FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION NO. 333-51690
PROSPECTUS
UP TO 25,000,000 SHARES
TCPI, INC.
COMMON STOCK
----------------------------------------------
The selling shareholders listed below may use this prospectus in
connection with the following resales of our common stock:
o Investors named in a securities purchase agreement may offer up to
7,770,000 shares that they acquire upon conversion of the
$1,599,993 principal amount of our 6% convertible debentures due
2005 that we issued to the investors and 640,000 shares that they
acquire upon the exercise of warrants;
o GMF Holdings may offer up to 13,900,000 shares that it acquires
upon conversion of the $10 million principal amount of our 6%
convertible debentures that we may issue and sell to it when we
exercise our right to "put" debentures to GMF under our credit
line agreement with GMF;
o The May Davis Group, Inc. and its affiliates may offer up to
750,000 shares of common stock acquired in consideration for
certain services and 2,000,000 shares that they acquire upon
the exercise of warrants; and
o Butler Gonzalez LLP may offer up to 10,000 shares that it acquires
upon the exercise of warrants.
The selling shareholders may sell the common stock at prices and on
terms determined by the market, in negotiated transactions or through
underwriters. GMF is an "underwriter" within the meaning of the Securities Act
in connection with its sales of our common stock.
We will not receive any proceeds from the sale of shares by the selling
shareholders. However, we will receive proceeds from the sale of convertible
debentures to GMF and upon the exercise of warrants held by investors under the
securities purchase agreement, May Davis and its affiliates and Butler Gonzalez.
INVESTING IN THE SHARES INVOLVES A HIGH DEGREE OF RISK. "RISK FACTORS"
BEGIN ON PAGE 8.
Our common stock is listed and traded on the NASD O.T.C. Bulletin Board
under the symbol "TCPI." The last reported sales price of the common stock on
December 8, 2000 was $.125 per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
DATED DECEMBER 12, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Prospectus Summary................................................................................................3
Risk Factors......................................................................................................8
Special Note Regarding Forward-Looking Statements................................................................20
Use of Proceeds..................................................................................................27
Securities Purchase Agreement....................................................................................28
The GMF Line of Credit Agreement.................................................................................29
Selling Shareholders.............................................................................................32
Plan Of Distribution.............................................................................................36
Description of Capital Stock.....................................................................................38
Transfer Agent And Registrar.....................................................................................45
Legal Matters....................................................................................................45
Experts..........................................................................................................45
Where You Can Find More Information..............................................................................46
Information Incorporated by Reference............................................................................46
</TABLE>
You should only rely on the information contained in this prospectus or
any supplement. We have not authorized anyone to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer of these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume
that the information in this prospectus is accurate as of any date other than
the date on the front cover of this prospectus or any supplement.
2
<PAGE>
PROSPECTUS SUMMARY
As used in this prospectus, unless otherwise indicated, any reference
to our business, our products or our financial condition includes all of our
subsidiaries, including our wholly-owned subsidiaries, Health-Mark Diagnostics,
L.L.C. and TCPI Holdings, Ltd., and our joint venture, Technical Electronics
Corporation.
OUR BUSINESS
We develop, manufacture and distribute point-of-care medical diagnostic
products for use at home, in physician offices, and other healthcare locations
that we serve through domestic and international channels. In addition, we also
own a patent-protected proprietary portfolio of transdermal and dermal drug
delivery technologies and skin permeation enhancers. We also manufacture high
purity specialty biochemicals.
We manufacture and market in the U.S. and internationally medical
diagnostic testing products that utilize membrane-based technology. Diagnostic
products sold in the United States have received 510(k) marketing clearance from
the United States Food and Drug Administration. The balance of our 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. We presently hold 26 U.S. and foreign patents, and have 61 domestic and
foreign patent applications pending.
OUR PRODUCT PORTFOLIO
We currently market various medical diagnostic products. These products
utilize rapid testing procedures to detect and/or quantify substances in urine
or blood. Our diagnostic portfolio presently includes testing and screening
products for:
o family planning (pregnancy detection and ovulation timing);
o cholesterol monitoring and detection of diabetes, urinary tract
infection and kidney and bladder disease, skin cancer and
deteriorating vision;
o infectious diseases; and
o drugs of abuse.
Our transdermal/dermal portfolio includes development-stage technologies in the
areas of smoking addiction reduction, hormone replacement therapy, and
cardiovascular disease, as well as commercialization of skin permeation
enhancers.
We also have certain key products in various stages of development that
include:
o our noninvasive TD Glucose(TM) Monitoring System for diabetics;
o our new Total and HDL Cholesterol screening and monitoring
products for over-the-counter use and professional use; and
o our HealthCheck(R) and private-label brands of over-the-counter
diagnostic screening tests for at-home use by consumers.
3
<PAGE>
We market diagnostic products worldwide through multiple distribution
channels that include:
o original equipment manufacture ("OEM") marketing relationships
with multinational pharmaceutical and diagnostic companies for
product use on a professional and/or over-the-counter basis;
o over-the-counter sales of our proprietary HealthCheck(R) and
private-label brands for consumer use on an over-the-counter
basis; and
o Internet sales via our web site, www.health-check.com.
In the OEM sector, a significant portion of our family planning
products for pregnancy and fertility are currently marketed by Roche Diagnostics
GmbH for international distribution under their trademarks. However, as
discussed below, on May 20, 2000 we entered into an asset purchase agreement
with Roche Diagnostics for the acquisition of certain trademarks and business
assets relating to the pregnancy and ovulation business of Roche Diagnostics. If
we successfully complete this acquisition, we will be responsible for the
marketing and distribution of these products. The OEM sector also includes
marketing of our 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, we opened an international sales and
marketing office in Milan, Italy to expand distribution of our diagnostic
products outside of North America. International expansion of our diagnostic
products is ongoing. Product marketing and/or registration with local health
officials is underway in a number of foreign countries.
Our 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. We private label our family planning products for 7 drug, discount
and supermarket chains.
In 1999, sales of our products to Roche Diagnostics GmbH accounted for
approximately 31% of sales; CVS Distribution, Inc. (CVS Drug Stores) accounted
for approximately 25% of sales; and LVMH Moet Hennessy Louis Vuitton, Inc.
accounted for approximately 13% of sales.
Our executive offices are located at 3341 S.W. 15th Street, Pompano
Beach, Florida 33069, and our telephone number is (954) 979-0400.
RECENT DEVELOPMENTS
THE SWARTZ TRANSACTION
On May 3, 2000, we entered into an investment agreement with Swartz
Private Equity, LLC. Under the Swartz investment agreement, also referred to as
an equity line, we have the option to sell, or "put," up to $25 million of our
common stock to Swartz, subject to a formula based on stock price and trading
volume, over a three year period beginning on November 3, 2000. In addition, we
issued to Swartz a warrant to purchase 312,500 shares of our common stock at a
price of $1.9063 per share, subject to adjustment, and a warrant to purchase
312,500 shares of our common stock at a price of $0.9375, subject to adjustment.
We may issue additional warrants to Swartz under the terms of the Swartz
investment agreement.
4
<PAGE>
THE ROCHE DIAGNOSTICS TRANSACTION
On May 20, 2000 our wholly-owned Cayman Islands subsidiary, TCPI
Holdings, Ltd, entered into a business and asset purchase agreement with Roche
Diagnostics GmbH of Mannheim, Germany. Under the asset purchase agreement and
several local asset purchase agreements entered into in connection with the
asset purchase agreement, TCPI Holdings will acquire certain trademarks,
distribution rights and business assets of the world-wide over-the-counter
pregnancy and ovulation testing business carried on by Roche Diagnostics. The
trademarks include EVATEST", EVAPLAN", EVENT-TEST", DIAGNOSIS" and related
goodwill. We have guaranteed TCPI Holdings' performance under the asset purchase
agreement. We have agreed to hold Roche Diagnostics and its affiliates harmless
against any and all past and future patent infringement actions directed against
pregnancy and ovulation testing products that we have supplied to Roche
Diagnostics under our previous OEM agreements. See the discussion under "Legal
Proceedings" for a description of currently pending patent infringement
litigation relating to these products.
The purchase price for the assets included in the asset purchase
agreement and the local asset purchase agreements is $7 million plus value added
tax, if applicable. We do not believe the purchase is subject to value added
tax. TCPI Holdings made a down payment of $500,000 upon signing of the asset
purchase agreement. The agreement called for a second down payment of $3 million
on the earlier of the effectiveness of an earlier registration statement (which
was declared effective on November 3, 2000), or 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 we
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 we have not made any additional payments to Roche Diagnostics.
Because of this failure to make additional payments, we currently are in breach
of the agreement. We have, however, with the concurrence of Roche Diagnostics,
taken over the marketing of the products in Germany, Italy and Spain through an
independent distributor that is well established in these markets.
As described in greater detail under the heading "Risk Factors," we do
not currently have sufficient funds to make the second and third payments due
under the asset purchase agreement. We are seeking to secure funds for these
payments 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. However, we cannot assure you that we will obtain the
necessary funds. We are in discussions with Roche in an attempt to modify
payment schedules, but cannot assure you that these efforts will be successful.
As described in this prospectus summary and in the "Risk Factors" section, since
the funds available under our equity line with Swartz and our credit line with
GMF Holdings are subject to the future market price and volume of trading of our
common stock, we may be unable to obtain sufficient funds from these
transactions on a timely basis, or at all. Therefore, absent a change in current
market conditions that would allow us to draw down more funds from the Swartz
equity line and the GMF credit line, we do not currently anticipate using these
funds to acquire the assets from Roche Diagnostics. The failure to complete the
acquisition will have a material adverse effect on our financial condition.
5
<PAGE>
If we do not make the required payments, we will forfeit the $500,000
we have already paid. Further, our obligation, which existed before we entered
into the asset purchase agreement, to indemnify Roche Diagnostics in connection
with patent infringement claims, including the litigation with Unilever, may
survive the termination of the asset purchase agreement. In addition, Roche
Diagnostics may sell the assets to one of our competitors, who may decide not to
sell our products, which would result in a material decrease in revenues,
thereby adversely affecting our operating results.
THE MAY DAVIS TRANSACTIONS
On August 28, 2000, we entered into a securities purchase agreement
with the investors listed in Schedule I to the securities purchase agreement
arranged through The May Davis Group, Inc., as placement agent. We have listed
these investors as selling shareholders under the caption "Selling
Shareholders." Under this agreement, we sold to the investors $1,599,993 of our
6% convertible debentures that mature at various dates between August 28, 2005
through November 23, 2005. The debentures are convertible into shares of our
common stock at any time after December 16, 2000, 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. In connection with the
beneficial conversion feature of these debentures, we will recognize $329,662 of
interest expense for the convertible debentures, $269,340 of which was recorded
in our results of operations for the quarter ended September 30, 2000. Also, in
connection with the issuance of the 6% convertible debentures to the investors,
we issued to the investors warrants to purchase 639,997 shares of our common
stock, which is equal to 20% of the number of shares of our 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 five
years.
On September 5, 2000, we entered into credit line agreement with GMF
Holdings, arranged through May Davis, as placement agent. Under the GMF credit
line agreement, we have the option to sell, or "put," up to $10 million of our
6% convertible debentures to GMF, subject to a formula based on stock price and
trading volume, over a three year period beginning on the effective date of the
registration statement of which this prospectus is a part. The debentures are
convertible into shares of our common stock at the lesser of $1.40 per share or
90% of the lowest closing bid price of our common stock during the 20 trading
days immediately preceding the conversion.
In providing us with the convertible debenture transaction and credit
line, compensation to May Davis is linked to both transactions. May Davis
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 our common stock at $1.50 per share. We
have the right to force conversion of the May Davis 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 May Davis, we would
receive additional capital. Additionally, in consideration for closing the
convertible debenture transaction and arranging the credit line, we issued to
affiliates of May Davis 750,000 shares of our common stock.
Under a registration rights agreement, we are obligated to register for
resale the shares issuable upon conversion of the convertible debentures and
upon exercise of the warrants. We are also obligated to register for resale the
shares issuable upon exercise of the May Davis warrant. The conversion price of
the debentures decreases and we incur penalties if the SEC does not declare this
registration statement effective by January 3, 2001. We discuss the terms of
these penalties in greater detail under the caption "Description of Capital
Stock - 6% Convertible Debentures."
6
<PAGE>
CHANGE IN BOARD OF DIRECTORS AND MANAGEMENT
Effective September 12, 2000, our board of directors elected Martin
Gurkin, Ph.D. as Chairman of the Board, succeeding Jack L. Aronowitz. The board
appointed Elliott Block, Ph.D., our Chief Executive Officer, to also become our
President. Mr. Aronowitz ceased to be employed by us on September 12, 2000. Mr.
Aronowitz will continue to serve as a Director. As described in more detail
under "Legal Proceedings," Mr. Aronowitz sued us in relation to his separation
from employment and a license agreement he signed with us. We believe that this
lawsuit is without merit and we intend to contest these allegations vigorously.
OFFERING
By means of this prospectus, the selling shareholders are offering for
sale up to 25,000,000 Shares of our common stock. We are required under a
registration rights agreement we entered into with the investors under the
securities purchase agreement to register 7,690,000 shares of common stock to be
issued upon conversion of the convertible debentures issued pursuant to the
securities purchase agreement; such shares of common stock as shall be
necessary, from time to time, to be issued upon conversion of the convertible
debentures issued under the GMF credit line agreement; 639,997 shares of common
stock underlying the warrants issued to investors; 2,000,000 shares underlying
the warrants issued to May Davis; and 10,000 shares underlying the warrants
issued to Butler Gonzalez. We have elected to register 25,000,000 million
shares. The selling shareholders may sell the common stock at prices and on
terms determined by the market, in negotiated transactions and through
underwriters.
7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, as well as
the other information contained in this prospectus, before purchasing shares of
our common stock.
WE HAVE HAD OPERATING LOSSES AND EXPECT TO CONTINUE TO HAVE OPERATING LOSSES.
We have experienced sustained significant operating losses that have
resulted in substantial consumption of our cash reserves. We dedicate a majority
of our research, development and engineering activities to the development of
new products. As a result, we are not generating sufficient revenue from the
sales of our existing products to cover the expenses associated with the
development of new products. In 1999 and 1998, we had a net loss of $15.3
million and $9.8 million, respectively. For the quarter ended September 30,
2000, our net loss was $2.2 million. We expect to continue to incur losses and
have negative cash flow for the immediate future. Based on our current rate of
losses and cash flow, we will not be able to continue our operations unless we
secure additional financing, reduce our operating losses, reduce expenses,
increase sales of our products, or sell assets. We cannot assure you that the
sales of certain of our products under development will ever commence or that we
will generate significant revenues or achieve profitability.
WE INCUR SIGNIFICANT NEW PRODUCT DEVELOPMENT EXPENSES THAT FURTHER CONTRIBUTE TO
OUR OPERATING LOSSES.
In order to support anticipated growth and new product development, we
expect to incur significant operating expenses and capital expenditures in the
future. We expect to continue to have significant cash requirements in the near
future, primarily as a result of the following:
o costs associated with completing our acquisition of assets
from Roche Diagnostics;
o increased research and development associated with the TD
Glucose Monitoring System and the commercialization and
conducting of clinical trials of all products requiring
domestic or foreign regulatory approval;
o expansion of direct distribution of medical diagnostic
products related to the national roll-out of our
HealthCheck(R) brand, our international business and our
private label business;
o introduction of our cholesterol monitoring system under
development, which physicians, laboratories, as well as
patients at home can use; and
o costs associated with expansion of our manufacturing
facilities.
Research and development expenditures for 1999 and 1998 were $1.7
million and $2.8 million, respectively, primarily as a result of ongoing
development of our TD Glucose Monitoring System, the cost of conducting clinical
trials for our new Total and HDL cholesterol monitoring products and new
diagnostic products. The future level of R&D expenditures will depend on, among
other things, the outcome of clinical testing of products under development
(including the TD Glucose Monitoring System and Total and HDL cholesterol
monitoring products), delays or changes in government required testing and
approval procedures, technological and competitive developments and strategic
marketing decisions.
8
<PAGE>
OUR AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
CONTAIN "GOING CONCERN" LANGUAGE.
The auditor's report for our financial statements for the year ended
December 31, 1999 states that because of recurring operating losses and our
continued experience of negative cash flows from operations, there is
substantial doubt about our ability to continue as a going concern. A
"going-concern" opinion indicates that the financial statements have been
prepared assuming we will continue as a going-concern and do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS.
If we are unable to obtain additional funding on satisfactory terms and
reduce our operating losses, we will have to consider selling some or all or our
technologies, reduce or terminate completely our research and development
activities, or reduce or discontinue some or all of our operations and/or apply
for protection from our creditors under the federal bankruptcy laws. In
addition, as described below, we have pending judgments against us in various
legal proceedings, some of which are currently secured by bonds collateralized
by existing working capital. Satisfying all or a significant portion of these
judgments on a basis faster than we presently anticipate would further
exacerbate our severe liquidity condition.
Our long-term ability to meet our liquidity requirements and to
continue operations will depend on the following:
o our ability to raise additional capital, including our ability
to draw down money under the Swartz equity line or the GMF
credit line;
o our ability to close the acquisition of and successfully
operate the pregnancy and ovulation business we are acquiring
from Roche Diagnostics;
o the successful completion of clinical trials and receipt of
governmental approvals to begin manufacturing and selling our
new products; and
o our ability to sell our new products at a profit.
Our future working capital and capital expenditure requirements may vary
materially from those now planned depending on numerous factors, including:
o the outcome of clinical testing of products under development
(including the TD Glucose Monitoring System and Total and HDL
cholesterol monitoring products), delays or changes in
government required testing and clearance or approval
procedures and our ability to receive FDA clearance or
approval for the marketing of our products under development;
o competitive and technological advances that may require us to
modify the design of our products under development;
o our ability to successfully resolve pending litigation; and
o manufacturing costs for our current and future products.
9
<PAGE>
WE MAY BE UNABLE TO OBTAIN SUFFICIENT FUNDS FROM THE SWARTZ EQUITY LINE AND THE
GMF CREDIT LINE TO MEET OUR LIQUIDITY NEEDS.
To continue operations, we must obtain sufficient funds from the Swartz
equity line agreement and the GMF credit line agreement. However, the future
market price and volume of trading of our common stock limits the rate at which
we can obtain money under the Swartz equity and GMF credit line agreements.
Further, we may be unable to satisfy the conditions contained in the Swartz
equity and GMF credit line agreements, which would result in our inability to
draw down money on a timely basis, or at all. If the price of our common stock
declines, or trading volume in our common stock is low, we will be unable to
obtain sufficient funds to meet our liquidity needs. Furthermore, based on
market conditions, the Swartz equity line and GMF credit line agreements would
not allow for sufficient funds to make the payments for the acquisition of
assets from Roche Diagnostics. We are in discussions with Roche Diagnostics
concerning a new due date for payments. We do not at this time have any other
sources of financing, or commitments for financing, in place to satisfy our
liquidity needs.
MANY OF OUR PRODUCTS ARE IN THE DEVELOPMENT STAGE AND CANNOT YET BE SOLD.
Many of our products are in various stages of development and have not
yet been commercialized. Before we can commercially market our products in the
United States, we must first conduct clinical trials using a version of the
product designed for commercial sale, prepare a submission to the FDA and obtain
permission for their distribution from the FDA. Generally, we must also seek
approval from comparable agencies in foreign countries where we desire to
distribute our products. We are in various stages of completing the development
of, and completing the FDA and foreign clearance processes for, products
including infectious disease detection, drugs of abuse screening and other
medical diagnostic testing products. As described below, we have experienced
significant delays in obtaining clearance from the FDA for a principal product
under development, the TD Glucose Monitoring System. We cannot assure you that
we will be able to obtain the necessary FDA clearance for these products or that
we will not experience significant delays and/or expenses in obtaining clearance
for our products, or that we will develop our various products under development
to a point at which we can submit them for FDA clearance. Lack of clearance of
any of these products may adversely affect our ability to market and sell our
products. Even in the event we receive the necessary regulatory clearance, we
cannot assure you that we can avoid unforeseen problems in product manufacturing
and commercial scale-up or marketing or product distribution, which could
significantly delay the commercialization of such products, or prevent our
market introduction entirely. We cannot assure you that the products selected
for development by us or which have received regulatory clearance and we
introduce into the market will in fact achieve any degree of commercial success.
WE HAVE ENDED CLINICAL TRIALS ON A PRINCIPAL PRODUCT UNDER DEVELOPMENT, THE TD
GLUCOSE MONITORING SYSTEM, RESULTING IN SIGNIFICANT DELAYS IN OUR OBTAINING FDA
CLEARANCE OF THIS PRODUCT.
In January, 2000, clinical trials on the TD Glucose Monitoring System
ended. We cannot submit the TD Glucose System to the FDA for clearance until we
conduct clinical trials. We believe that further refinements of the optical TD
Glucose meters are necessary to achieve greater precision before we initiate
expanded clinical trials that are required to obtain FDA consideration of this
device. The optical meters measure the color produced on the membrane in the
noninvasive patch in response to the level of glucose present. We cannot
determine when clinical trials will resume. Accordingly, we cannot assure you
10
<PAGE>
that we will be able to obtain the necessary FDA clearance for the TD Glucose
Monitoring System or that we will not experience further significant delays
and/or expenses in obtaining clearance for this product. Further, we cannot
assure you that we will be able to make the refinements necessary for us to
resume clinical trials, nor can we assure you that the delay in the development
of this product will not have an adverse effect upon our ability to raise
additional capital.
THE LOSS OF A MAJOR CUSTOMER COULD MATERIALLY ADVERSELY AFFECT REVENUES.
A large percentage of our revenue comes from the sale of products to a
small number of customers. In 1999, sales of our products to Roche Diagnostics
accounted for approximately 31% of sales, sales of our products to CVS
Distribution, Inc. (CVS Drug Stores) accounted for approximately 25% of sales,
and sales of our products to LVMH Moet Hennessy Louis Vuitton, Inc. accounted
for approximately 13% of sales. As described above, on May 20, 2000, we signed
an asset purchase agreement for the acquisition of certain trademarks and
business assets relating to the pregnancy and ovulation testing business of
Roche Diagnostics. We are currently in breach of this agreement. If we are able
to complete this acquisition successfully, we will be responsible for the
marketing and distribution of these products. As a result, if we are unable to
market and distribute these products successfully, it will adversely affect our
operating results. Further, the loss of one of our remaining major customers
would also adversely affect our operating results.
IF WE ARE UNABLE TO COMPLETE THE ACQUISITION OF ASSETS FROM ROCHE DIAGNOSTICS,
ROCHE DIAGNOSTICS MAY SELL THESE ASSETS TO A COMPETITOR, WHICH WOULD ADVERSELY
AFFECT OUR OPERATING RESULTS.
The acquisition of assets from Roche Diagnostics is contingent on us
obtaining sufficient funds to make the remaining payments due under the
contract. We may be unable to obtain these funds. Absent a change in current
market conditions that would allow us to draw down more funds from the Swartz
equity line and the GMF credit line, we do not currently anticipate using these
funds to acquire the assets from Roche Diagnostics. If we do not acquire these
assets, Roche Diagnostics may sell these assets to one of our competitors who
may not sell our products, which would result in a material decrease in
revenues, thereby adversely affecting our operating results. Previously, Roche
Diagnostics marketed a majority of our family planning products on an OEM basis
for international distribution under its trademarks. We have, however, taken
over the marketing of the products in Germany, Italy and Spain.
WE HAVE LIMITED EXPERIENCE IN DIRECTLY SELLING AND MARKETING OUR PRODUCTS IN
FOREIGN MARKETS AND MAY NOT BE ABLE TO EXPAND AND SUPERVISE A DIRECT SALES AND
MARKETING FORCE THAT CAN MEET OUR CUSTOMERS' NEEDS.
If we successfully complete the acquisition of assets from Roche
Diagnostics, we intend to sell a portion of our international family planning
products for pregnancy and fertility through our own sales force. Previously,
Roche Diagnostics marketed a majority of our family planning products on an OEM
basis for international distribution under its trademarks. We have limited
experience in direct marketing, sales and distribution outside the United
States. Our future profitability will depend, in part, on our ability to expand
and supervise a direct sales and marketing force to sell these products to our
customers. We may not be able to attract and retain qualified salespeople or be
able to build an efficient and effective sales and marketing force. However, we
intend to hire the intact Roche Diagnostics sales and marketing organization in
Argentina. Failure to attract or retain qualified salespeople or to build an
efficient and effective sales and marketing force could negatively impact sales
of our products, thus reducing our revenues and profitability, if any.
11
<PAGE>
Further, if we complete the acquisition of assets from Roche
Diagnostics, we will be acquiring the local distribution channels in Germany,
Switzerland, Italy, Spain, Uruguay and the local sales organization in
Argentina. We have no experience in marketing our products internationally on a
local basis. Further, we may be unable to integrate the foreign sales
organizations with our domestic operations. Conducting business in foreign
countries will expose us to the risks of dealing with foreign governmental
regulations, tariffs, import and export restrictions, transportation, currency
translations and taxes and local health and safety regulations. Consummation of
foreign marketing activities could lead to unanticipated and fluctuating
expenses and revenues and sales and marketing dislocations that are beyond our
ability to control, and which could negatively impact sales of our products,
thus reducing our revenues and profitability, if any.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL CHANGE.
A large number of companies develop and commercialize products
incorporating diagnostic and drug delivery systems. Competitors include major
pharmaceutical, medical diagnostic and chemical companies, many of which have
considerably greater financial, technical, clinical and marketing strength than
us. These companies may improve existing products more efficiently than us or
may design and develop new diagnostic and transdermal drug delivery products
which the marketplace accepts more than our products, our products under
development or our technologies. Further, the markets in which we compete and
intend to compete are undergoing, and we expect to continue to undergo, rapid
and significant technological change. We expect competition to intensify as
technological advances in these fields are made.
Several of our competitors have developed or may develop products that
are similar in design and capability to our existing products or products under
development. We further anticipate that our competitors will develop and market
additional products for similar applications. Our transdermal technology is
competitive with drugs marketed not only in similar drug delivery systems, but
also in traditional dosage forms such as oral administration, bolus injection
and continuous infusion. New drugs, new therapeutic approaches or future
developments in alternative drug delivery technologies, such as time-release
capsules, liposomes and implants, may provide therapeutic or cost advantages
over the drug delivery systems in our technology portfolio.
We expect that our primary competitors in the glucose monitoring
industry will be companies that currently market "finger stick" method products,
where patients obtain their blood by sticking their finger with a lancet. These
companies have established products and distribution channels. In addition, a
number of companies are developing products using technology which is different
than that used by us, but that are also intended to permit less painful or
painless glucose monitoring. These technologies include infrared spectroscopy,
and a variety of methods (including, in one case, transdermal technology) to
extract interstitial fluid and measure the glucose concentration in that fluid.
In addition, a number of companies have developed or are seeking to develop new
drugs to treat diabetes that could reduce demand for glucose monitoring systems.
Further, many of our competitors and potential competitors have substantially
greater resources, research and development staffs, capabilities and facilities
than we do for developing, manufacturing and marketing glucose monitoring
devices. Competition within the glucose monitoring industry could adversely
affect our business and also result in price reductions for glucose monitoring
devices such that we may not be able to sell the TD Glucose Monitoring System at
a price level adequate for us to realize a return on our investment. We cannot
assure you that we will have the resources, technical expertise or marketing,
distribution or support capabilities to compete successfully in the future or
that we will successfully develop technologies and products that are more
effective or affordable than those being developed by our competitors. Further,
12
<PAGE>
we cannot assure you that developments by our competitors will not be more
accepted in the marketplace than our products, including the TD Glucose
Monitoring System, or will not render our products or technologies obsolete or
noncompetitive. In addition, our competitors may achieve patent protection,
regulatory approval or commercialization earlier than us and gain competitive
advantages relative to us.
WE HAVE LIMITED MANUFACTURING EXPERIENCE.
We are subject to the problems facing product manufacturers generally,
including, without limitation, delays in receiving raw materials, rising prices
for materials and the need to obtain and maintain equipment and avoid down time
resulting from equipment failures. To be successful, we must manufacture our
products in commercial quantities in compliance with regulatory requirements and
at acceptable costs. Production of these products, especially in commercial
quantities, will create technical and financial challenges for us and we cannot
assure you that manufacturing or quality control problems will not arise.
We have not yet manufactured our TD Glucose Monitoring System that is
under development for commercial sale. To successfully commercialize the TD
Glucose Monitoring System after obtaining FDA clearance, we must manufacture the
device in compliance with regulatory requirements, in a timely manner and in
sufficient quantities while maintaining product quality and acceptable
manufacturing costs. We anticipate that we will be responsible for most aspects
of manufacturing the TD Glucose Monitoring System. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance and shortages of
personnel. We cannot assure you that we will be able to achieve and maintain
product quality and reliability if and when we produce the TD Glucose Monitoring
System in the quantities required for commercialization, or that we can assemble
and manufacture the TD Glucose Monitoring System at an acceptable cost, or at
all.
We intend to manufacture both TD Glucose Meters and TD Glucose Patches,
the components of the TD Glucose Monitoring System, and sell these finished
goods to future marketing partners for worldwide distribution. In July 1998, we
established Technical Electronics Corporation, a company of which we own 80%, to
manufacture electronic devices for our noninvasive glucose monitoring system and
other future electronic products. In January 1999, we announced the commencement
of the engineering phase of the manufacturing scale-up process to commercially
produce TD Glucose patches. Our plans include the design and construction of
high-speed state-of-the-art machinery to conduct the complex manufacturing and
automatic packaging of TD Glucose patches. The engineering phase is a key
element to the manufacturing scale-up process. We anticipate that the
engineering and manufacturing scale-up process will require a minimum of 24
months to complete. This process includes equipment installation and full-scale
operation under FDA diagnostic Good Manufacturing Practices, and inventory
build-up before market introduction. However, we cannot assure you that the
engineering or manufacturing scale-up process for the TD Glucose Patches and/or
TD Glucose Meters will be timely or successful or produce finished product in
sufficient quality or quantity, or on a cost-effective basis, or at all.
IF WE ARE UNABLE TO SECURE ADEQUATE PATENT PROTECTION FOR OUR TECHNOLOGIES, THEN
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
We hold 26 United States and foreign patents, and have 61 domestic and
foreign patent applications pending. With respect to such patents, we cannot
assure you:
o as to the degree or adequacy of protection any patents or patent
applications may or will afford;
13
<PAGE>
o that our competitors will not independently develop or patent
technologies that are substantially equivalent or superior to
our technology;
o that existing patent applications will mature into issued patents,
or that the claims allowed under any patents will be sufficiently
broad to protect our technology; or
o that any patents issued to us will provide us with competitive
advantages or will not be challenged by others, or if challenged,
will be held valid, or that the patents of others will not have an
adverse effect on our ability to conduct our business.
In addition, we rely on a combination of proprietary rights in various
unpatented technologies, know-how, trade secrets, trademarks and employee and
third-party nondisclosure agreements to protect our proprietary rights. The
steps taken to protect our rights may not be adequate to prevent
misappropriation of our technology or to preclude competitors from developing
products with features similar to our products.
WE ARE IN LITIGATION WITH OUR FORMER CHAIRMAN SEEKING TO RESCIND THE LICENSE
AGREEMENT FOR OUR TECHNOLOGY AND FOR OTHER MATTERS.
Our former Chairman, Jack Aronowitz, has filed suit against us, our
directors, and our general counsel. In general, Mr. Aronowitz is alleging that
we breached fiduciary duties to him in connection with his ceasing to be
employed by us as an employee and officer, and that we breached a letter of
intent regarding his termination of employment and is seeking to rescind the
license agreement he signed pursuant to which he licensed patents to us. Mr.
Aronowitz has asserted that the license agreement includes our TD Glucose
technology. An unfavorable outcome of this litigation would have a material
adverse impact on us, including possibly our inability to sell our TD Glucose
System if its development is completed successfully. We intend to defend this
lawsuit vigorously as we believe it is without merit.
WE ARE A PARTY TO LAWSUITS REGARDING PATENT INFRINGEMENT.
Our success will depend, in part, on our ability to protect, obtain or
license patents, protect trade secrets and operate without infringing the
proprietary rights of others. We are a party to lawsuits regarding patent
infringement. See the discussion below under the heading "Legal Proceedings." We
cannot assure you that third parties will not assert additional infringement
claims against us in the future. If we are found to be infringing any third
party patents, proprietary rights or trade secrets, we cannot assure you that we
will be able to obtain licenses with respect to these patents, proprietary
rights or trade secrets on acceptable terms, if at all. If we do not obtain
these licenses, we could encounter delays in product introductions or could find
that the development, manufacture or sales of products requiring such licenses
could be foreclosed. We could also experience a loss of revenues, an increase in
costs and incur substantial expense for defending our company in lawsuits
brought against us with respect to our patents, proprietary rights or trade
secrets or engaging in lawsuits to enforce patents issued to us or to protect
trade secrets or know-how owned by us.
WE ARE THE SUBJECT OF PENDING LITIGATION AND HAVE JUDGMENTS AGAINST US WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
As discussed under the heading "Legal Proceedings," we are the subject
of pending litigation. The cost of prosecuting and defending these actions or
the cost of a settlement or award of damages, if any, could have a material
adverse effect on our business, prospects, results of operations or financial
14
<PAGE>
condition. Further, we have pending judgments against us in various legal
proceedings, one of which is currently secured by a bond collateralized by
existing working capital. Satisfying all or a significant portion of these
judgments on a basis faster than we presently anticipate would further
exacerbate our severe liquidity condition. We maintain directors' and officers'
liability insurance; however, we cannot assure you that this insurance coverage
will cover all claims or be adequate to fund the costs of an award, if any, or
attorneys' fees. Demands have been made upon us which far exceed the amount of
this coverage.
IF ANY OF OUR PRODUCTS OBTAIN FDA CLEARANCE AND ENTER THE MARKET, PHYSICIANS AND
PATIENTS MAY NOT ACCEPT THEM IF ADEQUATE INSURANCE COVERAGE AND REIMBURSEMENT
LEVELS ARE NOT AVAILABLE.
Our ability to successfully commercialize our products may depend in
part on the extent to which government health administration authorities,
private health coverage insurers and other organizations reimburse the cost of
our products and related treatments. Significant uncertainty exists as to the
reimbursement status of newly approved health care products and we cannot assure
you that adequate third party reimbursement will be available for us to maintain
price levels or volume sufficient for the realization of an appropriate return
on our investment in our products. In certain foreign countries, the period of
time needed to obtain reimbursement can be lengthy. Government and other third
party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new and established
therapeutic and diagnostic products approved for marketing, and by refusing, in
some cases, to provide any coverage for indications for which the FDA and other
national health regulatory authorities have not granted marketing approval. The
failure of government and third party payors to provide adequate coverage and
reimbursement levels for uses of our TD Glucose Monitoring System or our other
products would adversely affect the market acceptance of these products.
Numerous health care reform proposals have been advanced in recent
years that are aimed at changing the health care system in the United States.
Although these proposals may lead to an increased emphasis on preventative
measures and to an expanded market for our products, third party health care
payors may not share this view. We are unable to predict the outcome or the
effect of the health care reform debate on our business and prospects.
WE DEPEND ON OUR KEY PERSONNEL.
Because of the specialized, technical nature of our business, we are
highly dependent upon our ability to retain our current personnel including, but
not limited to, our senior management. In addition, our ability to effectively
pursue our business strategy will depend upon, among other factors, our ability
to successfully recruit and retain additional highly skilled and experienced
managerial, marketing, engineering and technical personnel. In some cases, the
market for these skilled employees is highly competitive, which makes it
difficult to attract and retain key employees. We cannot assure you that we will
be able to retain or recruit such personnel, and the inability to do so could
materially and adversely affect our business, financial condition and results of
operations.
WE DEPEND ON OUTSIDE SUPPLIERS AND MANUFACTURERS.
We purchase the materials used to manufacture our products from single
suppliers to obtain the most favorable price and delivery terms. Although we
have identified an alternate supply source with respect to each of these
materials, a change in the supplier of these materials without the appropriate
lead time could result in a material delay in the delivery of products to our
customers. We cannot assure you that we would not be able to receive as
favorable price and delivery terms from alternative suppliers. Reliance on
suppliers generally involves several risks, including the possibility of
defective materials, supply shortages, increase in material costs and reduced
control over delivery schedules, any or all of which could adversely affect our
financial results.
15
<PAGE>
To the extent we use third party manufacturers, we cannot assure you
that we will be able to retain these manufacturers or obtain acceptable
replacement manufacturers, if necessary. A change in manufacturers without
appropriate lead time could result in a material delay in the delivery of our
products and may subject us to less favorable price terms. Furthermore, although
we have identified an alternate supply source with respect to the materials used
to manufacture our products, a change in the supplier of these materials without
appropriate lead time could result in a material delay in the delivery of
products to our customers. Either of the above could result in a material
adverse effect on our business, prospects, results of operation or financial
condition.
OUR BUSINESS SUBJECTS US TO PRODUCT LIABILITY CLAIMS.
Our business exposes us to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of medical diagnostic
and drug delivery products. To date, we have not experienced any material
product liability claims, but any such claim arising in the future could have a
material adverse effect on our business, financial condition or results of
operations. We have product liability insurance. However, potential product
liability claims may exceed the amount of our insurance coverage or the terms of
the policy may exclude these claims from coverage. We cannot assure you that we
will be able to renew our existing insurance at a cost and level of coverage
comparable to that presently in effect, if at all. In the event that we are held
liable for a claim against which we are not indemnified, or for damages
exceeding the limits of our insurance coverage, or if any claim or product
recall results in significant adverse publicity against us, such claim or
publicity could have a material adverse effect on our business, prospects,
results of operations or financial condition.
WE HAVE OPTIONS, WARRANTS, PREFERRED STOCK AND RESTRICTED SECURITIES OUTSTANDING
WHICH MAY CAUSE DILUTION OF OUR SHAREHOLDERS AND ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
As of November 30, 2000 we had outstanding 3,824,997 warrants with an
exercise price of $0.9375-$11.89 and 1,970,400 options with exercise prices
ranging from $0.375-$15. We have reserved additional shares for issuance under
options. If the holders exercise these stock options and warrants, it will
dilute the percentage ownership interest of our current shareholders. In
addition, the existence of these warrants and options may negatively affect the
terms upon which we would be able to obtain additional money through the sale of
our stock because new investors may be concerned about the impact upon the
future market price of our common stock if the holders of these warrants and
options exercise them and sell the underlying stock.
As of November 30, 2000 we had outstanding 700 shares of our Series A
Convertible Preferred Stock. Each share of the Series A Convertible Preferred
Stock is convertible into the number of shares of common stock determined by
dividing the stated value ($1,000) of a share of Series A Convertible Preferred
Stock (as this value is increased by a premium based on the number of days the
Series A Convertible Preferred stock is held) by the then current Conversion
Price (which is determined by reference to the then current market price). If
converted on November 30, 2000 the Series A Convertible Preferred Stock would
have been convertible into approximately 2,805,400 shares of common stock.
In addition, as of November 30, 2000 we had outstanding $1,599,993
principal amount of our convertible debentures issued to the investors listed in
the securities purchase agreement. Each debenture is convertible into common
stock 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 before conversion. These
debentures are not convertible until December 16, 2000. If converted on November
30, 2000 the convertible debentures would have been convertible into
approximately 9,494,822 shares of our common stock.
16
<PAGE>
On May 3, 2000, we entered into an investment agreement with Swartz
Private Equity, LLC. Under the Swartz investment agreement, also referred to as
an equity line, we have the option to sell, or "put," up to $25 million of our
common stock to Swartz, subject to a formula based on stock price and trading
volume, over a three year period beginning on November 3, 2000. We may also
issue additional warrants to Swartz under the terms of the Swartz investment
agreement.
The number of shares issuable upon conversion of the Series A
Convertible Preferred Stock and the convertible debentures could prove to be
significantly greater if our stock price decreases. If the holders convert their
shares of preferred stock and convertible debentures into common stock, it will
dilute the percentage ownership interest of our current shareholders.
Furthermore, as our stock price decreases, the number of shares that we would
issue to Swartz upon exercise of a put under the Swartz equity line will
increase. If we exercise a put when our stock price is depressed, our existing
shareholders' interests in us will be significantly reduced.
All of our outstanding shares of common stock are freely tradeable
without restriction under the Securities Act unless held by our affiliates and
except for 750,000 shares of restricted stock held by affiliates of May Davis.
In addition, certain holders of common stock and securities convertible into or
exercisable for shares of common stock, including the convertible debentures
described above, have certain registration rights under a registration rights
agreement among us and these holders. Also, we may issue additional shares of
common stock upon the exercise of our put rights under our equity line agreement
with Swartz and our credit line agreement with GMF.
WE HAVE RECENTLY BEEN DELISTED FROM NASDAQ, WHICH COULD CAUSE OUR STOCK PRICE TO
FALL AND DECREASE THE LIQUIDITY OF OUR COMMON STOCK.
Effective December 8, 2000, our common stock was delisted from The
Nasdaq National Market. Shares of our common stock are now traded on The NASD
O.T.C. Bulletin Board. Nasdaq delisted our common stock because the minimum bid
price of our common stock did not equal or exceed $1.00 for a minimum of ten
consecutive trading days.
Delisting of our common stock may have an adverse impact on the market
price and liquidity of our common stock. In addition, the trading price of our
common stock was less than $5.00 per share at the time of our Nasdaq delisting,
and therefore our common stock now comes within the definition of a "penny
stock." As a result, our common stock is subject to the penny stock rules and
regulations which require additional disclosure by broker-dealers in connection
with any trades involving a penny stock. The additional burdens imposed on
broker-dealers may restrict the ability of broker-dealers to sell our common
stock and may affect your ability to resell our common stock.
17
<PAGE>
AS A RESULT OF NASDAQ DELISTING OUR STOCK, WE MAY BE REQUIRED TO REDEEM OUR
SERIES A CONVERTIBLE PREFERRED STOCK, WHICH COULD HAVE A MATERIALLY ADVERSE
EFFECT ON OUR FINANCIAL CONDITION.
If the Nasdaq National Market delisting continues for ten days, the
holders of the Series A Convertible Preferred Stock have the right to require
that we redeem all outstanding shares of Series A Convertible Preferred Stock at
a price equal to the greater of
o 120% of the stated value of the shares plus any accrued
dividends; or
o the value of the common stock into which the shares of Series
A Convertible Preferred Stock were convertible.
As of November 30, 2000 this amount would be $946,553. Any such repurchase could
have a material adverse effect on our business, prospects, results of operations
or financial condition.
THE EXERCISE OF OUR PUT RIGHTS MAY SUBSTANTIALLY DILUTE THE INTERESTS OF OTHER
SECURITY HOLDERS.
We will issue shares to Swartz upon exercise of our put rights at a
price equal to the lesser of:
o the market price for each share of our common stock minus
$.10; or
o 92% of the market price for each share of our common stock.
We will issue shares to GMF upon conversion of the convertible
debentures which we have a right to "put" to GMF. The conversion price of the
debentures is equal to the lesser of:
o $1.40; or
o 90% of the market price for each share of our common stock.
Accordingly, the exercise of our put rights may result in substantial dilution
to the interests of the other holders of our common stock. Depending on the
price per share of our common stock during the three year period of the Swartz
investment agreement and the GMF credit line agreement, we may need to register
additional shares for resale or seek an amendment to our articles of
incorporation, to access the full amount of financing available. Based on
current market conditions, the 13,900,000 shares we are registering in this
prospectus for issuance under the GMF credit line agreement will not be
sufficient to access the full $10 million available. Registering additional
shares could have a further dilutive effect on the value of our common stock. If
we are unable to register the additional shares of common stock, we may
experience delays in, or be unable to, access some of the $25 million available
from Swartz and the $10 million available from GMF under our put rights.
THE SALE OF MATERIAL AMOUNTS OF OUR COMMON STOCK COULD REDUCE THE PRICE OF OUR
COMMON STOCK AND ENCOURAGE SHORT SALES.
If and when we exercise our put rights and sell shares of our common
stock to Swartz and convertible debentures to GMF, if and to the extent that
Swartz sells and GMF converts the debentures and sells the common stock, our
common stock price may decrease due to the additional shares in the market.
Also, if the investors listed in the securities purchase agreement convert their
debentures and sell the common stock, our common stock price may further
decrease. If the price of our common stock decreases, and if we decide to
exercise our right to put shares to Swartz, we must issue more shares of our
common stock for any given dollar amount invested by Swartz. Also, if our common
stock price decreases, we must issue more shares of our common stock upon
conversion of the convertible debentures we may sell to GMF and the convertible
debentures held by the investors listed in the securities purchase agreement.
This may encourage short sales, which could place further downward pressure on
the price of our common stock.
18
<PAGE>
OUR STOCK PRICE IS VOLATILE.
Future announcements concerning results of preclinical studies and
clinical trials by us or our competitors, other evidence of the safety or
efficacy of our products or our competitors, announcements of technological
innovations or new products by us or our competitors, changes in governmental
regulations, developments in our patent or proprietary rights or those of our
competitors, including competitors' litigation, fluctuations in our operating
results and changes in general market conditions for medical diagnostic or
pharmaceutical companies could cause the market price of the common stock to
fluctuate substantially. These fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
common stock. Historically, the market price of the common stock has been
volatile. Our stock price has fluctuated from $13.750 during the fiscal quarter
ended March 31, 1998 to $0.281 during the fiscal quarter ended December 31,
1999. Our stock price was $0.15 as of November 30, 2000.
OUR ARTICLES AND BYLAWS HAVE ANTI-TAKEOVER PROVISIONS, AND THE GMF CREDIT LINE
AGREEMENT CONTAINS RESTRICTIONS, WHICH COULD MAKE IT DIFFICULT FOR A POTENTIAL
BUYER TO ACQUIRE US.
Our articles of incorporation and bylaws include certain anti-takeover
provisions that could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from acquiring, a majority of
our outstanding voting stock. These provisions include:
o a staggered board of directors;
o certain supermajority voting requirements with respect to
removal of directors and amendments of the articles of
incorporation and bylaws;
o requirements concerning the filling of board vacancies;
o Florida's Control Share Acquisition Act;
o elimination of shareholder action by written consent;
o creation of a class of "blank check" preferred stock; and
o an increase in the percentage of shareholder votes required to
call a special meeting of shareholders.
Furthermore, during the term of the GMF credit line agreement, we may
not merge or consolidate with, or transfer all, or substantially all, of our
assets to another entity unless the acquiring entity assumes our obligation to
issue securities to GMF that it is entitled to receive under the GMF credit line
agreement. See "The GMF Credit Line Agreement."
19
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Statements of our intentions, beliefs,
expectations or predictions for the future, denoted by the words "believes,"
"expects," "may," "will," "should," "seeks," "pro forma," "anticipates,"
"intends" and similar expressions are forward-looking statements that reflect
our current views about future events and are subject to risks, uncertainties
and assumptions. Specifically, this prospectus and the documents incorporated
into this prospectus contain forward-looking statements regarding:
o our ability to obtain sufficient liquidity and capital to fund
our operations and to complete acquisitions;
o delays in product development;
o our ability to satisfactorily perform clinical trials
demonstrating efficacy of our products under development;
o the probability and timing of obtaining FDA clearance or
approval of our products under development;
o our ability to successfully develop and market new products on
a profitable basis or at all;
o the ability to complete the design, construction and
manufacturing scale-up of our products on a timely basis
within budget parameters;
o future advances in technology and medicine by others that may
render our products obsolete;
o competition from other pharmaceutical, medical and diagnostic
companies;
o risks and expense of government regulation and effects of
changes in regulation (including risks associated with
obtaining requisite domestic and foreign governmental
approvals for our products, manufacturing equipment or related
facilities);
o uncertainties connected with product liability exposure and
insurance;
o risks associated with obtaining and maintaining patents and
other protections on intellectual property and patents
obtained by others that may adversely affect us; and
o the results of litigation pending against us and the costs of
defending ourselves and prosecuting claims against others in
such litigation.
We wish to caution readers that these forward-looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including, without
limitation, the risk factors and other matters contained in this prospectus
generally. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements included in this document.
20
<PAGE>
LEGAL PROCEEDINGS
We are 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 our results of operations or
financial position, except as otherwise stated. For the year ended December 31,
1999, and the first six months of 2000, we incurred substantially increased
litigation expenses compared to earlier periods. For the third quarter and
nine-month periods ended September 30, 2000, these litigation expenses decreased
from the comparable periods of the prior year.
HIV SALIVA COLLECTOR TECHNOLOGY. A lawsuit was brought against us 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 we 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 we and Mr. Aronowitz intentionally interfered with the plaintiffs' business
relationships and assessed approximately $328,000 in damages against us 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, we 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 us 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.
We have previously obtained appeal bonds staying enforcement of the
judgment against us 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 us. On October 26, 2000, the court denied
our motion to vacate the tortious interference judgment. We filed an immediate
appeal of this ruling. We cannot assure you that we will be successful in
vacating the judgment on appeal. On November 20, 2000, the Fourth District Court
of Appeals denied our motion to stay enforcement of the judgment and subsequent
to such order, the surety providing the bond paid the judgment. We have arranged
with the surety to reimburse its payments in excess of the collateral.
We 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
we have not recorded an accrual for loss in the financial statements as of
September 30, 2000.
21
<PAGE>
NONINVASIVE GLUCOSE MONITORING TECHNOLOGY. In November 1997, a lawsuit
was brought against us 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. We 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, we and Mr. Aronowitz filed a motion for summary
judgment 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 us 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 we and Mr. Aronowitz made untrue
and misleading statements in our public disclosure documents and in certain
press releases, articles and reports. The disclosures relate primarily to the
development, clinical testing and viability of our 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 us. In response, on
June 18, 1999, we filed a motion to dismiss the Amended Consolidated Class
Action Complaint. On July 3, 2000, the court dismissed all claims against Mr.
Aronowitz and us, 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 we have not yet responded. On August 25, 2000, we filed a
motion to dismiss the second amended complaint. We believe the allegations lack
merit and plan to contest the allegations vigorously. At this time, we cannot
reasonably estimate the ultimate loss, if any, related to these claims and
therefore we have not recorded an accrual for loss as of September 30, 2000.
We maintain Directors and Officer's Liability Insurance. However, we
cannot assure you 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 us which far exceed the amount of this coverage. Our 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 us.
LANHAM ACT. On July 1, 1999, we 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
22
<PAGE>
action. On January 4, 2000, we 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. We and Mr. Aronowitz filed a motion to dismiss
these counterclaims, and these defendants have since withdrawn those
counterclaims. The court entered a default judgment against Medex, Inc. We 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, we 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 us 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 we 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 us 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. We are awaiting a ruling on the remaining issues
on remand, in particular, those relating to the '580 patent.
DEFAMATION ACTION. On June 16, 1999, we 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. We have filed
a motion for summary judgment, which the court granted in part, dismissing
Counts I and II for libel against us 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 us in favor of Hooper & Associates, Inc. for $197,807.
Gary Hooper was the president and chief operating officer of Pharma Patch, PLC.
We 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".)
We have 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 us by making fraudulent
23
<PAGE>
representations to us in connection with our 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 our claims against Mr. Hooper
and Hooper & Associates, Inc. in the federal action. At this time, we do not
believe it is possible to estimate the ultimate loss, if any, related to the
resolution of these matters and therefore we have 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 us 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. We
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, we 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 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, we made our first payment of $112,963 on October
13, 2000. Our 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 us. We recorded an accrual for loss equal to
$650,000 as of March 31, 2000. We are seeking full contribution from Mr.
Aronowitz for the total amount of the judgment.
UNILEVER PATENT LITIGATION. In 1994, we 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, we 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 we 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 we
and the other parties intend to vigorously contest such action.
On January 26, 2000, we, 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. We
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 us
and the other plaintiffs do not infringe the European Patent (the "Italian
Action"). An oral hearing on procedural matters occurred on November 15, 2000
with a further hearing scheduled for January 17, 2001 to discuss the court's
jurisdiction to hear the action. We manufacture the EVATEST(R) test devices.
24
<PAGE>
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 us 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 we 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.
We have 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. We have, as the manufacturer of these
products, previously provided the same indemnity to Roche Diagnostics. A
majority of our 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 our results of
operations and financial condition.
LITIGATION WITH FORMER CHAIRMAN AND CERTAIN FAMILY LIMITED
PARTNERSHIPS. We have filed three actions in the United States District Court
for the Southern District of Florida against our former Chairman and President,
Jack L. Aronowitz and/or certain family limited partnerships. Collectively these
actions seek full contribution of more than $650,000 from Mr. Aronowitz related
to our prior settlement agreement with the United States of America related to
an Environmental Protection Agency matter described above under the caption
"Judgment in Hazardous Waste Lawsuit" as well as a declaratory judgment
upholding our contractual rights to our noninvasive glucose monitoring and other
technology. In addition, we called due a loan in the amount of $713,000
personally guaranteed by Mr. Aronowitz and commenced litigation against the
family limited partnership, which is the maker of the note.
Previously, Mr. Aronowitz filed a lawsuit in Broward County (Florida)
Circuit Court against us, our directors, and our general counsel seeking to
rescind his license agreement with us as well as various other claims disputing
the manner in which his employment agreement was terminated and he ceased to be
our Chairman, President and Chief Technical Officer. An amended complaint was
subsequently filed on November 13, 2000. We believe the claims contained in the
complaint, as amended, are without merit and are vigorously defending ourselves
in this lawsuit.
The following summarizes the actions we have taken and outlines our
position on these matters:
1. On September 12, 2000, our board of directors 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 our Chairman, President and Chief Technical
Officer. Mr. Aronowitz remains a director of our company. He owns or
controls approximately 13% of our outstanding shares of common stock.
25
<PAGE>
2. On September 13, 2000, we and Mr. Aronowitz executed a letter of intent
that provided, among other things, that Mr. Aronowitz' signature on the
letter of intent was deemed his resignation and retirement as our
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 us,
which was to be signed by no later than September 20, 2000. No such
definitive agreement was entered into by September 20, 2000.
3. Subsequent to the execution of the letter of intent, Mr. Aronowitz made
certain demands on us that were beyond the scope of the letter of
intent; including a demand that payments be made to him related to our
noninvasive TD Glucose Monitoring System and other technology. We
rejected these demands.
4. On October 19, 2000, we were 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 us, our directors (with the
exclusion of Mr. Aronowitz) and our general counsel. On November 13,
2000, Mr. Aronowitz amended the complaint to assert claims for
indemnification of certain litigation in which he is named as a party.
We believe the claims contained in this complaint, as amended, are
without merit and will vigorously defend itself in this lawsuit. An
unfavorable outcome of this litigation would have a material adverse
impact on us, including possible inability to sell our TD Glucose
Monitoring System. Mr. Aronowitz is seeking unspecified damages. We
presently have until December 15, 2000 to respond to the amended
complaint.
5. On November 9, 2000, we 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 of $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. We are 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 us are
being applied periodically to the reduction of Mr. Aronowitz' Guaranty
obligation to TCPI. On December 4, 2000, the defendant filed a motion
with the court seeking to dismiss the case for lack of jurisdiction. We
are preparing our response.
6. On November 13, 2000, we 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 on January 31, 1996 by Mr. Aronowitz. Mr. Aronowitz is a
limited partner of one of the defendants. The action includes our
claims (1) for a declaratory judgment that the licensor has no right,
title or interest, in and to the technology of our TD Glucose
Monitoring System and any patents that mature from related patent
applications, and that the licensor has no rights to receive royalty
payments on the sale or license by us 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, we are seeking our
attorneys' fees.
7. On November 22, 2000, we filed a claim in the United States District
Court Southern District of Florida Case No. 98-6201-CIV - Dimitrouleas
- for full contribution and declaratory judgment against Jack L.
Aronowitz. This action seeks to hold Mr. Aronowitz fully liable for the
26
<PAGE>
judgment and subsequent settlement entered into by us with the EPA in
the amount of approximately $650,000 as described above under the
caption "Judgment in Hazardous Waste Lawsuit." We are also seeking an
order from the court of our nonliability to Mr. Aronowitz for
contribution or indemnity. We assert that Mr. Aronowitz is 100%
responsible for this judgment as it was his conduct prior to the
incorporation of TCPI in January of 1992 that resulted in the judgment
against us and Mr. Aronowitz. Under the terms of this agreement, we
made our first payment of $112,963 on October 13, 2000.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock by the selling shareholders; rather, the selling shareholders will receive
those proceeds directly. However, we will receive cash infusions of capital if
and when we issue convertible debentures to GMF under the credit line agreement
and if and when investors under the securities purchase agreement, May Davis and
its affiliates and Butler Gonzalez exercise warrants, as described below. We
intend to use these proceeds for working capital, strategic alliances (including
potential joint ventures, acquisitions and mergers), plant, equipment and
machinery, including capital expenditures, and general corporate purposes.
27
<PAGE>
SECURITIES PURCHASE AGREEMENT
6% CONVERTIBLE DEBENTURES
Under the securities purchase agreement, we sold to the investors
$1,599,993 of our 6% convertible debentures that mature at various dates between
August 28, 2005 through November 23, 2005. The principal of and interest on the
debentures are convertible into shares of our common stock at the lesser of
$1.05 per share or 80% of the average of the closing bid prices of our common
stock during the 5 trading days immediately preceding the conversion. Beginning
on December 16, 2000, the investors may convert the debentures at any time and
from time to time into shares of our common stock until the entire principal
amount, plus accrued interest, is paid in full. This prospectus covers up to
7,770,000 shares of our common stock which may be issued to the investors upon
conversion of the 6% convertible debentures and may be offered and sold from
time to time by the investors. If the 6% convertible debentures were converted
in full as of November 30, 2000, the investors would be entitled to acquire
approximately 9,494,822 shares of our common stock, or approximately 22% of the
number of shares of common stock that were then outstanding after the
conversion.
If the SEC does not declare the registration statement of which this
prospectus is a part effective by January 3, 2001, we must reduce the conversion
percentage to be used in determining the conversion price of the 6% convertible
debentures by 2% for the first 30 days following such date and an additional 2%
every 30 days thereafter until the SEC declares the registration statement
effective. In addition, if, the SEC does not declare the registration statement
effective by January 3, 2001, or if, after the registration statement becomes
effective, sales cannot be made under the registration statement (whether
because of a failure to keep the registration statement effective, to disclose
information that is necessary for sales to be made under the registration
statement, to register sufficient shares of our common stock or otherwise), we
will pay a penalty equal to 2% of the purchase price of the shares of our common
stock then held by the investors for each 30-day period that the registration
statement is not effective.
WARRANTS
In connection with the issuance of the 6% convertible debentures, we
issued to the investors warrants to purchase 639,997 shares of our common stock,
which is equal to 20% of the number of shares of our common stock that would be
issuable upon conversion of the convertible debentures as of the closing dates.
The warrants have an exercise price equal to $1.50 and a term of five years. We
estimated the fair value of these warrants to be approximately $217,523 using
the Black-Scholes option valuation model. This prospectus covers up to 640,000
shares of our common stock which may be issued to the investors upon conversion
of the warrants.
If the SEC does not declare the registration statement of which this
prospectus is a part effective by January 3, 2001, or if, after the registration
statement becomes effective, sales cannot be made under the registration
statement (whether because of a failure to keep the registration statement
effective, to disclose information that is necessary for sales to be made under
the registration statement, to register sufficient shares of our common stock or
otherwise), we will pay a penalty equal to 2% of the purchase price of the
shares of our common stock then held by the investors for each 30 day period
that the registration statement is not effective.
28
<PAGE>
THE GMF CREDIT LINE AGREEMENT
OVERVIEW
On September 5, 2000, we entered into a credit line agreement with GMF
Holdings, arranged through The May Davis Group, Inc., the placement agent. Under
this agreement, GMF has agreed to purchase our 6% convertible debentures during
the three year period commencing on the effective date of the registration
statement of which this prospectus forms a part. From time to time during the
term of the agreement, but no more frequently than once every 15 calendar days,
we can require GMF to purchase between $100,000 and $2,000,000, subject to a
formula based on stock price and trading volume, of our 6% convertible
debentures until all the purchases total $10 million. We refer to each election
by us to sell debentures to GMF as a "put."
The debentures are immediately convertible into our common stock at the
price per share equal to either, at GMF's option:
o $1.40; or
o or 90% of the market price for each share of our common stock.
Market price is defined as the lowest closing bid price of our common stock
during the 20 trading days before the conversion date. We describe the terms of
the 6% convertible debentures in more detail under the caption "Description of
Capital Stock - The GMF 6% Convertible Debentures."
PUT RIGHTS
To exercise a put, we must have an effective registration statement on
file with the SEC covering the resale to the public by GMF of any shares that it
acquires upon the conversion of the debentures. Also, we must give GMF 20
business days advance notice of the date on which we intend to exercise a
particular put right.
The maximum amount of debentures which we may issue to GMF during each
put shall equal the difference between:
o the amount shown opposite the range of the average daily
trading on the date we elect to exercise our put right, as
indicated in the table below; and
o the sum of advances made under the GMF credit line agreement
in the 30 calendar days immediately before the date we elect
to exercise our put right.
29
<PAGE>
30-DAY AVERAGE DAILY TRADING (1) MAXIMUM ADVANCE AMOUNT (2)
$25,000-$50,000 $100,000
$50,001-$100,000 $200,000
$100,001-$200,000 $350,000
$200,001-$300,000 $500,000
$300,001-$400,000 $650,000
$400,001-$500,000 $900,000
$500,001-$600,000 $1,200,000
$600,001-$800,000 $1,500,000
$800,001-$1,000,000 $1,750,000
$1,000,001 and over $2,000,000
------
(1) The 30-day average trading volume equals the average of the closing bid
price for the five preceding trading days, multiplied by the volume for
each of the 30 calendar days before the date we elect to exercise a
put.
(2) Assuming that no advances have been made under the GMF credit line
agreement during the preceding 30 calendar days.
SAMPLE EXERCISE OF A PUT
As soon as practicable after the effectiveness of the registration
statement, we plan to draw down the maximum initial amount permitted under the
GMF credit line agreement. As of November 29, 2000, based on the average of the
closing bid price of our common shares for the five preceding trading days,
multiplied by the volume for each of the preceding 30 calendar days, our 30-day
average daily trading volume was $80,319. Therefore, we would be entitled to
draw down approximately $200,000 in connection with our first draw down. Based
on these facts, we would issue $200,000 principal amount of our 6% convertible
debentures. Based on a conversion price of $0.2025, which is the lower of $1.40
or 90% of the lowest closing bid price of our common stock during the 20 trading
days before the date of conversion (assuming a conversion date of November 29,
2000), these debentures would be convertible into 803,213 shares of our common
stock.
The following tables illustrate the amount of debentures we could issue
to GMF and the number of shares it could receive upon conversion given the
hypothetical variables shown in the tables:
<TABLE>
<CAPTION>
---------------------- ------------------ ---------------------- ------------------ --------------------
30-DAY AVERAGE CLOSING BID ADVANCE PURCHASE NUMBER OF
DAILY TRADING PRICE (1) AMOUNT (2) PRICE SHARES ISSUED (3)
------------- --------- ---------- ----- -----------------
---------------------- ------------------ ---------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
$30,000 $.1875 $100,000 $.1688 592,417
---------------------- ------------------ ---------------------- ------------------ --------------------
$75,000 $.1875 $200,000 $.1688 1,184,834
---------------------- ------------------ ---------------------- ------------------ --------------------
$150,000 $.1875 $350,000 $.1688 2,073,460
---------------------- ------------------ ---------------------- ------------------ --------------------
$350,000 $.1875 $650,000 $.1688 3,850,711
---------------------- ------------------ ---------------------- ------------------ --------------------
$450,000 $.1875 $900,000 $.1688 5,331,754
---------------------- ------------------ ---------------------- ------------------ --------------------
</TABLE>
-------------------------
(1) Represents our closing bid price on November 28, 2000 and assumes such
price is the lowest closing bid price of our common stock for the twenty
trading days immediately preceding the conversion date.
(2) Assumes that no advances have been made in the thirty calendar days
immediately preceding the notice of an advance.
(3) Assumes conversion of the convertible debentures received pursuant to a
put. At no time may GMF hold more than 10% of our outstanding common stock.
30
<PAGE>
We cannot assure you what the actual price of the shares will be at any
time we exercise our right to a put. Our stock price as of November 30, 2000 was
$0.156 per share.
We are registering 13,900,000 shares of common stock for issuance to
GMF under the GMF credit line agreement. Based on the recent market prices of
our shares of common stock and volume in our common stock, 13,900,000 shares may
not be sufficient to satisfy our obligations to issue stock to GMF in order to
fully utilize the $10 million available under the GMF credit line agreement. If
13,900,000 shares are not sufficient, we will register additional shares for
resale by GMF.
LIMITATIONS AND CONDITIONS TO OUR PUT RIGHTS
Our ability to put our 6% convertible debentures, and GMF's obligation
to purchase the debentures, is subject to the satisfaction of certain
conditions. These conditions include:
o the registration statement for the shares issuable upon
conversion of the debentures we will be issuing to GMF must
remain effective as of the put date and no stop order with
respect to the registration statement is in effect;
o we have obtained all permits and qualifications, or an
exemption from such permits and qualifications, required by
any state regarding the offer and sale of the debentures and
the shares underlying the debentures;
o our representations and warranties in the GMF credit line
agreement are accurate as of the date of each put;
o we have satisfied all obligations under the agreements entered
into between us and GMF in connection with the GMF credit line
agreement;
o no court or governmental authority prohibits or adversely
affects any of the transactions contemplated by the GMF credit
line agreement;
o other than delisting of our common stock from the Nasdaq
National Market (so long as we maintain a listing on another
market), at the time of a put, there can be no material
adverse change in our business prospects or financial
condition;
o the SEC, Nasdaq, the O.T.C. Bulletin Board or any other
relevant market on which our common stock trades does not
suspend trading in our stock;
o the issuance of shares of common stock upon conversion of the
debentures does not violate the shareholder approval
requirements of the market on which our common stock trades.
TERMINATION OF GMF CREDIT LINE AGREEMENT
The obligations of GMF to make advances under the GMF credit line
agreement terminate on September 1, 2003. In addition, GMF shall have no further
obligations to purchase our convertible debentures under the GMF credit line
agreement if the effectiveness of this registration statement is suspended for
more than 20 trading days (not including any period during which a
post-effective amendment to this registration statement has been filed with, but
not yet been declared effective by, the SEC).
31
<PAGE>
RESTRICTIONS ON MERGERS
During the term of the GMF credit line agreement, we may not merge or
consolidate with, or transfer all, or substantially all, of our assets to
another entity unless the acquiring entity assumes our obligation to issue
securities to GMF that it is entitled to receive under the GMF credit line
agreement.
PLACEMENT AGENT AND LEGAL FEE
For arranging the sale to the investors under the securities purchase
agreement, we have issued to May Davis, as placement agent, five-year stock
purchase warrants to purchase 2,000,000 shares of our common stock at a price of
$1.50 per share.
For arranging the sale to GMF, we have issued to May Davis, as
placement agent, 750,000 shares of our common stock.
We have agreed to register for resale the shares May Davis receives
under the securities purchase agreement and the GMF credit line agreement.
As part of their legal fee in connection with the preparation of
documents relating to the 6% convertible debentures and the GMF credit line,
Butler Gonzalez, LLP, as counsel to May Davis, received five-year stock purchase
warrants to purchase 10,000 shares of our common stock at a price of $1.50 per
share. These warrants have cashless exercise provisions that will expire
immediately upon the declaration of effectiveness of a registration statement
applicable to the securities. We have the right to force conversion of the
warrants if our common stock closes at a bid price of $3.00 or higher for ten
consecutive trading days. We have agreed to register for resale the shares
Butler Gonzalez receives under the securities purchase agreement and GMF credit
line agreement.
In addition, we have reimbursed Butler Gonzalez LLP $12,500 for their
legal fee in connection with the preparation of documents relating to the 6%
convertible debenture and the private equity line.
SELLING SHAREHOLDERS
Common stock registered for resale under this prospectus constitutes
approximately 73% of our issued and outstanding common shares as of November 30,
2000.
INVESTORS UNDER THE SECURITIES PURCHASE AGREEMENT
This prospectus covers 7,770,000 shares of common stock issuable upon
the exercise of convertible debentures and 640,000 shares of common stock
issuable upon the exercise of warrants we issued to the investors under the
securities purchase agreement.
GMF
This prospectus covers 13,900,000 shares of common stock issuable upon
the exercise of convertible debentures in connection with our right to "put"
convertible debentures to GMF under the GMF credit line agreement.
32
<PAGE>
GMF does not beneficially own any of our common stock or any other of
our securities as of the date of this prospectus. Other than its obligations to
purchase convertible debentures under the GMF credit line agreement, it has no
other commitments or arrangements to purchase or sell any of our securities.
THE MAY DAVIS GROUP, INC.
This prospectus covers 598,000 shares of common stock issuable upon
exercise of warrants we issued to The May Davis Group, Inc. and 1,402,000 shares
issuable upon exercise of warrants assigned by May Davis to its affiliates as
follows: 115,000 to Hong Zhu, 122,000 to Adam Mayblum, 243,000 to Mark Angelo,
243,000 to Joseph Donohue, 243,000 to Hunter Singer, 243,000 to Robert Farrell,
100,000 to Kimberly Holt, 25,000 to Michael Jacobs, 25,000 to Kevin Davis, 5,000
to each of Barbara Zingalli, Kevin Nesfield, Joshua Alexander May, Taylor May
and Curtis May, 6,000 to Matthew Beckman and 12,000 to James Gonzalez. We issued
these warrants to May Davis as part of its compensation for acting as our
placement agent in connection with the securities purchase agreement.
This prospectus also covers the resale of up to 750,000 shares of
common stock that we issued to affiliates of May Davis as part of compensation
to May Davis for acting as placement agent in connection with the GMF credit
line agreement as follows: 187,500 shares each to Mark Angelo, Joseph Donohue,
Robert Farrell and Hunter Singer.
BUTLER GONZALEZ LLP
This prospectus covers up to 10,000 shares of common stock issuable
upon the exercise of warrants we issued to Butler Gonzalez. We issued these
warrants to Butler Gonzalez as part of its legal fee in connection with the
preparation of documents relating to the 6% convertible debentures and the GMF
credit line.
The table below includes information regarding beneficial ownership of
our common stock by the selling shareholders on November 30, 2000 and the number
of shares that they may sell under this prospectus.
The number of shares of common stock issuable upon conversion of the 6%
convertible debentures that we issued to the investors and that we could issue
to GMF pursuant to our put rights is also subject to adjustment and could be
materially less or more than the amount contained in the table below, depending
on factors which we cannot predict at this time, including, among other factors,
the future price of our common stock.
Other than as described above, none of the selling shareholders has had
within the past three years any material relationship with our company or any of
our predecessors or affiliates. None of the selling shareholders are or were
affiliated with registered broker-dealers other than The May Davis Group, Inc.
and its affiliates listed above. Unless otherwise indicated, the selling
shareholders have advised us that they possess sole voting and investment power
with respect to the shares being offered.
33
<PAGE>
<TABLE>
<CAPTION>
Percent of
Shares Percent of
Shares Beneficially Shares Shares
Beneficially Owned Prior Beneficially Beneficially
Owned Prior to to the Owned After the Owned After
Selling shareholders the Offering Offering Shares Offered Offering (1) the Offering
-------------------- ------------ -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
GMF Holdings............. 13,900,000 (2) 28.8% 13,900,000 0 *
Sui Wa Chau.............. 544,750 (3) * 544,750 0 *
Peter Che Nan Chen....... 633,430 (3) * 633,430 0 *
Jingsheng Yi............. 63,343 (3) * 63,343 0 *
Lam King Shan............ 633,430 (3) * 633,430 0 *
Kwok Leung Lai........... 633,430 (3) * 633,430 0 *
Wei Z. Yen............... 316,715 (3) * 316,715 0 *
Timothy Borne............ 190,029 (3) * 190,029 0 *
James Ratliff............ 190,029 (3) * 190,029 0 *
George McDonnell......... 63,343 (3) * 63,343 0 *
Herbert Robbins.......... 348,387 (3) * 348,387 0 *
John Martin.............. 126,686 (3) * 126,686 0 *
David Hungerford......... 316,715 (3) * 316,715 0 *
Arab Commerce Bank, Ltd.
(4)...................... 633,430 (3) * 633,430 0 *
Robert L. Anoff.......... 126,686 (3) * 126,686 0 *
William Murphy........... 158,358 (3) * 158,358 0 *
Cliff Dropkin............ 126,686 (3) * 126,686 0 *
John Diesel.............. 316,715 (3) * 316,715 0 *
Zhong Wei Lu............. 152,023 (3) * 152,023 0 *
Keway Holding Co......... 633,430 (3) * 633,430 0 *
Ronald Horner............ 63,343 (3) * 63,343 0 *
Frank Collins............ 126,686 (3) * 126,686 0 *
Carl Grant Johnson....... 316,715 (3) * 316,715 0 *
Marvin Strauss........... 158,358 (3) * 158,358 0 *
George Knox.............. 94,970 (3) * 94,970 0 *
Dr. Harry Kaplan......... 63,343 (3) * 63,343 0 *
Kenneth E. Rogers........ 126,686 (3) * 126,686 0 *
Facile Corporation....... 63,343 (3) * 63,343 0 *
John Bolliger............ 63,343 (3) * 63,343 0 *
David Black.............. 63,343 (3) * 63,343 0 *
Sheila Gill.............. 158,358 (3) * 158,358 0 *
Michael Dahlquist........ 63,343 (3) * 63,343 0 *
Marvin Black............. 126,686 (3) * 126,686 0 *
David Miller............. 633,430 (3) * 633,430 0 *
Adam Denish.............. 63,343 (3) * 63,343 0 *
MYOB Investments......... 63,343 (3) * 63,343 0 *
Brian McNay.............. 348,387 (3) * 348,387 0 *
Mary Ellen Misiak........ 696,773 (3) * 696,773 0 *
Dr. Gerald Holland....... 316,715 (3) * 316,715 0 *
Andrew Carter............ 126,686 (3) * 126,686 0 *
Chien Chang 190,029 (3) * 190,029 0 *
The May Davis Group, Inc. 598,000 * 598,000 0 *
Mong Zhu 115,000 * 115,000 0 *
Adam Mayblum............. 122,000 * 122,000 0 *
34
<PAGE>
Percent of
Shares Percent of
Shares Beneficially Shares Shares
Beneficially Owned Prior Beneficially Beneficially
Owned Prior to to the Owned After the Owned After
Selling shareholders the Offering Offering Shares Offered Offering (1) the Offering
-------------------- ------------ -------- -------------- ------------ ------------
Joseph Donohue........... 430,500 * 430,500 0 *
Hunter Singer............ 430,500 * 430,500 0 *
Robert Farrell........... 430,500 * 430,500 0 *
Kimberly Holt............ 100,000 * 100,000 0 *
Michael Jacobs........... 25,000 * 25,000 0 *
Kevin Davis.............. 25,000 * 25,000 0 *
Kevin Nesfield........... 5,000 * 5,000 0 *
Joshua Alexander May..... 5,000 * 5,000 0 *
Taylor May............... 5,000 * 5,000 0 *
Curtis May............... 5,000 * 5,000 0 *
Matthew Beckman.......... 6,000 * 6,000 0 *
James Gonzalez........... 12,000 * 12,000 0 *
Mark Angelo.............. 430,500 * 430,500 0 *
Barbara Zingalli......... 5,000 * 5,000 0 *
Butler Gonzalez LLP...... 10,000 * 10,000 0 *
</TABLE>
* Less than one percent.
(1) Assumes that the selling shareholders will sell all of the shares of
common stock offered by this prospectus. We cannot assure you that the
selling shareholders will sell all or any of these shares.
(2) This number includes (solely for purposes of this prospectus) up to an
aggregate of 13,900,000 shares of our common stock issuable upon
conversion of our 6% convertible debentures that we may sell to GMF
under the GMF credit line agreement. These shares would not be deemed
beneficially owned within the meaning of Sections 13(d) and 13(g) of
the Exchange Act before GMF acquires the 6% convertible debentures
which are convertible into such shares of common stock. GMF may not
beneficially own more than 10% of our outstanding common stock at any
time. Diego Davis holds investment and voting control of the shares GMF
may acquire.
(3) Includes shares of common stock which may be acquired under the
securities purchase agreement if the 6% convertible debentures were
converted in full as of the date of this prospectus and shares of our
common stock which may be acquired upon the exercise of a stock
purchase warrant.
(4) Anthony DeNazareth holds voting and investment control of the shares
held by Arab Commerce Bank, Ltd.
35
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders and their successors, which term includes
their transferees, pledgees or donees or their successors may sell the common
stock directly to one or more purchasers (including pledgees) or through
brokers, dealers or underwriters who may act solely as agents or may acquire
common stock as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated prices or at
fixed prices, which may be changed. The selling shareholders may effect the
distribution of the common stock in one or more of the following methods:
o ordinary brokers transactions, which may include long or short
sales;
o transactions involving cross or block trades or otherwise on
the NASD O.T.C. Bulletin Board;
o purchases by brokers, dealers or underwriters as principal and
resale by such purchasers for their own accounts under this
prospectus;
o "at the market" to or through market makers or into an
existing market for the common stock;
o in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales
effected through agents;
o through transactions in options, swaps or other derivatives
(whether exchange listed or otherwise); or
o any combination of the above, or by any other legally
available means.
In addition, the selling shareholders or successors in interest may
enter into hedging transactions with broker-dealers who may engage in short
sales of common stock in the course of hedging the positions they assume with
the selling shareholders. The selling shareholders or successors in interest may
also enter into option or other transactions with broker-dealers that require
delivery by such broker-dealers of the common stock, which common stock may be
resold thereafter under this prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the common stock may receive compensation in the form of
discounts, concessions or commission from the selling shareholders and/or the
purchasers of common stock for whom such broker-dealers may act as agent or to
whom they may sell as principal, or both (which compensation as to a particular
broker-dealer may be in excess of customary commissions).
GMF is, and each remaining selling shareholder and any broker-dealers
acting in connection with the sale of the common stock by this prospectus may be
deemed to be, an underwriter within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profit realized by
them on the resale of common stock as principals may be underwriting
compensation under the Securities Act. Neither we nor the selling shareholders
can presently estimate the amount of such compensation. We do not know of any
existing arrangements between the selling shareholders and any other
shareholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the common stock.
The selling shareholders and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Securities Exchange Act and the rules and regulations thereunder, including,
36
<PAGE>
without limitation, Regulation M, which may restrict certain activities of, and
limit the timing of purchases and sales of securities by, the selling
shareholders and other persons participating in a distribution of securities.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions subject to specified exceptions or
exemptions. GMF has, before any sales, agreed not to effect any offers or sales
of the common stock in any manner other than as specified in this prospectus and
not to purchase or induce others to purchase common stock in violation of
Regulation M under the Exchange Act. All of the foregoing may affect the
marketability of the securities offered by this prospectus.
Any securities covered by this prospectus that qualify for sale under
Rule 144 under the Securities Act may be sold under that Rule rather than under
this prospectus.
We cannot assure you that the selling shareholders will sell any or all
of the shares of common stock offered by the selling shareholders.
In order to comply with the securities laws of certain states, if
applicable, the selling shareholders will sell the common stock in jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states, the selling shareholders may not sell the common stock unless the shares
of common stock have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our articles of incorporation authorize capital stock consisting of
100,000,000 shares of common stock, par value of $.001 per share and 25,000,000
shares of preferred stock. As of November 30, 2000, 34,451,276 shares of common
stock and 700 shares of Series A Convertible Preferred Stock were outstanding.
An additional 5,795,397 shares of common stock may be issued upon the exercise
of outstanding options and/or warrants. The following summary of the description
of our capital stock is qualified in its entirety by reference to our articles
of incorporation and bylaws.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share
held. Shareholders do not have the right to cumulate their votes in elections of
directors. Accordingly, holders of a majority of the issued and outstanding
shares of common stock will have the right to elect all of our directors and
otherwise control the affairs of our company. Holders of common stock are
entitled to dividends on a pro rata basis upon declaration of dividends by our
board of directors. Dividends are payable only out of funds legally available
for the payment of dividends. Our board of directors is not required to declare
dividends, and it currently expects to retain earnings to finance the
development of our business.
Upon a liquidation of our company, holders of the common stock will be
entitled to a pro rata distribution of our assets, after payment of all amounts
owed to our creditors, and subject to any preferential amount payable to holders
of our preferred stock. Holders of common stock have no preemptive,
subscription, conversion, redemption or sinking fund rights.
PREFERRED STOCK
Our articles of incorporation permit the board of directors to issue
shares of preferred stock in one or more series and to fix the relative rights,
preferences and limitations of each series. These rights, preferences and
limitations include dividend rates, provisions of redemption, rights upon
liquidation, conversion privileges and voting powers. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from acquiring, a majority of our
outstanding voting stock.
SERIES A CONVERTIBLE PREFERRED STOCK
Of the 16,200 shares of Series A Convertible Preferred Stock authorized
by the board of directors, 700 shares are currently issued and outstanding. The
stated value per share of the Series A Convertible Preferred Stock is $1,000.
With respect to rights upon liquidation and winding up or dissolution, the
Series A Convertible Preferred Stock will generally rank:
o prior to the common stock; and
o prior to any future class or series of capital stock unless,
with the consent of the holders of the Series A Convertible
Preferred Stock, the terms of the newly created securities
provide that they rank senior to, or pari passu with, the
Series A Convertible Preferred Stock.
38
<PAGE>
DIVIDENDS.
Holders of the Series A Convertible Preferred Stock are not entitled to
receive dividends. So long as any shares of the Series A Convertible Preferred
Stock are outstanding, however, we may not, without the written consent of the
holders of a majority of the outstanding shares of Series A Convertible
Preferred Stock:
o declare or pay any dividends on, or make any distribution on,
any junior securities;
o redeem or repurchase any junior securities; or
o pay any money to, or make available for, a sinking fund for
the benefit of any junior securities.
LIQUIDATION.
Each holder of Series A Convertible Preferred Stock is entitled to a
liquidation preference of $1,000 per share plus an amount equal to 6% per year
for the period beginning May 19, 1998 and ending on the date of final
distribution. A change in control of our company, as defined in the articles of
incorporation, will be deemed to be a liquidation of our company and the holders
of the Series A Convertible Preferred Stock will be entitled to 115% of their
liquidation preference.
VOTING RIGHTS.
The holders of the Series A Convertible Preferred Stock are entitled to
notice of all shareholders meetings and to receive copies of proxy materials and
other information sent to shareholders. Except as otherwise provided by Florida
law and as described below, the holders of the Series A Convertible Preferred
Stock have no voting power whatsoever. The Series A Convertible Preferred Stock
terms include what are customarily called "protective provisions." Under these
provisions, a vote of the holders of at least a majority of the outstanding
Series A Convertible Preferred Stock is required before we can:
o alter or change the rights, preferences or privileges of the
Series A Convertible Preferred Stock or any senior securities
so as to adversely affect the Series A Convertible Preferred
Stock;
o create any new class or series of senior securities;
o create any new class or series of pari passu securities;
o increase the number of shares of Series A Convertible
Preferred Stock; or
o intentionally take any action which would result in taxation
to the holders of the Series A Convertible Preferred Stock
under Section 305 of the Internal Revenue Code of 1986, as
amended.
CONVERSION.
Each share of Series A Convertible Preferred Stock is convertible into
the number of shares of our common stock equal to the stated value ($1,000) of
the share of Series A Convertible Preferred Stock plus a premium of 6% per annum
of the stated value from May 19,1998, divided by the conversion price. The
39
<PAGE>
conversion price is equal to the lesser of (A) 92% of the market price, as
described below, and (B) $11.89. The market price is defined as the average of
the closing bid prices of the common stock on the Nasdaq National Market or, if
the Nasdaq National Market is not the principal trading market of the common
stock, such principal trading market or over-the-counter market, in each case as
reported by Bloomberg Financial Markets, for any five consecutive trading days
during the thirty trading day period ending on the day before the date of
conversion. If, however, the average closing bid price on the day of conversion
is below 70% of the average of the closing bid prices of the common stock for
any five trading days during the thirty trading day period ending on the day
before the date of conversion, the conversion price is equal to the lesser of
(A) 115% of the market price and (B) $11.89.
If on the conversion date, the last sale price of the common stock on
the Nasdaq National Market or, if the Nasdaq National Market is not the
principal trading market of the common stock, such principal trading market or
over-the-counter market, in each case as reported by Bloomberg is below 70% of
the average of the closing bid prices for the five consecutive trading days
ending one day before May 19, 1998, then we may, at our option, (i) redeem in
cash the Series A Convertible Preferred Stock submitted for conversion for an
amount equal to the number of shares of common stock that we would have issued
had we not opted for the cash redemption, multiplied by the market price, or
(ii) redeem the Series A Convertible Preferred Stock by issuing a convertible
note, in the principal amount equal to 115% of the amount payable in a cash
redemption, bearing interest at the rate of 10% per annum, provided that we have
sufficient shares of common stock authorized and reserved to cover the full
conversion thereof and a registration statement under the Securities Act
covering the shares of common stock issuable under the redemption note is
effective.
The Series A Convertible Preferred Stock is subject to mandatory
redemption under certain circumstances and, under certain circumstances, is also
redeemable at our option. Furthermore, any shares of Series A Convertible
Preferred Stock outstanding on May 18, 2003 shall automatically be converted
into common stock at the then effective conversion price.
6% CONVERTIBLE DEBENTURES
As of November 30, 2000, convertible debentures in an aggregate
principal amount of $1,599,993 due 2005 and bearing interest at 6% per year are
currently issued and outstanding.
CONVERSION.
The debentures are convertible at any time after December 16, 2000 into
shares of common stock at the price per share equal to either, at the holders'
option:
o $1.05; or
o 80% of the average of the closing bid prices of our common
stock during the 5 trading days immediately preceding the
conversion.
The holders' right to convert terminates on the due date of the debentures, and
the debentures will be automatically converted on that date at the above price
per share. We are not required to issue shares upon conversion of the debenture
if after the conversion, the holder would be deemed the beneficial owner of 10%
or more of our outstanding common stock.
40
<PAGE>
We will decrease the conversion price if we subdivide our outstanding
common stock or issue a stock dividend on our outstanding common stock. We will
increase the conversion price if we combine our outstanding shares of common
stock.
If the SEC does not declare the registration statement of which this
prospectus is a part effective by January 3, 2001, we must reduce the conversion
percentage to be used in determining the conversion price of the 6% convertible
debentures by 2% for the first 30 days following such date and an additional 2%
every 30 days thereafter until the SEC declares the registration statement
effective. In addition, if the SEC does not declare the registration statement
effective by January 3, 2001, or if, after the registration statement becomes
effective, sales cannot be made under the registration statement (whether
because of a failure to keep the registration statement effective, to disclose
information that is necessary for sales to be made under the registration
statement, to register sufficient shares of our common stock or otherwise), we
will pay a penalty equal to 2% of the purchase price of the shares of our common
stock then held by the investors for each 30 day period that the registration
statement is not effective.
INTEREST.
The debentures bear interest at the rate of 6% per year. We may elect
to pay interest in cash or in the form of shares of our common stock. If we pay
interest in the form of common stock, we calculate the value of the stock we
will issue as follows: The value of the stock shall be the closing bid price on:
o the date the interest payment is due; or
o if the interest payment is not made when due, the date the
interest payment is made.
We will issue a number of shares of common stock with a value equal to the
amount of interest due. We will not issue fractional shares. Therefore, if the
value of the common stock per share does not equal the total interest due, we
will pay the balance in cash.
RANKING.
The debentures and all payments, including principal or interest, are
subordinate and junior in right of payment to all company debt, but only to the
following extent:
(1) Upon the maturity of any company debt, we must pay all company
debt in full before we make any payment of principal or
interest on the debenture; and
(2) In the event of any insolvency or bankruptcy proceedings
affecting us, or any receivership, liquidation, reorganization
or other similar proceedings affecting us, and, in the event
of any proceedings for voluntary liquidation, dissolution or
other winding up of us, whether or not involving insolvency or
bankruptcy, then we must pay in full principal and interest on
all company debt before we make any payments of principal or
interest on the debentures.
The debenture defines company debt as our current bank debt and all indebtedness
we incur after the issuance of the debentures, other than indebtedness to any
officer, director or 10% shareholder.
41
<PAGE>
AMENDMENTS.
We may amend the debenture with the consent of the debenture holders.
Without the consent of the debenture holders, we may amend the debenture to cure
any ambiguity, defect or inconsistency, to provide for assumption of our
obligations to the holders or to make any change that does not adversely affect
the rights of the holders.
EVENTS OF DEFAULT.
An event of default occurs when:
o we fail to pay amounts due within two days of the maturity
date;
o we fail to advise our transfer agent to issue shares of common
stock to the holders within two days of receipt of the
holders' request to convert;
o we fail to comply with any other agreements in the debenture
for thirty days after notice;
o there is a bankruptcy or insolvency;
o we breach our obligations under the registration rights
agreement.
We describe certain adjustments to the conversion price and penalty provisions
under the caption "Securities Purchase Agreement."
RESTRICTIONS ON ISSUANCES OF COMMON STOCK.
While any of the principal or interest on the debentures remain unpaid
and unconverted, we may not, without the holders' prior consent, issue or sell
any common stock, or any right to acquire common stock, without consideration or
for consideration per share less than its fair market value. This restriction
does not apply to issuances of common stock contained in any agreements entered
into before the issuance of the debentures or in connection with benefit plans
applicable to our officers, directors, employees and independent contractors.
THE GMF 6% CONVERTIBLE DEBENTURES
Under the terms of the credit line agreement we entered into with GMF,
we may issue and sell to GMF, from time to time, convertible debentures in an
aggregate principal amount of $10,000,000 due five years after issuance and
bearing interest at 6% per year. As of the date of this prospectus, we have not
issued any of these debentures. We describe the terms of the GMF credit line
agreement in more detail under the caption "The GMF Credit Line Agreement."
CONVERSION.
The debentures are convertible at any time into shares of common stock
at the price per share equal to either, at the holders' option:
o $1.40; or
o 90% of the lowest closing bid price of our common stock during
the 20 trading days immediately preceding the conversion.
42
<PAGE>
The holders' right to convert terminates 18 months after we issue the
debentures, and the debenture will be automatically converted on that date at
the above price per share. We are not required to issue shares upon conversion
of the debenture if after the conversion, the holder would be deemed the
beneficial owner of 10% or more of our outstanding common stock.
We will decrease the conversion price if we subdivide our outstanding
common stock or issue a stock dividend on our outstanding common stock. We will
increase the conversion price if we combine our outstanding shares of common
stock.
If the SEC does not declare the registration statement of which this
prospectus is a part effective by January 3, 2001, we must reduce the conversion
percentage to be used in determining the conversion price of the 6% convertible
debentures by 2% for the first 30 days following such date and an additional 2%
every 30 days thereafter until the SEC declares the registration statement
effective. In addition, if the SEC does not declare the registration statement
effective by January 3, 2001, or if, after the registration statement becomes
effective, sales cannot be made under the registration statement (whether
because of a failure to keep the registration statement effective, to disclose
information that is necessary for sales to be made under the registration
statement, to register sufficient shares of our common stock or otherwise), we
will pay a penalty equal to 2% of the purchase price of the shares of our common
stock then held by the investors for each 30 day period that the registration
statement is not effective.
INTEREST.
The debentures bear interest at the rate of 6% per year. We may elect
to pay interest in cash or in the form of shares of our common stock. If we pay
interest in the form of common stock, we calculate the value of the stock we
will issue as follows: The value of the stock shall be the closing bid price on:
o the date the interest payment is due; or
o if the interest payment is not made when due, the date the
interest payment is made.
We will issue a number of shares of common stock with a value equal to the
amount of interest due. We will not issue fractional shares. Therefore, if the
value of the common stock per share does not equal the total interest due, we
will pay the balance in cash.
RANKING.
The debentures and all payments, including principal or interest, are
subordinate and junior in right of payment to all company debt, but only to the
following extent:
o Upon the maturity of any company debt, we must pay all company
debt in full before we make any payment of principal or
interest on the debenture; and
o In the event of any insolvency or bankruptcy proceedings
affecting us, or any receivership, liquidation, reorganization
or other similar proceedings affecting us, and, in the event
of any proceedings for voluntary liquidation, dissolution or
other winding up of us, whether or not involving insolvency or
bankruptcy, then we must pay in full principal and interest on
all company debt before we make any payments of principal or
interest on the debentures.
43
<PAGE>
The debenture defines company debt as our current bank debt and all indebtedness
we incur after the issuance of the debentures, other than indebtedness to any
officer, director or 10% shareholder.
AMENDMENTS.
We may amend the debenture with the consent of the debenture holders.
Without the consent of the debenture holders, we may amend the debenture to cure
any ambiguity, defect or inconsistency, to provide for assumption of our
obligations to the holders or to make any change that does not adversely affect
the rights of the holders.
EVENTS OF DEFAULT.
An event of default occurs when:
o we fail to pay an amount due within two days of the maturity
date;
o we fail to advise our transfer agent to issue shares of common
stock to the holders within two days of receipt of the
holders' request to convert;
o we fail to comply with any other agreements in the debenture
for thirty days after notice;
o there is a bankruptcy or insolvency;
o we do not comply with our obligation to register for resale
the common stock issuable upon conversion of the debentures.
RESTRICTIONS ON ISSUANCES OF COMMON STOCK.
While any of the principal or interest on the debentures remain unpaid
and unconverted, we may not, without the holders' prior consent, issue or sell
any common stock, or any right to acquire common stock, without consideration or
for consideration per share less than its fair market value. This restriction
does not apply to issuances of common stock contained in any agreements entered
into before the issuance of the debentures or in connection with benefit plans
applicable to our officers, directors, employees and independent contractors.
ANTI-TAKEOVER EFFECTS OF FLORIDA LAW AND OUR ARTICLES OF INCORPORATION AND
BYLAWS
Certain provisions of our articles of incorporation, our bylaws and
Florida law summarized below may be deemed to have an anti-takeover effect and
may discourage, delay, defer or prevent a tender offer or takeover attempt that
a shareholder might consider in its best interest, including those attempts that
might result in a premium over the market price for shares held by our
shareholders.
ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF INCORPORATION AND BYLAWS
Our articles of incorporation provide for a classified board of
directors. The directors are divided into three classes, as nearly equal in
number as possible. The directors will be elected for three-year terms, which
are staggered so that the terms of approximately one-third of the directors
expire each year.
44
<PAGE>
Our articles of incorporation permit removal of directors only for
cause by the shareholders at a meeting by the affirmative vote of at least 60%
of the outstanding shares entitled to vote for the election of directors. Our
articles of incorporation also provide that any vacancy on the board of
directors may be filled only by the remaining directors then in office.
Our articles of incorporation also contain provisions that require:
o the affirmative vote of 60% of the voting stock to amend our
articles of incorporation or bylaws;
o the demand of not less than 50% of all votes entitled to be
cast on any issue to be considered at a proposed special
meeting to call a special meeting of shareholders;
o that all shareholder action, including the election of
directors, be taken by means of a vote at a duly convened
shareholders meeting and not by use of written consents; and
o an advance notice procedure for the nomination of candidates
for election as directors by shareholders as well as for
shareholder proposals to be considered at shareholders'
meetings.
ANTI-TAKEOVER PROVISIONS OF FLORIDA LAW
Florida law prohibits the voting of shares in a publicly held Florida
corporation that are acquired in a "control share acquisition" unless the board
of directors approves the control share acquisition or the holders of a majority
of the corporation's voting shares approve the granting of voting rights to the
acquiring party. A "control share acquisition" is generally defined as an
acquisition that immediately thereafter entitles the acquiring party, directly
or indirectly, to vote in the election of directors within any of the following
ranges of voting power:
o one-fifth or more but less than one-third;
o one-third or more but less than a majority; or
o majority or more.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is OTC Corporate
Transfer Service at 9 Field Avenue, Hicksville, New York 11801.
LEGAL MATTERS
Akerman, Senterfitt & Eidson, P.A., Miami, Florida will pass upon the
validity of the shares of common stock offered by this prospectus for us.
EXPERTS
Ernst & Young LLP, independent certified public accountants, have
audited our consolidated financial statements and schedule included in our
Annual Report on Form 10-K for the year ended December 31, 1999, as set forth in
their report (which contains an explanatory paragraph describing conditions that
45
<PAGE>
raise substantial doubt about our ability to continue as a going concern as
described in Note 1 to the consolidated financial statements), which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and schedule are incorporated by reference
in reliance on Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information
with the SEC. You may read our SEC filings over the Internet at the SEC's
website at http://www.sec.gov. You may also read and copy documents at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or at
its regional offices located at 7 World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
We have filed with the SEC a registration statement on Form S-2 under
the Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus, which is a part of the registration statement, does
not contain all of the information included in the registration statement. For
further information about us and our common stock, you should refer to the
registration statement.
Our common stock is listed on the NASD O.T.C. Bulletin Board and
reports and proxy statements and other information concerning us also can be
inspected at the offices of The Nasdaq-Amex Stock Market, Inc. at 1735 K Street,
N.W., Washington, D.C. 20006-1500.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to provide information about our business and other
important information to you by "incorporating by reference" the information we
file with the SEC, which means that we can disclose the information to you by
referring in this prospectus to the documents we file with the SEC.
46
<PAGE>
We incorporate by reference into this prospectus the following
documents that we have filed with the SEC. You should consider each document
incorporated by reference an important part of this prospectus:
<TABLE>
<CAPTION>
SEC FILING (FILE NO. 000-30110) PERIOD COVERED OR DATE OF FILING
------------------------------- --------------------------------
<S> <C>
Annual Report on Form 10-K........................................... Year ended December 31, 1999
Annual Report on Form 10-K/A......................................... May 1, 2000
Annual Report on Form 10-K/A......................................... June 5, 2000
Annual Report on Form 10-K/A......................................... June 9, 2000
Annual Report on Form 10-K/A......................................... November 1, 2000
Quarterly Report on Form 10-Q........................................ Quarter ended March 31, 2000
Quarterly Report on Form 10-Q........................................ Quarter ended June 30, 2000
Quarterly Report on Form 10-Q........................................ Quarter ended September 30, 2000
Quarterly Report on Form 10-Q/A...................................... October 31, 2000
Quarterly Report on Form 10-Q/A...................................... October 31, 2000
Current Report on Form 8-K........................................... February 18, 2000
Current Report on Form 8-K........................................... June 8, 2000
Current Report on Form 8-K........................................... June 30, 2000
Current Report on Form 8-K........................................... September 14, 2000
Current Report on Form 8-K........................................... November 30, 2000
Current Report on Form 8-K........................................... December 6, 2000
Current Report on Form 8-K........................................... December 11, 2000
Description of our common stock contained in our Registration Statement
on Form 8-A and any amendment or report filed for the purpose of
updating such description ........................................... January 20, 1995
</TABLE>
47
<PAGE>
We are delivering along with this prospectus a copy of our most recent
Annual Report on Form 10-K and Quarterly Report on Form 10-Q. You may request a
copy of the other filings that we are incorporating by reference in this
prospectus, but are not delivering with this prospectus, at no cost, by writing
or telephoning us at the following address, telephone or facsimile number:
TCPI, Inc.
3341 S.W. 15th Street
Pompano Beach, FL 33069
Phone: (954) 979-0400
Fax: (954) 979-6125
Attention: Jay E. Eckhaus, Esq.
We will not provide exhibits to a document unless they are specifically
incorporated by reference in that document.
