10-Q 1 tcpi-10q.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ Commission File Number 0-25406 ------------------------ TCPI, INC. (Exact name of registrant as specified in its charter) Florida 65-0308922 ------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3333 S.W. 15th Street Pompano Beach, Florida 33069 ---------------------------- (Address of principal executive offices) (Zip Code) (954) 979-0400 -------------- (Registrant's telephone number, including area code) Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] The aggregate market value of Common Stock held by non-affiliates as of May ___, 2001 was approximately $__________ (based upon the closing sale price of $______ per share on the NASD OTC Bulletin Board on May ___, 2001). As of May ___, 2001, _________ shares of the Registrant's $.001 par value Common Stock were outstanding. Transitional Small Business Disclosure Format (check one): YES [ ] NO[ x ] ================================================================================ PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TCPI, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)

*The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. See accompanying notes. 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) TCPI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except share data)

See accompanying notes. 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) TCPI, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands, except share data)

See accompanying notes 4 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary Of Significant Accounting Policies Basis Of Presentation Since inception, TCPI, Inc. and Subsidiaries have experienced recurring operating losses and negative cash flows from operations. Our operating losses have in large part been due to insufficient revenues from our current product portfolio to support operating costs, including those related to the development of our future products. In addition, we incurred significant costs during the three-year period ended December 31, 2000 relating to ongoing litigation. These conditions raise substantial doubt about our ability to continue as a going concern. Our accompanying unaudited condensed consolidated financial statements (the "Financial Statements") have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all normal and recurring adjustments that are necessary for a fair presentation. The Financial Statements should be read in conjunction with more complete disclosures contained in the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year. Revenue Recognition Revenues are recognized when title or risk of ownership transfers, which is generally at time of shipment. Product returns are permitted only in limited circumstances and are estimated and reflected as adjustments to current period sales. Payments received in advance of shipment of products are recognized as deferred revenue in the consolidated balance sheets until the related products are shipped, the risk of ownership transfers and all contractual obligations have been met. Research and development contract revenue is recognized when we have fulfilled our obligations in accordance with the provisions of the contractual arrangements and collectibility is reasonably assured. Research And Development Costs Research and development costs are expensed as incurred. Payments received for research and development arrangements are recognized as research and development contract revenue when the services are performed and collectibility is reasonably assured. Income Taxes We account for income taxes under SFAS No. 109, "Accounting for Income Taxes". Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Inventories Inventories, consisting of raw materials and finished goods, are valued at the lower of cost (computed on the first-in, first-out method) or market. Property And Equipment Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The cost of maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized and depreciated over their estimated useful lives. 5 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Summary Of Significant Accounting Policies (Continued) Intangible Assets Purchased patents and trademarks are amortized using the straight-line method over a composite life of 15 years based on the shorter of their legal life or estimated useful life of the individual patents and trademarks, which range from 11 to 17 years. Goodwill is amortized using the straight-line method over 15 years. We periodically review our intangible assets to assess recoverability and a charge will be recognized in the consolidated statement of operations if a permanent impairment is determined to have occurred. Recoverability of intangibles is determined based on undiscounted future operating cash flows from the related business unit or activity. The amount of impairment, if any, would be measured based on discounted future operating cash flows using a discount rate reflecting our average cost of funds. The assessment of the recoverability of intangible assets will be affected if estimated future operating cash flows are not achieved. We do not believe that any impairment has occurred and that no reduction of the estimated useful lives is warranted. 2. Loss Per Share Data The following table sets forth the computation of basic and diluted losses per share for the periods indicated.

6 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Details Of Certain Balance Sheet Accounts Details of selected balance sheet accounts are as follows (in thousands):

4. Redeemable Preferred Stock In 1998, we issued 15,000 shares of our Series A Redeemable Convertible Preferred Stock (the "Preferred Stock"). No shares of our Preferred Stock are presently outstanding. The investor converted all 15,000 shares of Preferred Stock into 39,800,473 shares of our common stock during the period of October 28, 1998 and ending February 6, 2001. 5. Common Stockholders' Equity On May 3, 2000, we entered into an equity line investment agreement with Swartz under which 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 also issued to Swartz warrants to purchase our common stock at prices ranging from $0.9375 to $1.9063 per share, subject to adjustment. Prior to February 21, 2001, we did not sell any stock to Swartz pursuant to this 7 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. Common Stockholders' Equity (Continued) agreement. On February 21, 2001, we issued a "put" to Swartz for 3,500,000 shares of our common stock pursuant to this agreement and received $135,000 in proceeds. Based on the terms of the equity line investment agreement with Swartz and the trading price of our common stock at the time we issued the "put", the parties executed a wavier and agreement to redefine and set the minimum share price and trigger price of the "put". With respect to any future sale or "put" transactions, we may be required to execute a wavier and agreement to redefine and set the minimum share price and trigger price of the "put" if the trading price of our common stock at such time does not meet the terms of the equity line investment agreement with Swartz. On September 5, 2000, we entered into a credit line agreement with GMF Holdings, arranged through May Davis, under which 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 December 22, 2000. As of March 31, 2001, we have not sold any convertible debentures to GMF Holdings pursuant to this agreement. For a complete description of the Swartz and GMF Holdings funding transactions, see our Registration Statements on Form S-2, and amendments thereto, as filed with the SEC. In connection with the May Davis securities purchase agreement, we sold to investors $1,599,993 of our 6% convertible debentures that mature at various dates between August 28, 2005 through November 23, 2005. The debentures became convertible into shares of our common stock at any time after 120 days from closing 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. The earliest date for conversion of these debentures was December 26, 2000. In connection with the issuance of the 6% convertible debentures to the investors, we also issued warrants to the investors to purchase 639,997 shares of our common stock. Such issuance 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 respective closing dates. The warrants have an exercise price of $1.50 and a term of five years. As of March 31, 2001, the investors have converted debentures into 25,984,670 shares of our common stock, and presently have $461,478 of convertible debentures outstanding. Based upon the terms of the convertible debentures, as of March 31, 2001 the outstanding convertible debentures would be convertible into 10,682,361 shares of our common stock. For additional information related to this transaction, see our Registration Statement on Form S-2, and amendments thereto, as filed with the SEC. 6. Certain Relationships And Related Transactions During August 1998, our outside directors unanimously approved our guaranty, for a period of up to 90 days, of $750,000 of the collateral obligations of a family limited partnership (the "Partnership") of our former Chairman to a brokerage house. Under the terms of our agreement with the Partnership, the brokerage house called on our guaranty; the Partnership then executed and delivered to us a promissory note personally guaranteed by our former Chairman in an amount equal to the amount of the guaranty. The note was a six-month note payable on demand and bears interest at the rate of interest of 7-3/4% per annum. In February 1999, accrued interest was paid and the note was extended an additional three months. After becoming due on May 26, 1999, interest was paid and an additional extension of one year was authorized by the Board of Directors. The balance of funds advanced under the note was approximately $647,000 at December 31, 1999, and was included in due from related party in the balance sheets based on our understanding that such amounts were to be repaid during 2000. At the Board meeting on April 27, 2000, the Board of Directors granted an additional eighteen-month extension of the note commencing on September 1, 2000, upon the condition that quarterly payments on the Note commence on September 1, 2000. No such payment was made on September 1, 2000. On October 25, 2000, we accelerated the principal and interest due on the Promissory Note for non-payment. As of March 31, 2001, the amount of the indebtedness is approximately $621,740. We have commenced litigation against the family limited partnership and our former Chairman to collect on the note and personal guaranty of our former Chairman. The amount of the indebtedness is being offset against the payments we are required to make to our former Chairman under the termination without cause provision of his employment agreement. We and an assignee of our former Chairman are parties to an exclusive, worldwide license agreement dated January 31, 1996 ("License Agreement") under which we have the right to manufacture, promote, market and sell all medical, pharmaceutical and health care products and devices created by our former Chairman on or before the date of the License Agreement. The License Agreement is for a term of twenty years with automatic renewals and requires annual fees equal to the greater of (i) 3% of net collected sales revenues from products based upon certain technology or (ii) $10,000, with an aggregate maximum limitation of $10,000,000. The License Agreement replaces an earlier license agreement with similar provisions. Through March 31, 2001, our former Chairman 8 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. Certain Relationships And Related Transactions (Continued) received approximately $686,000 pursuant to the License Agreement (he waived all licensing fees due him for the years ended December 31, 1995 and 1994). Our former Chairman is also party to an employment contract with us. A family limited partnership controlled by our former Chairman is the legal owner of three patents that we have licensed. We are presently in litigation with our former Chairman who is seeking to rescind the license agreement for technology and for other matters. He has filed suit against us, our directors, and our general counsel 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. He is also seeking to rescind the license agreement he signed pursuant to which he licensed patents to us and also asserted that the license agreement includes our TD Glucose technology. We are vigorously defending this lawsuit and believe it is without merit (see - Note 5. Legal Proceedings.) We made a loan to Dr. Block in the amount of $50,000 pursuant to his Employment Agreement with us, which shall be deemed repaid with respect to 50% of the amount due and owing on each of the first two anniversary dates of this agreement as long as Dr. Block remains an employee of us or is not terminated for cause (as defined). The principal amount of this loan bears interest at the London Interbank (LIBOR) rate, as adjusted quarterly, with such principal and accrued interest due on September 1, 2001, subject to such loan being deemed repaid as provided above. As of March 31, 2001, the outstanding principal and interest was $27,137. 7. 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 first quarter of 2001, litigation expenses decreased by 87.5% from the first quarter of 2000. Litigation expenses decreased by 13% for the year ended December 31, 2000 from the prior year. Despite this improvement, we have incurred significant litigation expenses that resulted in a substantial consumption of our cash reserves. Settlement Of Litigation With The Americare Companies And Joseph P. D'Angelo. On February 5, 2001, we settled a patent infringement lawsuit related to our noninvasive TD Glucose Monitoring System as well as all other litigation between us and Americare Health Scan, Inc., its subsidiaries, affiliates and Dr. Joseph P. D'Angelo. The parties agreed to dismiss the various lawsuits and related counterclaims and have entered into mutual releases of all claims relating to the respective legal matters. None of the parties admits any wrongdoing related to claims in the various lawsuits and associated counterclaims. In connection with this settlement and a judgment previously entered pursuant to this litigation, we recorded litigation expense in the amount of $500,000 of which $67,000 remains unpaid and is accrued in the financial statements as of March 31, 2001. Payments pursuant to the Settlement Agreement were made in February and March, 2001 to Americare Health Scan, Inc. The Company maintains that it is the beneficiary of a third party's judgment against Americare Health Scan, Inc. in the amount of approximately $28,300 plus interest and has advised Americare Health Scan, Inc. that the Company is offsetting payments due that Company with the amount of the Judgment against Americare Health Scan, Inc. Americare Health Scan Inc. has made a motion pursuant to the Settlement Agreement in the United States District Court, Southern District of Florida to enforce the Settlement Agreement. Should Americare Health Scan, Inc. be successful in its motion to enforce the Settlement Agreement, such success may have a material adverse effect on our operations and financial condition. The settlement relates to the following cases: Americare Diagnostics, Inc., et al. v. Technical Chemicals and Products, Inc., et al., 97-3654-CIV-HUCK (S.D. Fla.); Joseph P. D'Angelo, et al. v. Technical Chemicals and Products, Inc., Case No. 95-011256(09); Americare Health Scan, Inc., et al. v. Technical Chemicals and Products, Inc., et al., Case No. 99-010726 CACE 18); Technical Chemicals and Products, Inc., et al. v. Joseph P. D'Angelo, et al., Case No. 99-1862-CIV-HUCK (S.D. Fla.) and Technical Chemicals and Products, Inc., et al. v. Joseph P. D'Angelo, et al., Case No. 00-12159 CACE 08. Dismissal Of 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 our former Chairman 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 our former Chairman 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 Monitoring System. The plaintiffs sought certification as a class on an 9 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Legal Proceedings (Continued) unspecified amount of damages, interest, costs and attorneys' fees. On April 19, 1999, an Amended Consolidated Class Action Complaint was served upon us. 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 us and our former Chairman, but granted plaintiffs leave to amend their complaint on or before July 24, 2000. On July 24, 2000, plaintiffs filed a second amended complaint. On August 25, 2000, we filed a motion to dismiss the second amended complaint. On March 20, 2001, the Court issued a Final Order of Dismissal, dismissing with prejudice the second amended complaint. The Plaintiffs have appealed the Dismissal Order to the United States Court of Appeals for the Eleventh Circuit. We believe the allegations lack merit and plans to vigorously contest any appeal. At this time, we cannot reasonably estimate the ultimate loss, if any, related to these claims and therefore have not recorded an accrual for loss as of March 31, 2001. We maintain Directors and Officer's Liability Insurance. However, we cannot provide assurance that this insurance coverage will be adequate to fund the costs of a settlement, an award, if any, or attorneys' fees. Demands have been made upon us that 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 and/or director of us. Home Diagnostics Litigation. In November 1993, we and our former Chairman 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 our former Chairman 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 our former Chairman 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 our former Chairman 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) our former Chairman 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. 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 representations to us in connection with our acquisition of certain assets of the co-defendants Pharma Patch, PLC and PP Holdings, LTD. 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. Mr. Hooper has requested from the Court granting the stay of enforcement of the judgment an increase in the amount of the Bond obtained by the Company to prevent enforcement of Mr. Hooper's judgment. The Company and Hooper have agreed that the amount of the Bond be increased no later than 20 days after the order to increase the amount of the bond is entered. The Company believes that the Bond will need to be increased on or about May 22, 2001. Under the agreed proposed Order submitted by Mr. Hooper and the Company, the amount of the Bond will need to be increased by that date from the current approximate sum of $216,500 to approximately $240,400 10 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Legal Proceedings (Continued) and increased every 90 days thereafter by the sum of approximately $5400. No assurance can be given that the Company will be able to increase the amount of the bond on or about May 22, 2001. The failure to increase the Bond as described above may have a material adverse effect on the Company's operations and financial condition. Should the Company be unable to increase the amount of the Bond, the stay of enforcement of the judgment will be lifted and Mr. Hooper may be able to execute on such judgment. An execution on the judgment will adversely affect the liquidity of the Company which may force the Company to seek protection under the federal bankruptcy laws. We recorded an accrual for loss equal in the amount of $197,807 as of March 31, 2001. On March 7, 2001, Hooper & Associates filed a motion to dismiss our complaint. The Company has responded to this motion. No decision has been rendered by the Court. 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 our former Chairman, 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 its first payment of $112,963 on October 13, 2000. Subsequently, we entered into a modification of this Settlement Agreement with the United States whereby the second quarterly payment will be due on April 16, 2001 and additional payments made quarterly thereafter. The Company did not make the April payment to the United States. Should the United States seek to enforce the provisions of the settlement agreement, such enforcement will adversely affect the liquidity of the Company which may force the Company to seek protection under the federal bankruptcy laws. 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 and/or director of us. We recorded an accrual for loss equal to $650,000 as of March 31, 2001. We are seeking full contribution from our former Chairman for the total amount of the judgment. On January 24, 2001, we filed a claim in the United States District Court Southern District of Florida Case No. 01-6090-CIV - for full contribution and declaratory judgment against our former Chairman. This action seeks to hold our former Chairman fully liable for the 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 its nonliability to our former Chairman for contribution or indemnity. We assert that our former Chairman is 100% responsible for this judgment as it was his conduct prior to our incorporation in January of 1992 that resulted in the judgment against us and our former Chairman (see - Litigation With Former Chairman And Certain Family Limited Partnerships). 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 11 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Legal Proceedings (Continued) 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"). We supply the EVATEST(R) test devices to these Roche entities. 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 asked that Hestia Pharma GmbH refrain from commercializing, using, importing or possessing analytical test devices that 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. On March 29, 2001, we filed our answer with an oral hearing scheduled for May 3, 2001. 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 supplier of these products, previously provided the same indemnity to Roche Diagnostics. A majority of our diagnostic 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. 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 his employment agreement dated September 27, 1996 ("Employment Agreement"). Simultaneously, the board voted to remove Mr. Aronowitz as our Chairman, President and Chief Technical Officer. On December 20, 2000, Mr. Aronowitz resigned as a director of us. He presently owns or controls less than 5% of our outstanding shares of common stock. On September 13, 2000, we and our former Chairman executed a letter of intent that provided, among other things, that his 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 our former Chairman's 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. Subsequent to the execution of the letter of intent, our former Chairman 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. On October 19, 2000, we were served with a Summons and Complaint in an action commenced by our former Chairman 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 our former Chairman) and our general counsel. On November 13, 2000, our former Chairman 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 are vigorously defending 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. Our former Chairman is seeking unspecified damages. On April 3, 2001, we and the named officers and directors filed several motions to dismiss the complaint for being insufficient as a matter of law. The 13 counts in the Complaint are (1) rescission of a Cancellation and Exclusive License Agreement dated January 31, 1996 ("License Agreement"), (2) breach of contract with respect to the Letter of Intent, (3) anticipatory breach of contract with respect to the License Agreement and a previous license agreement, (4) breach of the duty of good faith and fair dealing, which our former 12 TCPI, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. Legal Proceedings (Continued) Chairman claims is owed to him, with respect to the Letter of Intent and the License Agreement (5) alleged fraud in the inducement in the signing by our former Chairman of the Letter of Intent and License Agreement, (6) fraud in the inducement against the individual directors and officer defendants as in count 5, (7) promissory estoppel against us, (8) promissory estoppel against the individual directors and officer defendants, (9) unjust enrichment against us, (10) tortious interference with contract against the individual directors and officer defendants, (11) breach of fiduciary duty against the individual directors and officer defendants, (12) Florida Racketeer Influenced and Corrupt Organizations Act count against the individual directors and officer defendants and (13) common law conspiracy against the individual directors and officer defendants. On November 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 our former Chairman. Our former Chairman 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. On December 15, 2000, we commenced an action in the Superior Court of the State of Delaware in and for New Castle County - against the Aronowitz Delaware 2 Family Limited Partnership, a Delaware limited partnership and successor to the maker of a negotiable promissory note dated August 28, 1998 in the amount $750,000. Our former Chairman 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 $621,740 as of March 31, 2001, together with attorneys' fees. On March 1, 2001, we filed an action against our former Chairman, individually, in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, Case No. 01003764-04 on his personal obligation guaranteeing the note. The net amount due our former Chairman under the termination without cause provision of his Employment Agreement (after deductions for taxes) as well as any other amounts due our former Chairman from us are being applied periodically to the reduction of our former Chairman's Guaranty obligation to us. 8. Other Information On March 20, 2001, the United States District Court for the Southern District of Florida dismissed with prejudice the securities class action lawsuit against us and our former Chairman. The Plaintiffs have appealed the Final Order of Dismissal. On February 5, 2001, we settled a patent infringement lawsuit related to our noninvasive TD Glucose(TM) Monitoring System as well as all other litigation between us and Americare Health Scan, Inc., its subsidiaries, affiliates and Joseph P. D'Angelo. The parties agreed to dismiss the various lawsuits and related counterclaims and have entered into mutual releases of all claims relating to the respective legal matters. None of the parties admits any wrongdoing related to claims in the various lawsuits and associated counterclaims. This litigation is discussed in more detail in Item 7 above. 9. Subsequent Events On April 30, 2001, the annual meeting of shareholders was held. After the election of two directors, Dr. Elliott Block and Dr. Martin Gurkin, the designated proxy holders moved to adjourn the Annual Meeting to allow for further solicitation of proxies with respect to Proposals #2 and #3 relating to Amending TCPI's Amended and Restated Articles of Incorporation. The Annual Meeting of Stockholders was adjourned to Monday, August 20, 2001 at 10:00 a.m. local time at TCPI's offices at 3333 S.W. 15th Street, Pompano Beach, Florida. The proxy holders reported that Proposal #2 received 26,176,236 shares For Adoption; 5,542,039 shares Against; and 49,908 shares Abstained. Proposal #3 received 25,352,883 shares For Adoption; 6,076,348 shares Against; and 342,451 shares Abstained. Proposal #2 of the Proxy Statement is for adoption of proposed Amended and Restated Articles of Incorporation in order to increase the total number of all classes of the Company's capital stock to 275,000,000 shares from 125,000,000; 250,000,000 shares shall have a par value of $.001 and shall be designated Common Stock and 25,000,000 shares shall have a par value of $.001 and shall be designated Preferred Stock. Proposal #3 is for adoption of proposed Amended and Restated Articles of Incorporation to reduce from 60% of the issued and outstanding shares to a majority of the votes cast as the amount of shares required to amend, alter, change or repeal any provision of the Amended and Restated Articles of Incorporation The Company will continue to solicit additional proxies in an effort to obtain a sufficient vote to pass Proposals #2 and #3. No assurance can be given that by the adjournment date for this Annual Meeting, sufficient shares will be voted in favor of Proposal #2 to pass such Proposal nor can any assurance be given that TCPI will be able to fund its operations from today, the immediate future 13 or through the adjourned date for resumption of the Annual Meeting. As disclosed in the Company's Definitive Proxy Statement on Form 14-A, TCPI will be unable to adequately fund its operations without approval of Proposal #2. Without approval of Proposal #2, the Company will not have a sufficient amount of common stock to potentially access any capital sources to immediately fund present operations. The failure to access or utilize such capital sources in the near future will likely put TCPI's operations in grave jeopardy. As disclosed in the Company's Annual Report on Form 10-K for the period ending December 31, 2000, the Company has experienced sustained significant operating losses in 2000 and 1999 that have resulted in substantial consumption of the Company's cash reserves. In addition, the Company expects to continue to incur losses and have negative cash flow for the immediate future. The Company is reducing or delaying expenses, reducing or discontinuing some of its operations, seeking accommodations from its creditors and seeking a purchaser of the Company or all or some of its assets. The Company is engaged in discussions with certain persons in an effort to address its liquidity concerns. Such discussions involve the sale and/or licensing of some or all of the Company's assets. There can be no assurance that the Company will be immediately successful in any of such efforts. Management believes that if the Company is not immediately successful in addressing its liquidity concerns, the Company may be forced to seek protection under the federal bankruptcy laws. On April 9, 2001, we reached an agreement with Roche Diagnostics GmbH to acquire the European distribution channels, certain trademarks and business assets related to the EVATEST(R) (pregnancy), EVAPLAN(R) (ovulation) and other similar trademarked over-the-counter (OTC) family planning products currently marketed by Roche Diagnostics. Since 1992, we continue to be the exclusive supplier of these OTC family planning products that are distributed on a worldwide basis. We will acquire the European business assets for an undisclosed amount that includes the down payment previously paid to Roche Diagnostics and an additional fixed amount to be funded from a percentage of future sales. We were also seeking to acquire the related business assets in South America, but were unable to secure funding to complete that portion of the acquisition. Roche Diagnostics has decided to continue to operate this business in Argentina and Uruguay. We will continue to supply Roche Diagnostics with our family planning products for their distribution in Latin America. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results Of Operations For the three months ended March 31, 2001, our operations experienced higher product sales and lower losses than in the prior year period. Our net sales for the first quarter of 2001 increased by 35% while our net loss attributable to common stockholders declined by more than 53% from the comparable prior a year earlier. Net Sales. Our net sales for the first quarter of 2001 rose by 35% to $1.6 million as compared to net sales of $1.2 million reported in the first quarter a year earlier. This increase reflected sales of our patented SR-38(TM) skin permeation enhancer to LVMH-Moet Hennessy Louis Vuitton, Inc. as well as increased sales of our OEM family planning (pregnancy and ovulation) tests through international distribution channels and expanded retail distribution of its private label home testing products. Sales of our branded HealthCheck(R) home testing products about the same as the first quarter of last year while sales of our biological buffers declined from the same quarter a year ago. Gross Profit. Our gross profit from net sales for the first three months of 2001 increased by 33% to $637,000 as compared to $478,000 in the same period of 2000. Gross profit, expressed as a percent of net sales, for the first quarter of 2001 and 2000 was relatively unchanged at 39.8% and 40.3%, respectively. The increase in gross profit corresponded to the higher net sales achieved in the first quarter of 2001. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Results Of Operations (Continued) Operating Expenses. Our total operating expenses for the first quarter of 2001 decreased by 42% to $1.8 million from $3.1 million in the prior year quarter. The mix of selling, general and administrative; litigation; and research and development expenses are as follows: - Selling, general and administrative (SG&A) expenses declined more than 27% in the first quarter of 2001 to $1.2 million from SG&A expenses of $1.6 million incurred in the first quarter of 2000 as a result of tighter control of expenses. - Litigation expenses in the first quarter of 2001 decreased by 87.5% to $90,000 as compared to $722,000 incurred in the same quarter a year earlier. This decrease in litigation expense reflects the resolution of certain legal matters, including the dismissal with prejudice of a securities class action lawsuit against us and our former Chairman, as well as the settlement of all litigation between us and Americare Health Scan, Inc., its subsidiaries, affiliates, and Joseph P. D'Angelo. - Research and development ("R&D") efforts remained focused on the continued development of our TD Glucose(TM) monitoring technology and development of our cholesterol testing products as well as several new products, including the MicroGlucose(TM) monitoring system. Total R&D expenses declined to $116,000 in the first quarter of 2001 from $290,000 incurred in the first quarter a year ago and reflected internal efforts related to clinical activities for certain key products anticipated to commence during the second quarter of 2001. Net Loss. Our net loss attributable to common stockholders declined by 53.3% to $1.2 million in the first quarter of 2001 from a net loss attributable to common stockholders of $2.6 million in the first quarter of 2000. This improvement was due to a 35% increase in net sales and a 42% decline in operating expenses. Financial Condition We had cash and cash equivalents of $558,000 at March 31, 2001, as compared to cash and cash equivalents of $481,000 at December 31, 2000. We had total current assets of $4.4 million and total current liabilities of $5.4 million at March 31, 2001. Total common stockholders' equity was $15.0 million at March 31, 2001. This compares to total current assets of $4.0 million and total current liabilities of $4.8 million at December 31, 2000 as well as total common stockholders' equity of $13.7 million at December 31, 2000. As discussed above, at March 31, 2001 our total current liabilities exceeded our total current assets resulting in a working capital deficiency of $970,000. This compares to a working capital deficiency of $876,000 at December 31, 2000. We continue to use our cash to fund operations. We require working capital to meet our immediate needs and plans to utilize financing activities to the extent that such financing activities are available to purchase production equipment, conduct clinical trials and regulatory submissions relating to our key products in development for glucose and cholesterol monitoring, develop new diagnostic products, invest in marketing activities, and continue our day-to-day business. No assurance can be given that our financing activities will be successful. In the event that the financing activities are not successful in the immediate future, we may be forced to seek protection under the federal bankruptcy laws in the immediate future. Liquidity And Capital Resources The Company has experienced sustained significant operating losses in 2000 and 1999 that have resulted in substantial consumption of the Company's cash reserves. In addition, the Company expects to continue to incur losses and have negative cash flow for the immediate future. The Company is reducing or delaying expenses, reducing or discontinuing some of its operations, seeking accommodations from its creditors and seeking a purchaser of the Company or all or some of its assets. The Company is engaged in discussions with certain persons in an effort to address its liquidity concerns. Such discussions involve the sale and/or licensing of some or all of the Company's assets. There can be no assurance that the Company will be immediately successful in any of such efforts. Management believes that if the Company is not immediately successful in addressing its liquidity concerns, the Company may be forced to seek protection under the federal bankruptcy laws. Net cash used in operating activities was approximately $100,000 in the first quarter of 2001 as compared to approximately $1.7 million in the same quarter a year earlier. This difference is primarily due to a substantial reduction in our net loss for the first quarter of 2001 to $1.2 million from a net loss of $2.5 million for the first quarter of 2000. This difference also reflected a decrease in accounts receivable of $67,000 in the current year quarter as compared to a decrease of $298,000 in the prior year quarter; a decrease in inventory of $335,000 in the current year quarter from a decrease of $65,000 in the prior year quarter; an increase in other current assets of $246,000 in the current year quarter from an increase of $42,000 in the prior year quarter; an increase in other assets and liabilities in the current year quarter of $31,000 from an increase of $139,000 in the prior year quarter; and an increase in accounts payable and accrued expenses of $535,000 in the current year quarter from $262,000 in the prior year quarter. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity And Capital Resources (Continued Net cash provided by investing activities for the first quarter of 2001 decreased by more than $1.3 million from the first quarter of 2000 due primarily to the sale of $1.2 million in investments that occurred during the first quarter of last year. Financing activities in the first quarter of 2001 generated $223,000 in net cash from proceeds of stock puts and stock options exercised. This compares to $5,000 of net cash generated in the same quarter a year ago from the exercise of stock options. While our net loss for the year ended December 31, 2000 and first quarter of 2001 was reduced from the net loss in the corresponding prior year periods, we have sustained significant operating losses over the past several years that have resulted in a 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 addition, 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 and reduce our operating losses by reducing expenses and/or increasing 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 have entered into investment agreements with Swartz Private Equity, LLC ("Swartz") for the purchase of up to $25 million in common stock under a private equity line and also entered into an agreement through the May Davis Group ("MDG") with GMF Holdings, Inc. ("GMF") for the purchase of up to $10 million of our convertible debentures and have achieved effective registration with the Securities and Exchange Commission. These transactions are subject to certain terms and market conditions related to trading price and volume as well as other contingencies, including the availability of sufficient authorized and unissued common stock. However, the dilutive effect of prior funding transactions has nearly exhausted our present number of authorized shares of common stock and placed us in a position of being unable to proceed with funding opportunities to provide working capital necessary to implement our business plan. In order for us to proceed in raising additional capital, our Board of Directors has unanimously adopted, subject to shareholder approval, a proposal to amend our Amended and Restated Articles of Incorporation and in doing so increasing the number of authorized common shares to 250,000,000 ("Charter Amendment"). For a discussion of the Annual Meeting, its adjournment and the adverse effect that not having obtained sufficient votes to pass and the Charter Amendment has on Company's liquidity, see "Subsequent Events," Part I, ITEM 9 above. If we are unable to successfully obtain funds under these investment agreements due to unfavorable market conditions, lack of authorized common stock, maintain the effectiveness of our current registration statements, issue common or preferred stock or sell debentures or otherwise obtain additional capital from other sources on satisfactory terms, or significantly reduce our operating losses, we would have to consider selling some or all of our technologies, reduce or terminate completely our research and development activities, or reduce or discontinue some or all of our operations, or apply for protection from our creditors under the federal bankruptcy laws. In addition, as described elsewhere in this Form 10-Q, 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. In order to pursue growth and new product development, we would need to incur significant operating expenses and capital expenditures in the future. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity And Capital Resources (Continued Our short-term ability to meet our liquidity requirements and to continue operations have been significantly impaired by the failure of our stockholders to authorize additional shares of common stock. Our immediate working capital and capital expenditure requirements may vary materially from those now planned depending on numerous factors, including: 1. Further reducing or discontinuing some or all of our operations, seeking accomodations from our creditors, seeking a purchaser of the Company or all or some of its assets, and/or seeking protection under the federal bankrupcy laws. 2. our ability to successfully resolve pending litigation; 3. manufacturing costs for our current and future products; 4. our marketing and distribution strategy. Forward Looking Statements This Form 10-Q 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 Form 10-Q and any documents incorporated into this Form 10-Q contain forward-looking statements regarding: 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Forward Looking Statements (Continued) - seeking further accommodations from our creditors, seeking a purchaser or purchasers of the Company or some or all of our assets, and/or seeking protection under the federal bankruptcy laws in the near future; - uncertainties in immediate availability of funding of ongoing operations, risks associated with the Company's ability to negotiate and obtain immediate additional financing, equity investments or strategic transactions on favorable terms or at all; the failure to immediately generate additional liquidity and working capital which may result in the further reducing or delaying of expenses, reducing or discontinuing some or all of the Company's operations; - delays in product development; - our ability to satisfactorily perform clinical trials demonstrating efficacy of our products under development; - the probability and timing of obtaining FDA clearance or approval of our products under development; - our ability to successfully develop and market new products on a profitable basis or at all; - our ability to complete the design, construction and manufacturing scale-up of our products on a timely basis within budget parameters; - future advances in technology and medicine by others that may render our products obsolete; - competition from other pharmaceutical, medical and diagnostic companies; - 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); - uncertainties connected with product liability exposure and insurance; - risks associated with obtaining and maintaining patents and other protections on intellectual property and patents obtained by others that may adversely affect us; and - the results of litigation pending against us, enforcement of judgments, the ability to obtain bonds to prevent enforcement of judgments, 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 document 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. Factors that may cause actual future events to differ significantly from those predicted or assumed include, but are not limited to: the Company's limited cash and sources of liquidity, including the satisfaction of terms and conditions relating to funding, including the on availability of sufficient authorized common stock to access financial facilities now in place or in the future seeking protection under the Federal Bankruptcy Act due to the Company's, limited cash and sources of liquidity ability to obtain stockholder approval to adopt Amended and Restated Articles of Incorporation in order to increase the total number of all classes of the Company's capital stock authorized to be issued, and timing and receipt of proceeds from any funding; uncertainties regarding timing and effectiveness of registration statements; delays in product development; risks associated with the Company's ability to successfully develop and market new products on a profitable basis or at all; availability of labor and sufficient parts and materials; risks related to the early stage of the Company's existence and its products' development; the Company's ability to execute its business plans; the Company's dependence on outside parties such as its key customers, suppliers, licensing and alliance partners; competition from major pharmaceutical, medical and diagnostic companies; risks and expense of government regulation and effects of changes in regulation (including risks associated with obtaining requisite FDA and other governmental approvals for the Company's products); the limited experience of the Company in manufacturing and marketing products; uncertainties connected with product liability exposure and insurance; risks associated with international operations (including risk associated with international economies, currencies and business conditions); risks associated with obtaining and maintaining patents and other 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Forward Looking Statements (Continued) protections of intellectual property; risks associated with uncertainty of litigation and appeals, and the payment or enforcement of judgments; and the influence, if any, a delay in developing the Company's products may have on such funding of operations and for obtaining additional financing, equity investments or strategic transactions, as well as those listed in the Company's other press releases and in its other filings with the Securities and Exchange Commission. The Company may determine to discontinue or delay the development of any or all of its products under development at any time. Moreover, the Company may not be able to successfully develop and market new products, complete planned acquisitions, enter into strategic alliances or implement any or all of its operating strategy unless it is able to generate additional liquidity and working capital. For a complete description of the Company's business, products and liquidity, see the Company's Annual Report on Form 10-K for the year ended December 31, 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS At March 31, 2000, we had only cash and cash equivalents and no investments. However, as of March 31, 2001, the full amount of $1,599,993 of our 6% convertible debentures issued to investors were outstanding. Such debentures are convertible into common shares based on the market price of our common shares at the time of conversion. As a result, a 10% decrease in the market price of our common shares would increase the number of shares issuable upon conversion by approximately 11%. Conversely, an increase in the market price of our common shares of 10% would decrease the shares issuable by approximately 9%. PART II OTHER INFORMATION ITEM 1. 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 first quarter of 2001, litigation expenses decreased by 87.5% from the first quarter of 2000. Litigation expenses decreased by 13% for the year ended December 31, 2000 from the prior year. Despite this improvement, we have incurred significant litigation expenses that resulted in a substantial consumption of our cash reserves. Settlement Of Litigation With The Americare Companies And Joseph P. D'Angelo. On February 5, 2001, we settled a patent infringement lawsuit related to our noninvasive TD Glucose Monitoring System as well as all other litigation between us and Americare Health Scan, Inc., its subsidiaries, affiliates and Dr. Joseph P. D'Angelo. The parties agreed to dismiss the various lawsuits and related counterclaims and have entered into mutual releases of all claims relating to the respective legal matters. None of the parties admits any wrongdoing related to claims in the various lawsuits and associated counterclaims. In connection with this settlement and a judgment previously entered pursuant to this litigation, we recorded litigation expense in the amount of $500,000 of which $67,000 remains unpaid and is accrued in the financial statements as of March 31, 2001. Payments pursuant to the Settlement Agreement were made in February and March, 2001 to Americare Health Scan, Inc. The Company maintains that it is the beneficiary of a third party's judgment against Americare Health Scan, Inc. in the amount of approximately $28,300 plus interest and has advised Americare Health Scan, Inc. that the Company is offsetting payments due that Company with the amount of the Judgment against Americare Health Scan, Inc. Americare Health Scan Inc. has made a motion pursuant to the Settlement Agreement in the United States District Court, Southern District of Florida to enforce the Settlement Agreement. Should Americare Health Scan, Inc. be successful in its motion to enforce the Settlement Agreement, such success may have a material adverse effect on our operations and financial condition. The settlement relates to the following cases: Americare Diagnostics, Inc., et al. v. Technical Chemicals and Products, Inc., et al., 97-3654-CIV-HUCK (S.D. Fla.); Joseph P. D'Angelo, et al. v. Technical Chemicals and Products, Inc., Case No. 95-011256(09); Americare Health Scan, Inc., et al. v. Technical Chemicals and Products, Inc., et al., Case No. 99-010726 CACE 18); Technical Chemicals and Products, Inc., et al. v. Joseph P. D'Angelo, et al., Case No. 99-1862-CIV-HUCK (S.D. Fla.) and Technical Chemicals and Products, Inc., et al. v. Joseph P. D'Angelo, et al., Case No. 00-12159 CACE 08. 19 PART II OTHER INFORMATION (Continued) ITEM 1. Legal Proceedings (Continued) Dismissal Of 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 our former Chairman 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 our former Chairman 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 Monitoring System. The plaintiffs sought 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. 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 us and our former Chairman, but granted plaintiffs leave to amend their complaint on or before July 24, 2000. On July 24, 2000, plaintiffs filed a second amended complaint. On August 25, 2000, we filed a motion to dismiss the second amended complaint. On March 20, 2001, the Court issued a Final Order of Dismissal, dismissing with prejudice the second amended complaint. The Plaintiffs have appealed the Dismissal Order to the Eleventh Circuit Court of Appeal. We believe the allegations lack merit and plans to vigorously contest any appeal. At this time, we cannot reasonably estimate the ultimate loss, if any, related to these claims and therefore have not recorded an accrual for loss as of March 31, 2001. We maintain Directors and Officer's Liability Insurance. However, we cannot provide assurance that this insurance coverage will be adequate to fund the costs of a settlement, an award, if any, or attorneys' fees. Demands have been made upon us that 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 and/or director of us. Home Diagnostics Litigation. In November 1993, we and our former Chairman 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 our former Chairman 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 our former Chairman 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 our former Chairman 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) our former Chairman 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. 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 representations to us in connection with our acquisition of certain assets of the co-defendants Pharma Patch, PLC and PP Holdings, LTD. 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. Mr. Hooper has requested from the Court granting the stay of enforcement of the judgment an increase in the amount of the Bond obtained by the PART II OTHER INFORMATION (Continued) 20 ITEM 1. Legal Proceedings (Continued) Company to prevent enforcement of Mr. Hooper's judgment. The Company and Hooper have agreed that the amount of the Bond be increased no later than 20 days after the order to increase the amount of the bond is entered. The Company believes that the Bond will need to be increased on or about May 22, 2001. Under the agreed proposed Order submitted by Mr. Hooper and the Company, the amount of the Bond will need to be increased by that date from the current approximate sum of $216,500 to approximately $240,400 and increased every 90 days thereafter by the sum of approximately $5400. No assurance can be given that the Company will be able to increase the amount of the bond on or about May 22, 2001. The failure to increase the Bond as described above may have a material adverse effect on the Company's operations and financial condition. Should the Company be unable to increase the amount of the Bond, the stay of enforcement of the judgment will be lifted and Mr. Hooper may be able to execute on such judgment. An execution on the judgment will adversely affect the liquidity of the Company which may force the Company to seek protection under the federal bankruptcy laws. We recorded an accrual for loss equal in the amount of $197,807 as of March 31, 2001. On March 7, 2001, Hooper & Associates filed a motion to dismiss our complaint. The Company has responded to this motion. No decision has been rendered by the Court. 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 our former Chairman, 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 its first payment of $112,963 on October 13, 2000. Subsequently, we entered into a modification of its Settlement Agreement with the United States whereby the second quarterly payment will be due on April 16, 2001 and additional payments made quarterly thereafter. The Company did not make the April payment to the United States. Should the United States seek to enforce the provisions of the settlement agreement, such enforcement will adversely affect the liquidity of the Company which may force the Company to seek protection under the federal bankruptcy laws. 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 and/or director of us. We recorded an accrual for loss equal to $650,000 as of March 31, 2001. We are seeking full contribution from our former Chairman for the total amount of the judgment. On January 24, 2001, we filed a claim in the United States District Court Southern District of Florida Case No. 01-6090-CIV - for full contribution and declaratory judgment against our former Chairman. This action seeks to hold our former Chairman fully liable for the 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 its nonliability to our former Chairman for contribution or indemnity. We assert that our former Chairman is 100% responsible for this judgment as it was his conduct prior to our incorporation in January of 1992 that resulted in the judgment against us and our former Chairman (see - Litigation With Former Chairman And Certain Family Limited Partnerships). 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. 21 PART II OTHER INFORMATION (Continued) ITEM 1. Legal Proceedings (Continued) 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"). We supply the EVATEST(R) test devices to these Roche entities. 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 asked that Hestia Pharma GmbH refrain from commercializing, using, importing or possessing analytical test devices that 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. On March 29, 2001, we filed our answer with an oral hearing scheduled for May 3, 2001. 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 supplier of these products, previously provided the same indemnity to Roche Diagnostics. A majority of our diagnostic 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. 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 his employment agreement dated September 27, 1996 ("Employment Agreement"). Simultaneously, the board voted to remove Mr. Aronowitz as our Chairman, President and Chief Technical Officer. On December 20, 2000, Mr. Aronowitz resigned as a director of us. He presently owns or controls less than 5% of our outstanding shares of common stock. On September 13, 2000, we and our former Chairman executed a letter of intent that provided, among other things, that his 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 our former Chairman's 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. Subsequent to the execution of the letter of intent, our former Chairman 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. On October 19, 2000, we were served with a Summons and Complaint in an action commenced by our former Chairman 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 our former Chairman) and our general counsel. On November 13, 2000, our former Chairman 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 are vigorously defending 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. Our former Chairman is seeking unspecified damages. On April 3, 2001, we and the named officers and directors filed several motions to dismiss the complaint for being insufficient as a matter of law. 22 PART II OTHER INFORMATION (Continued) ITEM 1. Legal Proceedings (Continued) The 13 counts in the Complaint are (1) rescission of a Cancellation and Exclusive License Agreement dated January 31, 1996 ("License Agreement"), (2) breach of contract with respect to the Letter of Intent, (3) anticipatory breach of contract with respect to the License Agreement and a previous license agreement, (4) breach of the duty of good faith and fair dealing, which our former Chairman claims is owed to him, with respect to the Letter of Intent and the License Agreement (5) alleged fraud in the inducement in the signing by our former Chairman of the Letter of Intent and License Agreement, (6) fraud in the inducement against the individual directors and officer defendants as in count 5, (7) promissory estoppel against us, (8) promissory estoppel against the individual directors and officer defendants, (9) unjust enrichment against us, (10) tortious interference with contract against the individual directors and officer defendants, (11) breach of fiduciary duty against the individual directors and officer defendants, (12) Florida Racketeer Influenced and Corrupt Organizations Act count against the individual directors and officer defendants and (13) common law conspiracy against the individual directors and officer defendants. On November 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 our former Chairman. Our former Chairman 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. On December 15, 2000, we commenced an action in the Superior Court of the State of Delaware in and for New Castle County - against the Aronowitz Delaware 2 Family Limited Partnership, a Delaware limited partnership and successor to the maker of a negotiable promissory note dated August 28, 1998 in the amount $750,000. Our former Chairman 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 $621,740 as of March 31, 2001, together with attorneys' fees. On March 1, 2001, we filed an action against our former Chairman, individually, in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, Case No. 01003764-04 on his personal obligation guaranteeing the note. The net amount due our former Chairman under the termination without cause provision of his Employment Agreement (after deductions for taxes) as well as any other amounts due our former Chairman from us are being applied periodically to the reduction of our former Chairman's Guaranty obligation to us. ITEM 2. Changes In Securities In 1998, we issued 15,000 shares of our Series A Redeemable Convertible Preferred Stock (the "Preferred Stock"). We have no shares of our Preferred Stock presently outstanding. The investor converted all 15,000 shares of Preferred Stock into 39,800,473 shares of our common stock as of February 6, 2001. On May 3, 2000, we entered into an equity line investment agreement with Swartz under which 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 also issued to Swartz warrants to purchase our common stock at prices ranging from $0.9375 to $1.9063 per share, subject to adjustment. During 2000, we did not sell any stock to Swartz pursuant to this agreement. As of March 20, 2001, we issued a "put" to Swartz for 3,500,000 shares of our common stock pursuant to this agreement and receive $135,000 in proceeds. Based on the terms of our equity line investment agreement with Swartz and the trading price of our common stock at the time we issued the "put", the parties executed a wavier and agreement to redefine and set the minimum share price and trigger price of the "put". With respect to any future sale or "put" transactions, we may be required to execute a wavier and agreement to redefine and set the minimum share price and trigger price of the "put" if the trading price of our common stock at such time does not meet the terms of our equity line investment agreement with Swartz. On September 5, 2000, we entered into a credit line agreement with GMF Holdings, arranged through May Davis, under which 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 December 22, 2000. To date we have not sold any convertible debentures to GMF Holdings pursuant to this agreement. 23 PART II OTHER INFORMATION (Continued) ITEM 2. Changes In Securities (Continued) For a complete description of the Swartz and GMF Holdings funding transactions, see our Registration Statements on Form S-2, and amendments thereto, as filed with the SEC. In connection with the May Davis securities purchase agreement, we sold to investors $1,599,993 of our 6% convertible debentures that mature at various dates between August 28, 2005 through November 23, 2005. The debentures became convertible into shares of our common stock at any time after 120 days from closing 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. The earliest date for conversion of these debentures was December 26, 2000. In connection with the issuance of the 6% convertible debentures to the investors, we also issued warrants to the investors to purchase 639,997 shares of our common stock. Such issuance 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 respective closing dates. The warrants have an exercise price of $1.50 and a term of five years. As of March 31, 2001, the investors have converted debentures into 25,984,670 shares of common stock, and presently have $461,478 of convertible debentures outstanding. Based upon the terms of the convertible debentures, as of March 31, 2001 the outstanding convertible debentures would be convertible into 10,682,361 shares of common stock. For additional information related to this transaction, see our Registration Statement on Form S-2 as filed with the SEC. 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. If and when we issue shares to Swartz upon exercise of our put rights, it will be at a price equal to the lesser of the market price for each share of our common stock minus $0.10 or 92% of the market price for each share of our common stock. If and when we issue shares to GMF upon conversion of the convertible debentures that we have a right to "put" to GMF, the conversion price of the debentures will be equal to the lesser of $1.40 or 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. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We need additional authorized shares of common stock to raise additional capital necessary for liquidity and to implement our business plan. We have entered into investment agreements with Swartz and May Davis, and achieved effective registration with the Securities and Exchange Commission. These transactions are subject to certain terms and market conditions related to trading price and volume as well as the availability of sufficient authorized and unissued common stock. However, the dilutive effect of prior funding transactions has nearly exhausted our present number of authorized shares of common stock and placed us in a position of being unable to proceed with funding opportunities to provide working capital necessary to implement our business plan. On April 30, 2001, the annual meeting of shareholders was held. The designated proxy holders moved to adjourn the Annual Meeting to allow for further solicitation of proxies with respect to Proposals #2 and #3 relating to Amending TCPI's Amended and Restated Articles of Incorporation. The Annual Meeting of Stockholders was adjourned to Monday, August 20, 2001at 10:00 a.m. local time at TCPI's offices at 3333 S.W. 15th Street, Pompano Beach, Florida. The proxy holders reported that Proposal #2 received 26,176,236 shares For Adoption; 5,542,039 shares Against; and 49,908 shares Abstained. Proposal #3 received 25,352,883 shares For Adoption; 6,076,348 shares Against; and 342,451 shares Abstained. 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued) Proposal #2 of the Proxy Statement is for adoption of proposed Amended and Restated Articles of Incorporation in order to increase the total number of all classes of the Company's capital stock to 275,000,000 shares from 125,000,000; 250,000,000 shares shall have a par value of $.001 and shall be designated Common Stock and 25,000,000 shares shall have a par value of $.001 and shall be designated Preferred Stock. Proposal #3 is for adoption of proposed Amended and Restated Articles of Incorporation to reduce from 60% of the issued and outstanding shares to a majority of the votes cast as the amount of shares required to amend, alter, change or repeal any provision of the Amended and Restated Articles of Incorporation The Company will continue to solicit additional proxies in an effort to obtain a sufficient vote to pass Proposals #2 and #3. No assurance can be given that by the adjournment date for this Annual Meeting, sufficient shares will be voted in favor of Proposal #2 to pass such Proposal nor can any assurance be given that TCPI will be able to fund its operations from today, the immediate future or through the adjourned date for resumption of the Annual Meeting. As disclosed in the Company's Definitive Proxy Statement on Form 14-A, TCPI will be unable to adequately fund its operations without approval of Proposal #2. Without approval of Proposal #2, the Company will not have a sufficient amount of common stock to potentially access any capital sources to immediately fund present operations to meet its current obligations. The failure to access or utilize such capital sources in the near future will likely put TCPI's operations in grave jeopardy, which may require the Company to seek protection under the federal bankruptcy laws. As disclosed in the Company's Annual Report on Form 10-K for the period ending December 31, 2000, the Company has experienced sustained significant operating losses in 2000 and 1999 that have resulted in substantial consumption of the Company's cash reserves. In addition, the Company expects to continue to incur losses and have negative cash flow for the immediate future. The Company is reducing or delaying expenses, reducing or discontinuing some of its operations, seeking accommodations from its creditors and seeking a purchaser of the Company or all or some of its assets. The Company is engaged in discussions with certain persons in an effort to address its liquidity concerns. Such discussions involve the sale and/or licensing of some or all of the Company's assets. There can be no assurance that the Company will be immediately successful in any of such efforts. Management believes that if the Company is not immediately successful in addressing its liquidity concerns, the Company may be forced to seek protection under the federal bankruptcy laws. ITEM 5. OTHER INFORMATION Settlement Of Litigation With The Americare Companies And Joseph P. D'Angelo. ------------------------------------------------------------------------------ On February 5, 2001, we settled a patent infringement lawsuit related to our noninvasive TD Glucose(TM) Monitoring System as well as all other litigation between us and Americare Health Scan, Inc., its subsidiaries, affiliates and Joseph P. D'Angelo. The parties agreed to dismiss the various lawsuits and related counterclaims and have entered into mutual releases of all claims relating to the respective legal matters. None of the parties admits any wrongdoing related to claims in the various lawsuits and associated counterclaims. For additional information on this matter including the potential material adverse effect that current proceedings relating to the settlement may have on our financial condition, see Part II, ITEM 1. Dismissal Of Shareholder Class Action. ------------------------------------- On March 20, 2001, the United States District Court for the Southern District of Florida dismissed with prejudice the securities class action lawsuit against us and our former Chairman. The Plaintiffs have appealed the Final Order of Dismissal to the United States Court of Appeals for the 11th Circuit. Acquisition of Certain Business Assets Of Roche Diagnostics ----------------------------------------------------------- On April 9, 2001, we reached an agreement with Roche Diagnostics GmbH to acquire the European distribution channels, certain trademarks and business assets related to the EVATEST(R) (pregnancy), EVAPLAN(R) (ovulation) and other similar trademarked over-the-counter (OTC) family planning products currently marketed by Roche Diagnostics. Since 1992, we continue to be the exclusive supplier of these OTC family planning products that are distributed on a worldwide basis. We will acquire the European business assets for an undisclosed amount that includes the down payment previously paid to Roche Diagnostics and an additional fixed amount to be funded from a percentage of future sales. We were also seeking to acquire the related business assets in South America, but were unable to secure funding to complete that portion of the acquisition. Roche Diagnostics has decided to continue to operate this business in Argentina and Uruguay. We will continue to supply Roche Diagnostics with our family planning products for their distribution in Latin America. 25 PART II OTHER INFORMATION (Continued) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits

27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TCPI, INC. Date: May 10, 2001 By: /s/ Walter V. Usinowicz, Jr. ------------------------------ Walter V. Usinowicz, Jr. Vice President and Chief Financial Officer (Duly authorized officer and principal accounting officer) 28

TCPI INC 10-Q