SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
-----------------
TCPI, INC.
Formerly known as Technical Chemicals and Products, Inc.
(Exact name of registrant as specified in its charter)
Florida 65-0308922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3341 S.W. 15th Street
Pompano Beach, Florida 33069
(Address of principal executive offices)
(954) 979-0400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO 12(g) OF THE ACT:
Common Stock ($.001 par value)
(Title of class)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
The aggregate market value of Common Stock held by non-affiliates as of
August 11, 2000 was approximately $15,970,841 (based upon the closing sale price
of $0.625 per share on the Nasdaq National Market on August 11, 2000).
As of August 11, 2000, 30,423,196 shares of the Registrant's $.001 par
value Common Stock were outstanding.
Transitional Small Business Disclosure Format (check one):
YES NO x
---------- ----------
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TCPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands, except share data)
June 30, 2000 December 31,1999*
-----------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,731 $ 1,447
Investments -- 2,540
Accounts receivable, net 581 1,163
Inventory 2,461 2,036
Due from related parties 697 686
Other 957 486
------------- -------------
Total current assets 6,427 8,358
------------- -------------
Property and equipment, net 1,869 2,096
Patents and trademarks, net 10,782 11,256
Goodwill, net 1,721 1,807
Deferred financing costs 1,136 --
Other assets 16 71
------------- -------------
Total assets $ 21,951 $ 23,588
============= =============
Liabilities, redeemable preferred stock and
common stockholders' equity
Current liabilities:
Accounts payable $ 2,701 $ 988
Accrued expenses 1,301 1,360
------------- -------------
Total current liabilities 4,002 2,348
Deferred revenue 812 812
Other liabilities 25 --
Redeemable preferred stock, $.001 par value:
Authorized shares-25,000,000;
Series A 6% Redeemable Convertible Preferred Stock,
issued and outstanding shares-2,000 and 11,300
at June 30, 2000 and December 31, 1999 2,259 12,457
Common stock, $.001 par value:
Authorized shares-100,000,000; issued and outstanding
shares-30,423,196 and 14,541,544 at June 30, 2000
and December 31, 1999 30 15
Additional paid-in capital 53,073 41,638
Accumulated deficit (38,250) (33,682)
------------- -------------
Total common stockholders' equity 14,853 7,971
------------- -------------
Total liabilities, redeemable preferred stock and common stockholders'
equity $ 21,951 $ 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)
<TABLE>
<CAPTION>
(Amounts in thousands, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 1,125 $ 1,289 $ 2,312 $ 2,675
Cost of product sales 614 733 1,323 1,547
------------ ------------ ------------ ------------
Gross profit 511 556 989 1,128
R&D contract revenue -- 316 -- 471
Operating expenses:
Selling, general and administrative 1,472 1,763 3,096 3,686
Litigation 405 310 1,127 715
Research and development 219 660 509 1,209
Depreciation and amortization 428 482 869 954
------------ ------------ ------------ ------------
2,524 3,215 5,601 6,564
------------ ------------ ------------ ------------
Loss from operations (2,013) (2,343) (4,612) (4,965)
Other income (expense):
Investment income (36) 79 22 228
Interest expense (2) (4) (2) (7)
------------ ------------ ------------ ------------
Net loss (2,051) (2,268) (4,592) (4,744)
Accrued preferred redemption
accretion and dividends 40 396 137 795
------------ ------------ ------------ ------------
Loss attributable to common stockholders $ (2,091) $ (2,664) $ (4,729) $ (5,539)
============ ============ ============ ============
Net loss per common share -
Basic and Diluted $ (.07) $ (.25) $ (.18) $ (.53)
============ ============ ============ ============
Weighted average number of
common shares outstanding 29,793,240 10,636,626 26,930,250 10,518,541
============ ============ ============ ============
</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)
<TABLE>
<CAPTION>
(Amounts in thousands)
Six Months Ended June 30,
------------------------------
2000 1999
------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,592) $(4,744)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 869 954
Changes in operating assets and liabilities:
Accounts receivable 582 (524)
Inventory (425) 149
Other current assets (471) 82
Other assets and liabilities (37) --
Accounts payable and accrued expenses 1,883 (87)
Deferred revenue -- 812
------- -------
Net cash used in operating activities (2,191) (3,358)
INVESTING ACTIVITIES
Purchases of property & equipment (210) (193)
Proceeds from sale of equipment 165 --
Due from related party (11) --
Purchase of investments -- (3,688)
Proceeds from sale of investments 2,563 4,048
Investments in patents and trademarks (37) (68)
------- -------
Net cash provided by investing activities 2,470 99
FINANCING ACTIVITIES
Proceeds from stock options exercised 5 --
------- -------
Net cash provided by financing activities 5 --
------- -------
Net increase (decrease) in cash and cash equivalents 284 (3,259)
Cash and cash equivalents at beginning of period 1,447 5,207
------- -------
Cash and cash equivalents at end of period $ 1,731 $ 1,948
======= =======
</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>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Accounts receivable:
Accounts receivable $ 913 $ 1,481
Allowance for doubtful accounts (332) (318)
-------- --------
Accounts receivable, net $ 581 $ 1,163
======== ========
Property and equipment:
Furniture, fixtures and equipment $ 3,623 $ 3,766
Leasehold improvements 174 174
-------- --------
3,797 3,940
Accumulated depreciation (1,928) (1,844)
-------- --------
$ 1,869 $ 2,096
======== ========
Patents and trademarks:
Patents and trademarks $ 15,440 $ 15,403
Accumulated amortization (4,658) (4,147)
-------- --------
$ 10,782 $ 11,256
======== ========
Goodwill:
Goodwill $ 2,494 $ 2,494
Accumulated amortization (773) (687)
-------- --------
$ 1,721 $ 1,807
======== ========
</TABLE>
3. REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
In May 1998, the Company completed a private placement of 15,000 shares
of Series A Convertible Preferred Stock (the "Preferred Stock") to a single
institutional investor (the "Investor"). As of June 30, 2000, the Investor has
converted 13,000 shares of Preferred Stock and received 20,317,428 shares of the
Company's common stock. See the Company's Annual Report on Form 10-K for the
years ended December 31, 1999 and 1998 and the Company's Report on Form 8-K
filed on May 21, 1998 for additional information related to this Preferred Stock
transaction.
5
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
3. REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (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 the time of effective
registration with the Securities and Exchange Commission. A Registration
Statement on Form S-2 was filed with the Securities and Exchange Commission on
June 9, 2000. Amendment No. 1 to the Registration Statement on Form S-2 was
filed with the Securities and Exchange Commission on July 26, 2000. 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 June 30, 2000.
4. RELATED PARTY TRANSACTIONS
During August 1998, the Company's outside directors unanimously
approved the Company's guarantee, for a period of up to 90 days, of $750,000 of
the collateral obligations of Mr. Aronowitz's family limited partnership
(Partnership) to a brokerage house. Under the terms of the Company's agreement
with the Partnership, the brokerage house called on the Company's guarantee; the
Partnership then executed and delivered to the Company a promissory note
personally guaranteed by Mr. Aronowitz in an amount equal to the amount of the
guarantee. The note was a six-month note payable on demand and bears interest at
the rate of interest charged by the brokerage house (7 3/4% at June 30, 2000).
In February 1999, accrued interest was paid and the note was extended an
additional three months. After becoming due on May 26, 1999, interest was paid
and an additional extension of one year was authorized by the Board of
Directors. At the Board meeting on April 27, 2000, an additional extension of
eighteen months commencing on September 1, 2000 was authorized by the Board of
Directors, with payments of principal and interest due quarterly. The balance of
funds advanced under the note was approximately $697,000 at June 30, 2000, and
was included in due from related party in the balance sheets.
The Company and Mr. Aronowitz are parties to an exclusive, worldwide
license agreement dated January 31, 1996 ("License Agreement") under which the
Company has the right to manufacture, promote, market and sell all medical,
pharmaceutical and health care products and devices created by Mr. Aronowitz on
or before the date of the License Agreement. The License Agreement is for a term
of twenty years with automatic renewals and requires annual fees equal to the
greater of (i) 3% of net collected sales revenues from products based upon
certain technology or (ii) $10,000, with an aggregate maximum limitation of
$10,000,000. The License Agreement replaces an earlier license agreement with
similar provisions. During 1999, 1998, 1997 and 1996, Mr. Aronowitz earned
approximately $149,000, $161,000, $148,000 and $114,000, respectively, pursuant
to the License Agreement. He waived all licensing fees due him for the years
ended December 31, 1995 and 1994. Mr. Aronowitz is also party to an employment
contract with the Company.
6
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
4. RELATED PARTY TRANSACTIONS (Continued)
The Company made a loan to Dr. Block in the amount of $50,000 pursuant
to his Employment Agreement with the Company dated May 10, 1999, which shall be
deemed repaid with respect to 50% of the amount due and owing on each of the
first two anniversary dates of this agreement as long as Dr. Block remains an
employee of the Company or is not terminated for cause (as defined). The
principal amount of this loan bears interest at the London Interbank (LIBOR)
rate, as adjusted quarterly, with such principal and accrued interest due on
September 1, 2001, subject to such loan being deemed repaid as provided above.
As of June 30, 2000, the outstanding principal and interest is approximately
$26,000.
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 year ended
December 31, 1999, and the quarter ended June 30, 2000, the Company incurred
substantially increased litigation expenses compared to earlier periods.
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 has pending
in the trial court a motion to vacate the tortious interference judgment and
have made a motion to stay execution on the judgment, which is pending. 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 during the pendency of the Company's motion to vacate the tortious
interference judgment. There can be no assurance that the Company will be
successful in vacating the judgment against it.
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 June 30, 2000.
7
<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. 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 21, 2000, plaintiffs filed a motion for
reconsideration of the court's ruling, which the Company responded to on July
24, 2000. The court has not yet ruled on that motion. Also, on July 24, 2000,
plaintiffs filed a second amended complaint, to which the Company has not yet
responded. TCPI intends to file a motion to dismiss the second amended
complaint. 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 June 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
8
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
a motion to dismiss these counterclaims, and these defendants have since
withdrawn those counterclaims. The court entered a default judgment against
Medex, Inc. The defendants, The Creative Connection, Inc., and Debra Lapierre,
have made a motion for a summary judgment, which remains pending. This case is
currently in the discovery phase which is scheduled to close on August 30, 2000.
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.
9
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
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 June 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 April
24, 2000, the parties reached a tentative settlement in the amount of $650,000
payable over a 21-month period with approximately $110,000 payable within 30
days of execution of a formal settlement agreement and quarterly payments made
thereafter on the balance plus interest at the rate of 5.3% per year. The
Company expects the United States will enter into a formal agreement
memorializing this settlement; however, there can be no assurance that the
United States will enter into such an agreement. 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.
The Company has not yet determined whether to pursue an appeal of the
court's ruling, but filed a notice of appeal on or about March 31, 2000. On July
26, 2000, the Company, with the consent of the United States, voluntarily
dismissed without prejudice the Company's appeal. If the Company were to appeal
the court's ruling, TCPI may be required to post an appeal bond in order to stay
execution of the judgment. There can be no assurance that an appeal, if taken,
would be successful, or that the posting of an appeal bond or enforcement of the
judgment would not have a material adverse impact on the Company's liquidity and
capital resources. Management believes that payment of this judgment and related
expenses is probable and has estimated that the ultimate loss related to the
resolution of this matter will be approximately $650,000 and, accordingly, has
recorded an accrual for loss equal to this amount as of June 30, 2000. At
December 31, 1999, management estimated the probable loss to be $500,000 and
recorded a liability in that amount.
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.
10
<PAGE>
TCPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. LEGAL PROCEEDINGS (Continued)
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 our
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.
6. OTHER INFORMATION
On June 1, 2000, the Company's wholly owned subsidiary, TCPI Holdings,
Ltd., signed a purchase agreement to acquire the worldwide over-the-counter
(OTC) pregnancy and ovulation self testing business assets of Roche Diagnostics
GmbH, including trademarks and distribution rights related to these products.
The Company has agreed to acquire these assets for $7 million in cash payable on
a scheduled basis according to the terms of the agreement, including required
country-specific contracts to be completed when the transfers of regulatory
authorization and/or product registration by local health agencies become
effective. Since 1992, TCPI has been the exclusive manufacturer of the
EVATEST(R) (pregnancy), EVAPLAN(R) (ovulation) and other similar family planning
products for Boehringer Mannheim Italy S.p.A., and later Roche Diagnostics,
which distributed these products in many countries throughout the world.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPANY BACKGROUND
TCPI, Inc. (the "Company" or "TCPI") manufactures point-of-care medical
diagnostic products for use at home, in physician offices, and other healthcare
locations and markets them worldwide through multiple distribution channels
under its own HealthCheck(R) brand as well as OEM (original equipment
manufacture) and private label programs.
TCPI's key diagnostic products on the market and in development include
its HealthCheck(R) brand of at home testing and screening products, noninvasive
TD Glucose(TM) Monitoring System for diabetics to monitor glucose levels,
HealthCheck Total and HDL Cholesterol Home Screening Tests, professional use
TriMeter(TM) system for analytical monitoring of Total and HDL Cholesterol and
blood glucose from a finger stick, Drug of Abuse screening tests available in
TCPI's branded ScanGuard(TM) and private label One-Step slide, strip or
multi-test cassette formats, and over-the counter and professional pregnancy and
fertility family planning products in multiple formats - including TCPI's
accurate and easy to use One Step-One Minute Pregnancy TestTM.
Many of TCPI's diagnostic products incorporate its patented and
proprietary membrane-based technology platform. The Company also owns a
patent-protected and proprietary portfolio of transdermal and dermal drug
delivery technologies and skin permeation enhancers. TCPI presently holds 26
U.S. and foreign patents, and has 61 domestic and foreign patent applications
pending.
FORWARD LOOKING STATEMENTS
Information in this Form 10-Q, including any information incorporated
by reference herein, includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Act of 1934, as amended, and is subject to the safe-harbor created by
such sections. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements.
Statements regarding development and FDA clearance of future products,
future prospects, business plans and strategies, future revenues and revenue
sources, the resolution of pending litigation, future liquidity and capital
resources, health care market directions, future acceptance of the Company's
products, possible recommendations of health care professionals or governmental
agencies regarding use of diagnostic products, possible growth in markets for
at-home diagnostic testing, the possibility and timing of additional equity
investments, mergers, acquisitions or other strategic transactions, as well as
other statements contained in this report that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, and similar statements are forward-looking statements. These
statements are based upon assumptions and analyses made by the Company in light
of current conditions, future developments and other factors the Company
believes are appropriate in the circumstances, or information obtained from
third parties and are subject to a number of assumptions, risks and
uncertainties. Readers are cautioned that forward-looking statements are not
guarantees of future performance and that actual results might differ materially
from those suggested or projected in the forward-looking statements. Factors
that may cause actual future events to differ significantly from those predicted
or assumed include, but are not limited to: the satisfactory completion of
clinical trials demonstrating efficacy of the TD GlucoseTM Monitoring System;
FDA and foreign regulatory clearance of the TD Glucose Monitoring System; delays
in product development; risks associated with the Company's ability to
successfully develop and market new products on a profitable basis or at all;
availability of labor and sufficient parts and materials to complete the design,
construction and manufacturing scale-up of required equipment; ability to
complete the design, construction and manufacturing scale-up on a timely basis
within budget parameters; receipt of any required regulatory approvals for
manufacturing equipment or related facilities; future advances in technologies
and medicine; the uncertainties of health care reform; risks related to the
early stage of the Company's existence and its products' development; the
Company's ability to execute its business plans; engineering development; lead
time for delivery of equipment; the Company's dependence on outside parties such
as its key customers, suppliers, licensing and alliance partners; competition
from major pharmaceutical, medical and diagnostic companies; risks and expense
of government regulation and effects of changes in regulation (including risks
associated with obtaining requisite FDA and other governmental approvals for the
Company's products); the limited experience of the Company in manufacturing and
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
FORWARD LOOKING STATEMENTS (Continued)
marketing products; uncertainties connected with product liability exposure and
insurance; risks associated with domestic and international growth and
expansion; risks associated with international operations (including risk
associated with international economies, currencies and business conditions);
risks associated with obtaining and maintaining patents and other protections of
intellectual property; risks associated with uncertainty of litigation and
appeals, and the payment of judgments not reversed on appeal or otherwise; the
Company's limited cash reserves and sources of liquidity; uncertainties
regarding timing and effectiveness of registration statements; uncertainties in
availability of expansion capital in the future and other risks associated with
capital markets, including funding of ongoing operations, risks associated with
the Company's ability to negotiate and obtain additional financing, equity
investments or strategic transactions on favorable terms or at all, as well as
those listed in the Company's other press releases and in its other filings with
the Securities and Exchange Commission. The Company may determine to discontinue
or delay the development of any or all of its products under development at any
time. Moreover, the Company may not be able to successfully develop and market
new products, 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
During the second quarter of 2000, the Company's operations continued
to experience significant losses. For the quarter and six-month periods ended
June 30, 2000, such losses were substantially reduced from the comparable
periods of the prior year. While losses associated with ongoing investment
spending in product and market development activities are expected to continue,
the Company has centered its focus on key development efforts and remains
capable of funding selected programs. The Company's loss attributable to common
stock for the quarter ended June 30, 2000 was $2,091,000 or 22% less than that
of the same quarter a year ago and 21% less than the loss reported for the first
quarter of 2000. For the six months ended June 30, 2000, the net loss
attributable to common stock was $4,729,000 and represented an improvement over
the same period of the prior year of $810,000 or 15%.
Net Sales. The Company's net sales for the second quarter ended June
30, 2000 declined by 13% to $1,125,000 as compared to $1,289,000 in the same
period a year earlier. Net product sales for the first six months of 2000 were
$2,312,000 as compared to $2,675,000 for the same period last year representing
a 14% decline. Domestic sales exhibited some improvement in the quarter ended
June 30, 2000 increasing by 9% over the quarter ended June 30, 1999 due to the
addition of several new HealthCheck(R) customers in the retail pharmacy segment.
Sales of the Company's HealthCheck(R) products increased 23% in the first six
months of 2000 over the same period of last year. Private label sales were up
slightly in the second quarter of 2000 from the same period a year ago. However,
for the six months ended June 30, 2000, the increasing private label sales were
not sufficient to offset the significant initial stocking activity which
occurred in the quarter ended March 31, 1999. International sales continue below
the levels of the prior year. The Company believes that these declines are the
result of inattention to these OTC markets by the Company's largest
international distributor. For the quarter ended June 30, 2000, sales through
these channels dropped by 31%. As TCPI's planned acquisition of international
distribution channels and associated product trademarks from Roche Diagnostics
GmbH proceeds, the Company expects that sales and marketing efforts related to
these products will be invigorated. As a result, the Company anticipates that
the downward trend in international family planning product sales will begin to
be reversed through the second half of this year and into the year 2001 as the
acquisition process continues. For the quarter ended June 30, 2000 sales of
biological buffers and specialty chemicals declined by approximately 50%, but
remain significantly ahead of last year's pace for the six months ended June 30,
2000. Furthermore, the Company has received customer orders and associated
deposits with scheduled shipments within the current year that are sufficient to
more than double sales of these products from sales recorded in 1999. For the
six months ended June 30, 2000, total revenues were further adversely impacted
by the absence of R & D Contract Revenue formerly generated by the Company's
research and development facility in California. This facility was closed as a
cost containment measure a year ago. Total revenue for the six-month period
ended June 30, 2000 was $2,312,000 and represented a decline of $834,000, over
half of which was due to this discontinuance.
13
<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 quarter
ended June 30, 2000 was $511,000 as compared to $556,000 for the quarter ended
June 30, 1999 and $989,000 for the six months ended June 30, 2000 versus
$1,128,000 in the same period a year earlier. The declines were in line with the
drops in net sales. Gross profit as a percent of net sales for the quarter ended
June 30, 2000 improved to 45% from 43% for the quarter ended June 30, 1999 and
improved to 43% for the six months ended June 30, 2000 from 42% for the
comparable six months of the prior year due to a shift in the mix of products
sold.
Operating Expenses. The Company's total operating expenses for the
quarter ended June 30, 2000 decreased by 21% to $2,524,000 from $3,215,000 in
the quarter ended June 30, 1999, and by 18% from the previous quarter ended
March 31, 2000. For the six months ended June 30, 2000, total operating expenses
declined $963,000 or 15% from the same period a year ago. 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 June 30, 2000 were
$1,472,000 representing a decline of 17% from those experienced for the quarter
ended June 30, 1999. For the six months ended June 30, 2000, SG&A expenses
declined by 19% to $3,096,000 from $3,686,000 in the same period a year ago. The
declines are due primarily to lower commissions and other volume related selling
expenses due mainly to lower net sales on a period to period comparison, as well
as ongoing cost containment efforts.
Litigation. Litigation expenses for the quarter ended June 30, 2000
were $405,000 as compared to $310,000 for the same quarter a year ago and to
$722,000 for the immediately preceding quarter ended March 31, 2000. The
increase over the quarter ended June 30, 1999 was due to the ongoing defense of
certain legal matters with the decline from the immediately preceding quarter
ended March 31, 2000 due to 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. Net of the decrease in spending in the first
six months of 2000 due to the closure of the California facility, research and
development expenses have increased 38% for the six months ended June 30, 2000
compared to the levels for the same period a year ago.
Net Loss. The Company's net loss for the quarter ended June 30, 2000 of
$2,051,000 is 10% less than that of the same quarter a year ago and 19% less
than the loss reported for the quarter ended March 31, 2000. For the six months
ended June 30, 2000, the net loss of $4,592,000 represents a decrease of
$152,000 or 3% from the comparable period in 1999.
The net loss attributable to common stock for the quarter ended June
30, 2000 declined by $573,000 or 22% to $2,091,000 from the $2,664,000 net loss
attributable to common stock incurred in the quarter ended June 30, 1999. The
net loss attributable to common stock for the first six months of 2000 decreased
$810,000, or 15%, to $4,729,000 from $5,539,000 in the same period a year
earlier. Of these decreases, $356,000 and $658,000 respectively were due to
lower accrued redemption accretion and accrued dividends of the redeemable
preferred stock issued in 1998 of which $40,000 was recognized in the quarter
ended June 30, 2000 as compared to $396,000 in the quarter ended June 30, 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 June 30,
2000 was $0.07 per share. This significant reduction from a net loss of $0.25
per share for the quarter ended June 30, 1999 was due primarily to an increase
in the average number of common shares outstanding.
14
<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 $1,731,000 at June 30, 2000, as
compared to $3,987,000 at December 31, 1999. Working capital at June 30, 2000
was $2,425,000, as compared to $6,010,000 at December 31, 1999. The Company had
Current Assets of $6,427,000 at June 30, 2000. Deferred Financing Costs of
$1,136,000 represent the value of warrants issued and other costs incurred in
conjunction with the above mentioned common stock subscription agreement with
Swartz. The Company had stockholders' equity of $14,853,000 at June 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 and
plans to utilize such funds to purchase production equipment, complete clinical
trials and regulatory submissions relating to the TD Glucose Monitoring System
and Total and HDL cholesterol monitoring products, develop new diagnostic
products, conduct clinical trials, continue its investment in marketing and
facility expansion, and continue its day-to-day business.
On May 8, 2000, the Company announced that it entered into a
subscription agreement with Swartz 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 the time of effective registration with 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $2,191,000 for the six months
ended June 30, 2000 as compared to $3,358,000 in the same period a year earlier.
This improvement is due to improved turnover of Accounts Receivable and customer
deposits recorded in Accounts Payable. Partially offsetting these generations of
cash was the initial payment for the purchase of certain assets of the Company's
primary international distributor.
No significant net cash amounts were provided by financing activities
for the six months ended June 30, 2000 or for the six months ended June 30,
1999.
During 1999 and 2000, the Company has sustained significant operating
losses that have resulted in substantial consumption of its cash reserves. The
Company believes it will continue to incur net losses and have negative cash
flow in the immediate future. Based on the current rate of losses and cash flow,
the Company plans to reduce its operating losses, contain expenses, increase
sales of its products, or sell certain assets. Given the Company's cash flow,
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, this
transaction is subject to certain terms and market conditions, including
effective registration with the Securities and Exchange Commission. If the
Company is unable to successfully obtain funds under this agreement due to
unfavorable market conditions or the Company's inability to achieve effective
registration on a timely basis or at all, or otherwise obtain additional capital
from other sources on satisfactory terms, or significantly reduce its operating
losses, the Company would have to consider selling some or all of its
technologies, reduce or terminate completely its research and development
activities, or reduce or discontinue some or all of its operations, or apply for
protection from its creditors under the federal bankruptcy laws.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In addition, as described elsewhere in this Form 10-Q under "Legal
Proceedings," the Company has pending judgments in various legal proceedings,
some of which are currently secured by bonds collateralized by existing working
capital. If TCPI was required to satisfy all or a significant portion of these
judgments on a basis faster than presently anticipated, the Company's present
liquidity condition would be further negatively impacted.
The Company's future working capital and capital expenditure
requirements may vary materially from those now planned depending on numerous
factors, including additional manufacturing scale-up costs for the Company's
current and future products, possible future acquisitions, the focus and
direction of the Company's research and development programs, competitive and
technological advances, future strategic alliances and relationships with
marketing partners, the FDA regulatory process, the regulatory process in
foreign countries, and the Company's marketing and distribution strategy.
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 completion of clinical trials and receipt of governmental
approvals to begin manufacturing and selling its new products, and (iii) the
ability of the Company to sell its new products at a profit. The Company's
future working capital requirements may vary materially from those now planned
depending on numerous factors, including:
(1) the outcome of clinical testing of products under development
(including the TD Glucose Monitoring System and the Total and
HDL cholesterol monitoring products), delays or changes in
government required testing and clearance or approval
procedures and the Company's ability to receive FDA clearance
or approval for the marketing of its products under
development;
(2) competitive and technological advances that may require the
Company to modify the design of its products under
development;
(3) the Company's ability to successfully resolve pending
litigation; and
(4) manufacturing costs for the Company's current and future
products.
The Company has received correspondence from the Nasdaq National Market
bringing to the Company's attention a concern regarding the continued listing of
the Company's common stock on that market. The Company'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. As disclosed earlier this year, the Nasdaq National
Market previously allowed the Company's common stock to remain listed on that
market after the Company regained compliance with listing requirements. In light
of this, there can be no assurance that, even if the price of the Company's
common stock increases above $1.00 for a minimum of ten days, that the Nasdaq
National Market will not delist the Company's common stock. If the Company's
stock does not satisfy listing requirements before then, the Company may attempt
to seek review of the Nasdaq National Market's decision to delist its stock, or
may apply for quotation of its common stock on the Nasdaq SmallCap Market or any
other organized market on which the shares may be eligible for trading. Further,
the Company has received a letter from Nasdaq expressing concern that the
Company may not be in compliance with a Marketplace Rule with respect to the
issuance of certain stock options and stock to non-employee directors. The
Company has responded to the inquiry, but has not received a reply. There can be
no assurance that the Company's common stock will satisfy the requirements for
listing on either the Nasdaq National Market or SmallCap Market, or that either
market will approve listing after reviewing any application submitted by the
Company.
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 ten days consecutive failure of the Company's common stock to be listed
for trading on the Nasdaq National Market or the Nasdaq SmallCap Market, 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
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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. The potential adverse impact of such a redemption can not be
quantified at this time as the aggregate mandatory redemption amount (or the
number of shares of common stock to be issued in lieu of the mandatory
redemption amount) would be based on the number of Series A shares outstanding
and the market price of the Company's common stock at the time that the shares
are redeemed. See the Company's Form 8-K dated May 21, 1998 for the terms of the
Company's Series A shares.
In addition, the Company's Investment 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 O.T.C. Bulletin Board, the American Stock Exchange, or the New York
Stock Exchange. The Company believes it would be eligible for listing on the
O.T.C. Bulleting 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 Swartz Investment Agreement. In that event, the Company may
be unable to put shares to Swartz 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. See the
exhibits to the Company Form 10-Q for the quarter ended March 31, 2000.
With respect to the acquisition of assets from Roche Diagnostics, there
can be no assurance that the Company will obtain the necessary funds. Since the
funds available under the Company's private equity line with Swartz are subject
to the future market price and volume of trading of our common stock, the
Company may be unable to obtain sufficient funds pursuant to the Swartz
transaction on a timely basis, or at all. 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 Company.
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 holder of the Preferred
Stock converted 13,000 shares of Preferred Stock into 20,317,428 shares of
Common Stock, and presently has 2,000 shares of its Preferred Stock outstanding.
Based upon the terms of the Preferred Stock, as of August 9, 2000 the
outstanding shares of Preferred Stock would be convertible into 3,492,000 shares
of Common Stock. For additional information related to this Preferred Stock
transaction, see the Company's Annual Reports on Form 10-K for the years ended
December 31, 1999 and 1998, respectively, and the Company's Report on Form 8-K
filed on May 21, 1998.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
At June 30, 2000, the Company had only cash equivalents and high grade,
short-term securities, which are not typically subject to material market risk.
The Company has no outstanding loans. A hypothetical 10% change in interest
rates would have an immaterial impact on the fair value of these instruments.
17
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
YEAR 2000
The term "Year 2000 issue" is a general term used to describe the
various problems that may have resulted from the improper processing of dates
and date-sensitive calculations by computers and other machinery as the year
2000 was reached. These problems generally arise from the fact that most of the
world's computer hardware and software has historically used only two digits to
identify the year in a date, often meaning that the computer will fail to
distinguish dates in the "2000s" from dates in the "1900s". These problems may
also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
The Company, its division and operating subsidiaries, implemented a
Year 2000 readiness program with the objective of having all significant
business systems function properly with respect to the Year 2000 issue before
January 1, 2000. Since 1997, the Company has added to its existing computer
capabilities as well as installed new computer systems and programs to
accommodate anticipated future growth of TCPI's business and internal
operations. Costs related to the Company's actions to become Year 2000 compliant
were funded through cash from operating activities. The total estimated costs
related to Year 2000 compliance efforts were approximately $60,000, of which
$55,000 was expensed and $5,000 capitalized.
The Company did not experience any Year 2000 computer related
difficulties. However, due to the general uncertainty with respect to the Year
2000 issue, there can be no assurance that all Year 2000 issues have been
foreseen and corrected, or that no future material disruption of the Company's
business will occur directly or indirectly as it relates to the Year 2000
compliance status of the Company's key vendors and customers or a general
failure of external local, national or international systems (including power,
communications, postal or transportation systems) necessary for the ordinary
conduct of business.
While the Company has developed a contingency plan that would allow for
the supply of materials and services from alternate key vendors as well as
inventory of necessary materials sufficient in the event a disruption occurs as
a result of the Year 2000 issue, these contingency plans are subject to
uncertainties.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TCPI, INC.
Date: October 31, 2000 By: /s/ Walter V. Usinowicz, Jr.
-----------------------------
Walter V. Usinowicz, Jr.
Vice President and Chief Financial Officer
(Duly authorized officer and principal
accounting officer)
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