Stock
would be traded on the Nasdaq OTC Bulletin Board under its current trading
symbol. The OTC Bulletin Board is a regulated electronic quotation service that
displays real-time quotes and last-sale price and volume information in
over-the-counter (OTC) equity securities.
The Company's amended Articles of Incorporation provide that, in the
event of the failure of the Company's common stock to be listed for trading on
the Nasdaq National Market or the Nasdaq SmallCap Market for ten consecutive
days, the holders of the Company's Series A Preferred Stock may claim the option
to require the Company to repurchase their shares.
30
<PAGE>
PART II OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Code Exhibit Description
------ ---- -------------------
2.1 14 Business and Asset Purchase Agreement dated May 20, 2000
between Roche Diagnostics GmbH and TCPI Holdings, Ltd.
2.2 14 Guaranty Agreement dated May 20, 2000 between Roche
Diagnostics GmbH and the Company.
3.1 5 Amended and Restated Articles of Incorporation of the
Company.
3.2 5 Amended and Restated Bylaws of the Company.
3.3 4 Articles of Amendment to the Articles of Incorporation
of the Company.
3.4 15 Articles of Amendment of the Company's Amended and
Restated Articles of Incorporation.
4.2 3 Form of Common Stock Certificate of the Company.
4.3 11 Warrant to purchase Common Stock dated April 19, 2000 (1
of 2) between the Company and Swartz Private Equity,
LLC.
4.4 11 Warrant to purchase Common Stock dated April 19, 2000 (2
of 2) between the Company and Swartz Private Equity,
LLC.
4.5 11 Warrant between the Company and Swartz Private Equity,
LLC.
10.2 5 Amended and Restated 1992 Incentive Stock Option Plan.
10.3 5 Cancellation and Exclusive License Agreement between
Jack Aronowitz and the Company dated January 31, 1996.
10.4 5 Stock Option Agreement between the Company and Martin
Gurkin, Stuart R. Streger, Colin Morris, Kathryn
Harrigan, Clayton Rautbord and Stephen Dresnick. 10.5 15
The Company's 2000 Stock Option Plan.
10.6 2 Lease - Pompano Beach, Florida.
10.6.1 9 Business Lease Extension - Pompano Beach, Florida.
10.8 3 Warrant Agreement between the Company and Jack L.
Aronowitz.
10.8.1 1 Amended Employment Agreement dated October 9, 1998
between the Company and Jack L. Aronowitz.
10.9 1 Employment Agreement dated October 9, 1998 between the
Company and Jay E. Eckhaus.
10.17 7 Employment Agreement dated September 10, 1999 between
the Company and Elliott Block, Ph.D.
10.18 8 Employment Agreement dated November 22, 1999 between the
Company and Walter V. Usinowicz, Jr.
10.19 11 Employment Agreement dated May 27, 1999 between the
Company and Robert M. Morrow.
10.20 13 Investment Agreement dated May 3, 2000 between the
Company and Swartz Private Equity, LLC.
10.21 13 Registration of Rights Agreement dated May 3, 2000
between the Company and Swartz Private Equity, LLC.
31
<PAGE>
10.22 17 Securities Purchase Agreement dated August 28, 2000.
10.23 17 Form of Warrant to Purchase Common Stock under the
Securities Purchase Agreement.
10.24 17 Form of Securities Purchase Agreement Debenture under
the Securities Purchase Agreement.
10.25 17 Placement Agency Agreement dated August 28, 2000 between
the Company and The May Davis Group, Inc.
10.26 17 Line of Credit Agreement dated September 5, 2000 between
the Company and GMF Holdings.
10.27 17 Form of Credit Line Debenture under the Credit Line
Agreement.
10.28 17 Registration Rights Agreement dated September 5, 2000.
10.29 17 Placement Agency Agreement dated September 5, 2000
between the Company and The May David Group, Inc.
10.30 17 Escrow Agreement dated August 28, 2000 between the
Company and First Union.
10.31 17 Escrow Agreement dated September 5, 2000 between the
Company and First Union.
27 Filed Financial Data Schedule
Herewith
1 Incorporated by reference to the Company's Form 10-Q
filed on November 12, 1998.
2 Incorporated by reference to the Company's Registration
Statement on Form SB-2 filed on October 28, 1994 (No.
33-85756).
3 Incorporated by reference to Amendment No. 4 to the
Company's Registration Statement on Form S-1 filed on
April 23, 1996 (No. 333-1272).
4 Incorporated by reference to the Company's Form 8-K
filed on May 21, 1998.
5 Incorporated by reference to the Company's Registration
Statement on Form S-1 filed on February 12, 1996 (No.
333-1272).
6 Incorporated by reference to Amendment No. 2 to the
Company's Registration Statement on Form S-1 filed on
March 20, 1996.
7 Incorporated by reference to the Company's Form 10-Q
filed on November 9, 1999.
8 Incorporated by reference to the Company's Form 8-K
filed on December 15, 1999.
9 Incorporated by reference to the Company's Form 10-K
filed on March 30, 2000.
10 Incorporated by reference to the Company's Form 10-K
filed on March 30, 2000.
11 Incorporated by reference to the Company's Form 10-Q
filed on May 16, 2000.
12 Incorporated by reference to the Company's Proxy
Statement on Form 14A filed on May 31, 2000.
13 Incorporated by reference to the Company's Registration
Statement on Form S-2 filed on June 9, 2000.
14 Incorporated by reference to the Company's Form 8-K
filed on June 8, 2000.
15 Incorporated by reference to the Company's Form 10-Q
filed on August 15, 2000.
32
<PAGE>
16 Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form S-2 filed on
July 26, 2000.
17 Incorporated by reference to Amendment No. 2 to the
Company's Registration Statement on Form S-2 filed on
October 18, 2000.
18 Incorporated by reference to Amendment No. 3 to the
Company's Registration Statement on Form S-2 filed on
November 1, 2000.
(b) Reports On Form 8-K
During the quarter ended September 30, 2000, the Company filed
a report on Form 8-K on September 14, 2000.
33
<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.
TCPI, INC.
Date: November 14, 2000 By: /s/ Walter V. Usinowicz, Jr.
-------------------------------------
Walter V. Usinowicz, Jr.
Vice President and Chief Financial Officer
(Duly authorized officer and principal
accounting officer)
34
