FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2001
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- OR -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-24542
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TECHSYS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEW JERSEY 22-3276736
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
147 COLUMBIA TURNPIKE
FLORHAM PARK, NEW JERSEY 07932
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(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, Including Area Code (973) 236-1919
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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 12 months (or for 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
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Applicable only to corporate issuers.
Shares outstanding as of August 7, 2001, 4,703,544 shares of common stock,
no par value.
Transitional Small Business Disclosure Format: Yes ____ No X
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TECHSYS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements .................................... 2
Consolidated Balance Sheets
as of June 30, 2001 (unaudited)
and December 31, 2000 ................................... 2
Consolidated Statements of Operations
for the Three and Six Months Ended
June 30, 2001, (unaudited) and June 30, 2000
(unaudited) ............................................. 3
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 2001 (unaudited) and June 30, 2000
(unaudited) ............................................. 4
Notes to Consolidated Financial Statements
(unaudited) ............................................. 5
Item 2. Management's Discussion and Analysis or Plan of
Operation ............................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................14
Item 6. Exhibits and Reports on Form 8-K ........................15
SIGNATURES ................................................................16
TECHSYS INC. AND SUBSIDIARIES
FORM 10-QSB
JUNE 30, 2001
This Report on Form 10-QSB contains "forward-looking statements" that
are based on management's assumptions, estimates and projections. When used in
this report, the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "intend" and similar expressions are intended to identify
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 regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, operating results and financial
position. Current stockholders and prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors, including, without limitation, the uncertainty of the Company's ability
to succeed in its business strategy to acquire companies in the technology
industry and ability to increase the number of commercial hotels serviced by its
dry cleaning business. Such factors are described under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business-Dry Cleaning Business" in the Company's Form 10-KSB
filed with the Securities and Exchange Commission on April 2, 2001 and other
factors as set forth in the Company's registration statement (No. 333-47756)
filed with the Securities and Exchange Commission on October 11, 2000.
PART I. FINANCIAL INFORMATION
The comparative consolidated statements of operations, balance sheets
and statements of cash flows for TechSys, Inc. and Subsidiaries (the "Company")
are presented with management's discussion and analysis of material changes in
operations on the pages which follow.
The consolidated financial statements and accompanying financial
information for the three and six month periods ended June 30, 2001 and 2000 are
unaudited but, in the opinion of management, include all adjustments (consisting
only of normal recurring adjustments and accruals) which the Company considers
necessary for a fair presentation of the financial position of the Company at
such dates and the operating results and cash flows for those periods. Results
for the interim periods are not necessarily indicative of results for the entire
year. The interim consolidated financial statements and the related notes should
be read in conjunction with the notes to the consolidated financial statements
of the Company included in its Form 10-KSB filed with the Securities and
Exchange Commission.
TECHSYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, 2001 DEC. 31, 2000
------------- -------------
Current Assets:
Cash and cash equivalents .............................................. $ 1,569,255 $ 32,447
Investments in U.S. Government securities .............................. -0- 500,000
Accounts receivable, less allowance for doubtful accounts of $13,512
at June 30, 2001 and $11,786 at December 31, 2000 ................. 98,276 101,202
Amounts due from consulting customers .................................. -0- 1,279,891
Note receivable ........................................................ 527,000 -0-
Amount due from affiliates ............................................. 355,022 355,022
Acquisition costs ...................................................... 293,447 -0-
Other current assets ................................................... 245,552 247,400
----------- -----------
Total current assets .............................................. 2,795,105 2,515,962
Note receivable ........................................................ -0- 527,000
Amounts due from officer ............................................... 330,000 330,000
Investment in Technology Keiretsu, LLC ................................. 1,065,251 1,065,251
Investment in SupportScape, Inc. ....................................... 250,000 250,000
Property and equipment, at cost, less accumulated depreciation ......... 115,063 138,690
Goodwill and other intangibles, less accumulated amortization .......... 174,107 182,143
Other assets ........................................................... 86,731 129,025
----------- -----------
$ 5,109,704 $ 5,138,071
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit ......................................................... $ 102,500 $ 102,500
Accounts payable ....................................................... 412,681 324,145
Accrued expenses ....................................................... 413,561 368,119
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Total current liabilities ...................................... 928,742 794,764
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Commitments and Contingencies
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized, none issued or outstanding ___ ___
Common stock, no par value, 20,000,000 shares authorized,
3,923,544 shares issued and outstanding at June 30, 2001
and December 31, 2000 ............................................. 8,535,279 8,535,279
Paid-in capital ........................................................ 1,976,746 2,180,913
Accumulated deficit .................................................... (5,485,230) (5,322,885)
Subscription receivable ................................................ (845,833) (1,050,000)
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Total stockholders' equity ........................................ 4,180,962 4,343,307
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$ 5,109,704 $ 5,138,071
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The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
2
TECHSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(UNAUDITED)
Three Months Ended Six Months Ended
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
Revenues from continuing operations
Dry cleaning services .................... $ 273,657 $ 270,081 $ 603,955 $ 585,998
Consulting services ...................... 47,223 83,331 47,223 166,662
----------- ----------- ----------- -----------
320,880 353,412 651,178 752,660
Costs of services ............................. 249,793 226,264 504,017 454,226
General and administrative expenses ........... 409,935 827,630 919,788 2,486,212
Depreciation and amortization ................. 13,595 11,830 27,191 24,302
Costs of failed acquisition ................... -0- -0- -0- 322,609
Interest income, net .......................... (22,212) (35,276) (37,473) (63,896)
Gain on sale of business ...................... -0- (755,764) -0- (755,764)
----------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES ................. 651,111 274,684 1,413,523 2,467,689
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS ...... (330,231) 78,728 (762,345) (1,715,029)
----------- ----------- ----------- -----------
BENEFIT FOR INCOME TAXES ...................... -0- -0- (226,500) (157,000)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS ................. (330,231) 78,728 (535,845) (1,558,029)
----------- ----------- ----------- -----------
INCOME FROM DISCONTINUED OPERATIONS, LESS
APPLICABLE INCOME TAXES OF $226,500 AND
$157,000 FOR THE SIX MONTHS ENDED JUNE 30, 2001
AND 2000, RESPECTIVELY ................... -0- -0- 373,500 258,082
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................. (330,231) 78,728 (162,345) (1,299,947)
----------- ----------- ----------- -----------
ACCUMULATED DEFICIT
BEGINNING OF PERIOD ...................... (5,154,999) (4,261,244) (5,322,885) (2,882,569)
----------- ----------- ----------- -----------
END OF PERIOD ............................ $(5,485,230) $(4,182,516) $(5,485,230) $(4,182,516)
=========== =========== =========== ===========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
CONTINUING OPERATIONS .................... $ (.08) $ .02 $ (.14) $ (.45)
----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS .................. -0- -0- .10 .07
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE .............. $ (.08) $ .02 $ (.04) $ (.38)
=========== =========== =========== ===========
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING .............................. 3,923,544 3,595,181 3,923,544 3,459,267
=========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE SHARES ............... 3,923,544 4,399,284 3,923,544 3,459,267
=========== =========== =========== ===========
OUTSTANDING
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
TECHSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
2001 2000
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(UNAUDITED) (UNAUDITED)
Cash Flows From Operating Activities:
Net loss ............................................................. $ (162,345) $(1,299,947)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................................... 35,919 32,789
Loss on equity investment......................................... -0- 18,078
Income from discontinued operations............................... (600,000) (415,082)
Stock based compensation expense.................................. -0- 1,527,000
Stock issued in settlement........................................ -0- 325,000
Changes in operating assets and liabilities:
Accounts receivable........................................ 2,926 (3,876)
Other assets............................................... (249,305) 1,645
Amounts due from affiliates ............................... -0- (43,515)
Accounts payable........................................... 88,536 (372,228)
Accrued expenses........................................... 45,442 (817,979)
----------- -----------
Net cash used in operating activities ................................. (838,827) (1,048,115)
----------- -----------
Cash Flows From Investing Activities:
Repayment of notes receivable..................................... -0- 500,000
Repayment of PineTree deposit..................................... -0- 915,000
Amounts repaid by consulting customers............................ 1,879,891 415,082
Investment in Little Universe LLC................................. -0- (250,000)
Proceeds from sale of U.S. Government securities.................. 500,000 1,480,220
Purchases of property and equipment............................... (4,256) (10,619)
----------- -----------
Net cash provided by investing activities.............................. 2,375,635 3,049,683
----------- -----------
Cash Flows From Financing Activities:
Net borrowings under line of credit............................... -0- 32,500
Proceeds from exercise of stock options........................... -0- 6,250
----------- -----------
Net cash provided by financing activities.............................. -0- 38,750
----------- -----------
Net increase in cash and cash equivalents.............................. 1,536,808 2,040,318
Cash and cash equivalents, beginning of year........................... 32,447 118,245
----------- -----------
Cash and cash equivalents, end of period............................... $ 1,569,255 $ 2,158,563
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes........................................ $ 9,258 $ 5,682
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Cash paid for interest............................................ $ 3,326 $ 2,870
=========== ===========
Non-Cash Disclosures:
The Company issued 30,000 shares of common stock to an outside consultant
valued at $180,000 and 150,000 warrants to financial services providers in
2000 in consideration of professional services valued at $238,500.
The Company issued 181,485 shares of common stock valued at $1,108,500 in
2000 in connection with the cashless exercise of stock options.
The Company issued 100,000 shares of common stock in 2000 valued at
$325,000 in connection with a settlement of a failed acquisition.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
TECHSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS:
TechSys, Inc. (the "Company") is in the business of investing in and acquiring
technology businesses based in emerging markets and operates a dry cleaning
business that provides dry cleaning services primarily to the hospitality
industry in the Phoenix, Arizona area.
(2) INCOME (LOSS) PER SHARE:
Basic income (loss) per share represents net income (loss) divided by the
weighted average shares outstanding. Diluted income (loss) per share represents
net income (loss) divided by the weighted average shares outstanding adjusted
for the incremental dilution of outstanding stock options and warrants, if
dilutive.
For the three and six months ended June 30, 2001, the basic and diluted weighted
average common shares outstanding were 3,923,544. For the three months ended
June 30, 2000, the basic weighted average common shares outstanding were
3,595,181, and the weighted average common shares outstanding assuming dilution
was 4,399,284. The difference of 804,103 relates to incremental shares issuable
relating to dilutive stock options and warrants. For the six months ended June
30, 2000, the basic and diluted weighted average common shares outstanding were
3,459,267. As of June 30, 2001, there were outstanding options to purchase
2,801,100 shares of the Company's common stock issued to employees, officers and
Directors of the Company and warrants to purchase 1,267,500 shares of the
Company's common stock issued to outside service providers which were excluded
from basic and diluted net income (loss) per share for the period because the
effect would be antidilutive.
(3) RELATED PARTY TRANSACTIONS:
As of June 30, 2001, the Company has advanced $355,022 to TechTron, Inc.
("TechTron") net of repayments. Most of the outstanding shares of TechTron, Inc.
are owned by Alvin S. Trenk, a Director of the Company, Martin G. Jacobs, M.D.,
Director of the Company and Steven L. Trenk, Chairman of the Board of Directors
and President of the Company (collectively "Certain Executive Officers"). The
Company has obtained promissory notes from TechTron for all of the advances. The
majority of the notes issued in connection with these advances bear interest at
a rate of 8% per annum and are payable upon demand. TechTron notified the
Company in 2000 that it had received proceeds from settled litigation and
intends to repay the Company for advances made by the Company to TechTron.
Repayment is anticipated in 2001.
On March 21, 2000, the Company awarded 30,000 shares of the Company's common
stock, valued at $180,000, as additional compensation to Jeffrey M. Trenk.
Jeffrey M. Trenk currently provides consulting services to the Company's dry
cleaning operation. Jeffrey M. Trenk is the son of Alvin S. Trenk, nephew of
Martin G. Jacobs and brother of Steven L. Trenk, collectively, the Certain
Executive Officers. The Company has recorded $180,000 in general and
administrative expenses relating to the issuance of these shares in the
accompanying Consolidated Statements of Operations.
5
On January 29, 1998, Upper Manhattan Dialysis Center, Inc. ("UMDC") sold
substantially all of its assets to Renal Research Institute, LLC ("RRI") for an
aggregate purchase price of approximately $7,984,000. Fifty percent of the
outstanding common stock of UMDC is owned by Certain Executive Officers.
On January 29, 1998 (the "First RRI Closing") the Company received approximately
$2,665,000 from UMDC. Subsequent to the First RRI Closing, the Company received
additional payments aggregating $415,082 in 2000 and $310,000 in 1998 from UMDC
through December 31, 2000. In February 2001, RRI paid UMDC additional amounts
aggregating approximately $3,279,000, representing the remainder of the purchase
price less the net value of certain current assets retained by UMDC. In
connection with the payments made to UMDC by RRI, the Company received
$1,279,890 in additional payments due from UMDC. In April 2001, the Company
received an additional payment of $600,000 from UMDC as repayment of all
remaining amounts due from UMDC as well as amounts assigned to the Company by
Certain Executive Officers. Accordingly, as of June 30, 2001 and for the year
ended December 31, 2000 respectively, the Company recorded $600,000 and
$1,694,972 in additional revenues related to payments from UMDC not previously
recorded as receivables due to realization uncertainties. Such revenues are
included in income from discontinued operations.
(4) FAILED MERGER:
On February 5, 1999, the Company and TelaLink Network, Ltd., a privately held
Delaware corporation ("TelaLink") executed an Agreement and Plan of Merger
("TelaLink Merger Agreement") to merge the two companies in a stock_for_stock
transaction (the "TelaLink Merger"). On September 21, 1999, the Company
terminated the TelaLink Merger Agreement upon determining that financing for the
proposed transactions would not be available on terms acceptable to the Company.
As of the date of termination, the Company had loaned a total of $1,027,000 to
TelaLink and its affiliates to provide working capital pursuant to promissory
notes made by TelaLink in favor of the Company bearing an interest rate of 12%
per annum which were due and payable on April 30, 2000. On January 19, 2000, the
Company sold its interests in the TelaLink notes, as discussed below.
In addition to amounts loaned to TelaLink, the Company also entered into a Stock
Purchase Agreement (the "Stock Purchase Agreement") by and among the Company,
Pine Tree Telephone and Telegraph Company ("PTTC") and the principal (95%)
stockholder of PTTC, whereby the Company agreed to purchase not less than 95% of
PTTC's issued and outstanding capital stock. PTTC is a telecommunication
services provider to areas near Lewiston and Portland, Maine. To secure the
Company's rights under the Stock Purchase Agreement, the Company deposited the
sum of $915,000 in an escrow account. The deposit was to be treated as a
non-refundable deposit against the purchase price to be paid by the Company at
closing, or otherwise in accordance with the Stock Purchase Agreement.
On January 19, 2000, the Company received $1,463,800 and subsequent payment of
$1,538 pursuant to the terms of an Inter-Party Agreement by and among the
Company, Quorum Communications, Inc., TelaLink, Country Road Communications,
Inc. ("Country Road"), Prudential Insurance Company of
6
America and various other unrelated third parties. Under the terms of the
agreement, the Company sold its interest in the various TelaLink notes totaling
$1,027,000 to Country Road for a purchase price of up to $1,100,000 of which
$500,000 was paid at closing and the balance paid in the form of a promissory
note. The note bears interest at a rate of 6.5% per annum and matures January
19, 2005. Interest is due and payable in annual installments on January 19,
2001, the first of which was received by the Company by such date, and on each
anniversary thereafter up to and including the maturity date. Country Road has
the right to prepay the note. If Country Road makes aggregate payments equal to
$500,000 plus accrued and unpaid interest thereon prior to January 19, 2002, the
obligation will be deemed satisfied in full. Under certain conditions, Country
Road may be required to prepay a principal amount of $500,000 plus accrued and
unpaid interest.
The Company also received reimbursement of the $915,000 PTTC deposit plus
accrued interest of $50,338 in exchange for the Company assigning all of its
rights and obligations under the PTTC Stock Purchase Agreement.
On April 21, 2000, the Company issued 100,000 shares of the Company's common
stock , with a fair market value of $325,000, to a third party equity investor
of TelaLink Network, Ltd. in exchange for the release of any and all claims and
liens that it may have the right to assert against TelaLink and the Company.
This value is included in costs of failed acquisition in 2000.
(5) INVESTMENTS IN INFORMATION TECHNOLOGY BUSINESSES
On August 31, 2000, the Company purchased a 2% equity interest in Technology
Keiretsu, LLC ("TK"), the parent company of Alliant Technologies, Inc.
("Alliant"). Alliant is a provider of Internet technology solutions for business
that offers a complete range of services, including strategic business
consulting, e-commerce application development, business process engineering and
infrastructure engineering. The purchase price for the Company's interest was
$250,000 cash and 66,666 shares of the Company's common stock valued at
$583,327, or $8.75 per share, which was the fair market value of the stock on
the date the transaction was consummated. On September 29, 2000, the Company
executed an Exchange Agreement whereby the Company exchanged its 25% interest in
Little Universe, LLC ("LU"), acquired from Alliant in April 2000 for $250,000,
for an additional 1% equity interest in TK. Prior to the exchange the Company
had recorded $18,076 in loss related to their equity portion of LU's loss. The
investment in TK is carried at cost.
On September 1, 2000, the Company purchased a 4% equity interest in
SupportScape, Inc. The all-cash purchase price for the Company's interest was
$250,000. SupportScape is a web resource which provides real time customer
support to e-businesses through personalized mail response service to customers
through online query forms and e-mails as well as live one-to-one chat. The
investment in SupportScape is carried at cost.
(6) Purchase Agreement
On August 21, 2000, the Company sold to Lazar & Company I.G., LLC ("Lazar"), a
New York limited liability company, 200,000 shares of the Company's common stock
and a warrant (the "Lazar Warrant") to purchase 6,800,000 additional shares of
the Company's common stock at an exercise price of $3.00 per share. The rights
to purchase the shares were to vest in five portions based upon targets relating
to the market capitalization of the Company.
7
The purchase price for the 200,000 shares of common stock was $750,000, or $3.75
per share, which was the fair market value of the stock on the date the
agreement was executed and the purchase price for the warrant was $350,000,
resulting in an aggregate purchase price of $1,100,000 (the "Purchase Price").
Lazar paid the Company $50,000 in cash, and delivered to the Company a
$1,050,000 secured recourse promissory note (the "Note"), with an interest rate
of 7% per annum for a term of three years, as payment of the Purchase Price. The
Note is included in stockholders' equity as a subscription receivable.
On December 5, 2000, the Company entered into an agreement with Lazar whereby
the Company obtained the right under certain circumstances to purchase from
Lazar portions of the Lazar Warrant. The purchase price would be paid by the
Company by a reduction of the unpaid principal amount due from Lazar pursuant to
the Note. The Company's right to purchase portions of the Lazar Warrant extended
for a period of 180 days from the date of the agreement. As of June 30, 2001,
the Company exercised its entire available purchase rights and purchased an
aggregate of rights to purchase 5,950,000 shares under the Lazar Warrant at an
aggregate exercise price of $204,167.
In August 2000, in connection with the Lazar Warrant, the Company also issued
warrants to purchase up to an aggregate of 1,350,000 shares of common stock at
an exercise price of $3.00 per share to Certain Executive Officers. The rights
to purchase the shares vest in five portions based upon targets relating to the
market capitalization of the Company. As of December 31, 2000, the first portion
of shares purchasable under the warrant, representing 168,750 shares, were
exercisable based upon the first targeted market capitalization of the Company
being achieved. The Company recorded a compensation charge of $1,012,500 in 2000
relating to the vested portion of the warrants.
(7) SUBSEQUENT EVENTS - FUEL CELL COMPANY ACQUISITIONS
The Company and Fuel Cell Companies, Inc., a privately held Nevada corporation,
("FCCI"), entered into an Agreement and Plan of Merger, (the "Merger Agreement")
pursuant to which the Company was to merge a wholly-owned subsidiary of the
Company with and into FCCI in a stock-for-stock transaction (the "Merger").
On August 2, 2001, the Company, FCCI and certain executive officers of FCCI
entered into an Exchange Agreement dated July 31, 2001 (the "Exchange
Agreement") pursuant to which the Merger Agreement was terminated by mutual
consent and the Company acquired from FCCI all of the capital stock of Micro
Fuel Cell Systems, Inc., ("MFCS") SOFC Energy, Inc., ("SOFC Energy") and Clean
Power Industries, Inc., (CPI") owned by FCCI including all such capital stock
previously owned, directly or indirectly, by the executive officers of FCCI,
representing approximately 82%, 84% and 100% of the outstanding equity of
MFCS, SOFC Energy and CIP, respectively. As a result of this transaction, the
Company is now in the fuel cell technology business.
SOFC Energy is a company strategically partnered with Adelan, Ltd. ("Adelan"),
which is located in Birmingham, England. SOFC Energy is a Solid Oxide Fuel Cell
commercialization company developing proprietary systems and products related to
the portable, automotive, residential, and commercial sectors utilizing Adelan's
Solid Oxide Fuel Cell technology. As a result of the strategic relationship with
Adelan, SOFC Energy holds worldwide exclusive rights to all exploitation of
Adelan's Solid Oxide Fuel Cell technologies related to Adelan's Solid Oxide Fuel
Cell fuel processing and its patents pending. Early commercialization
applications where Solid Oxide Fuel Cells are expected to find dominant and
competitive positions include portable power systems and auxiliary power units
for trucks, automobiles and recreational vehicles.
8
MFCS is a company enrolled in the Technology Affiliates Program with the
California Institute of Technology ("CalTech"), and the Jet Propulsion
Laboratory ("JPL"), a federally funded research and development facility managed
by CalTech for the National Aeronautics and Space Administration ("NASA"). As a
result of the affiliate relationships with JPL and CalTech, MFCS holds exclusive
rights to all exploitation of the micro DMFC technologies that are currently
patent pending to JPL and CalTech. To date, JPL and CalTech have filed the first
of what is expected to be multiple patents for micro DMFC related technologies
and processes. Micro DMFCs produce electricity from the simple components of
methanol, water and air. The DMFC converts the energy in methanol into an
electric current, and will be used to power portable electronic devices such as
cell phone, PDAs, laptops, and other small electronic devices.
The Company acquired FCCI's equity interests in SOFC Energy and MFCS in exchange
for the Company's purchase and cancellation of notes (the "FCCI Notes") of FCCI
for loans in the aggregate principal amount of $700,000, together with accrued
interest thereon. The loans to FCCI were made by a New York lender ("the
Lender") in which a Company Director is a founding partner. The Company issued
to the Lender a promissory note ("the Company Promissory Note") for $725,866,
representing principal plus accrued interest on the FCCI Notes as of the date of
the transaction. The Company Promissory Note has an interest rate of 8% and is
due and payable on or before October 29, 2001. In connection with the
transaction, the Lender assigned all of its interest in the Company Promissory
Note to TechTron which was the 100% participant in the loans to FCCI made by the
Lender.
Pursuant to the Exchange Agreement, the Company issued 780,000 shares of common
stock to FCCI with an approximate value of $1,021,800, or $1.31 per share, which
was the fair market value of the Company's common stock on the date of the
transaction. The 780,000 shares represent consideration paid by the Company to
secure the additional stock interests in SOFC Energy and MFCS held by FCCI's
executive officers and to secure certain non-competition covenants of FCCI and
its executive officers and agreements necessary for the Company to properly
consummate the transaction.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Six Months Ended June 30, 2001 Compared with Six Months Ended June 30, 2000.
On October 8, 1997, the Company completed the sale of substantially all its New
Jersey, New York,
Connecticut and Pennsylvania dialysis business assets to IHS of New York, a New
York corporation ("IHS"). Following the IHS closing, the Company's sources of
revenue included amounts payable for consulting services to be provided to IHS
through October 2000, at a rate of $27,777 per month. For the six months ended
June 30, 2001 and 2000, the Company recognized $47,223 and $166,662,
respectively, for consulting services under this agreement. The reduction in
2001 revenue versus the prior year revenue is due to the expiration of the
agreement in October, 2000. Amounts recorded in 2001 relate to payments received
by the Company in July, 2001 pursuant to a settlement agreement between the
Company and IHS which were previously unrecorded by the Company due to
realization uncertainties. (See Part II, Item 1. - Legal Proceedings).
In May 1998, the Company began acquiring dry cleaning businesses through a newly
formed subsidiary, United Dry Cleaning, L.L.C. ("United") in the Phoenix,
Arizona area. This area was selected for its rapid growth in construction and
development and increase in population, which the Company believes would provide
United with growth potential. United's objective was to capitalize on the trend
toward consolidation of small closely held companies where critical mass could
be achieved with limited capital expenditure.
During the first three quarters of 1999, United closed six of the eleven retail
facilities it had acquired or formed during 1998. During the same period, United
sold three retail facilities back to the original sellers. The sales were made
in consideration of the release of United's obligations under the purchase price
promissory notes executed in connection with the original purchases. On November
16, 1999, the Company sold its majority interest in United to UDC Acquisition
Corp., Inc.
In November 1999, the Company formed Valet-USA, Inc. ("Valet") a wholly-owned
subsidiary, to provide dry cleaning services to focus primarily on the
hospitality industry in the Phoenix, Arizona area. As of August 7, 2001, Valet
provided employee, guest, drapery and linen dry cleaning services to
approximately 184 hotel customers in the Phoenix area. The Company believes that
it can generate higher revenues from the hospitality business than it derived
from the retail business and that the Company will benefit due to a reduction in
personnel, supplies, capital equipment lease obligations and real property
leases as a result of the sale of the retail business. Valet currently operates
a single plant and drop store from a leased location.
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REVENUES
The Company's dry cleaning operation revenues were $603,955 and $585,998 for the
six months ended June 30, 2001 and 2000, respectively. Of these amounts,
approximately $509,121 and $478,971 or 84% and 82% in 2001 and 2000,
respectively, related to dry cleaning services provided to hotel customers. The
remaining $94,834 and $107,027 in 2001 and 2000, respectively, related to retail
dry cleaning services. The Company anticipates that hotels will continue to be
the major source of dry cleaning revenue. Valet continues to target additional
businesses in the Phoenix, Arizona area to maximize plant capacity usage as well
as broaden the Company's revenue base.
For the six months ended June 30, 2001 and 2000, respectively, the Company
recorded $600,000 and $415,082 in additional revenues related to payments from
Upper Manhattan Dialysis Center, Inc. ("UMDC"), not previously recorded due to
realization uncertainties. Such amount has been included in income from
discontinued operations in the accompanying Consolidated Statements of
Operations.
COST OF SERVICES
Cost of services was $504,017 and $454,226 or 83% and 78% of revenues
attributable to the Company's dry cleaning business in 2001 and 2000,
respectively. Cost of services is mostly comprised of $345,909 and $322,024 in
salaries and other payroll expenses as well as $60,157 and $66,429 for supplies
for the six months ended June 30, 2001 and 2000, respectively. Management
continues to seek ways to reduce Valet's costs and to increase revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $919,788 for the six months ended
June 30, 2001, as compared with $2,486,212 for the six months ended June 30,
2000. The net decrease of $1,566,424 relates primarily to $1,108,500 in
compensation expense recorded in 2000 related to the cashless exercise of stock
options and $418,500 in consulting expense in connection with the issuance of
30,000 shares of common stock valued at $180,000 to an outside consultant (See
Note 3 to the Consolidated Financial Statements) and warrants to financial
services providers valued at $238,500.
COSTS OF FAILED ACQUISITION
In connection with a failed acquisition and as part of a settlement agreement,
the Company became obligated at the time of settlement closing to issue 100,000
shares of the Company's common stock to a third party equity investor of
TelaLink Network, Ltd. ("TelaLink") in exchange for the release of any and all
claims and liens that it may have the right to asset against TelaLink and the
Company. Such shares were issued in 2000 and valued at $325,000, the fair market
value. This amount is included in costs of failed acquisition in 2000 (See Note
4 to the Consolidated Financial Statements).
GAIN ON SALE OF BUSINESS
On November 16, 1999, the Company sold its majority interest in United to UDC
Acquisition Corp., Inc. ("UDC Acquisition"), an Arizona corporation. The
majority of the outstanding common stock of UDC Acquisition is owned by Jeffrey
M. Trenk, brother of Steven L. Trenk, son of Alvin S. Trenk and nephew of Martin
G. Jacobs, collectively, the Certain Executive Officers. The sale included net
fixed assets of $199,292, a write-off of net goodwill of $588,959 offset by a
relief from liabilities of $1,544,015. The Company recognized a gain related to
the transaction of $755,764 in the second quarter of 2000, when certain
contingencies were resolved.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense for the six months ended June 30, 2001 and
2000 totaled $35,919 and $32,789, respectively, of which $8,728 and $8,487 is
included in cost of services.
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INTEREST INCOME AND INTEREST EXPENSE
Net interest income was $37,473 and $63,896 for the six months ended June 30,
2001 and 2000, respectively. The decrease of $26,423 relates primarily to the
decrease in cash and cash equivalents available for investment by the Company.
INCOME TAXES
All of the Company's deferred tax assets as of June 30, 2001 have been offset by
a valuation allowance as a result of the Company's operating results.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a positive net cash flow of $1,536,808 for the six
months ended June 30, 2001. Net cash used in operating activities of $838,827
related primarily to the income from discontinued operations of $600,000 as well
as the Company's net loss of $162,345. Net cash provided by investing activities
of $2,375,635 reflects amounts repaid by consulting customers of $1,879,891 as
well as proceeds from the sale of U.S. Government securities of $500,000.
As of December 31, 2000, the Company had advanced $355,022 to TechTron, net of
repayments. The Company has obtained demand promissory notes from TechTron for
all of the advances, of which the majority of notes issued bear an 8% rate of
interest. Interest of approximately $133,000 has accrued through June 30,2001,
but has not been recorded due to realization uncertainty. TechTron has notified
the Company that they have received proceeds from settled litigation to repay
advances made by the Company to TechTron. Repayments of the advances to TechTron
is expected in 2001. All amounts due from TechTron are unsecured and are
guaranteed by Certain Executive Officers in their capacities as Officers and
Directors of TechTron.
The Company will need to obtain additional financing to fund the Company's newly
acquired fuel cell subsidiary operations. There can be no assurance that the
Company will be able to obtain adequate financing. The Company expects that its
cash and cash equivalents will be sufficient to fund the Company's operations
through March 31, 2002.
In 1999, the Company arranged for a $250,000 line of credit for Valet to fund
its daily operations. The line bears interest at a rate of 8% per annum and is
payable on demand. The line of credit is with a company owned by a Director of
the Company. As of June 30, 2001, $147,500 of debt availability remained on the
line.
RECENT DEVELOPMENTS
On January 29, 1998 (the "First RRI Closing") the Company received approximately
$2,665,000 from UMDC. Subsequent to the First RRI Closing, the Company received
additional payments aggregating $415,082 in 2000 and $310,000 in 1998 from UMDC
through December 31, 2000. In February 2001, RRI paid UMDC additional amounts
aggregating approximately $3,279,000, representing the remainder of the purchase
price less the net value of certain current assets retained by UMDC. In
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connection with the payments made to the Company by RRI, the Company received
$1,279,890 in additional payments due from UMDC. In April 2001, the Company
received an additional payment of $600,000 from UMDC as repayment of all
remaining amounts due from UMDC as well as amounts assigned to the Company by
Certain Executive Officers. Accordingly, in 2001 and 2000 respectively, the
Company recorded $600,000 and $1,694,972 in additional revenues related to
payments from UMDC in 2001 and 2000 not previously recorded as receivables due
to realization uncertainties. Such revenues are included in income from
discontinued operations.
On December 5, 2000, the Company entered into an agreement with Lazar whereby
the Company obtained the right under certain circumstances to purchase from
Lazar portions of the Lazar Warrant. The purchase price would be paid by the
Company by a reduction of the unpaid principal amount due from Lazar pursuant to
the Note. The Company's right to purchase portions of the Lazar Warrant extended
for a period of 180 days from the date of the agreement. As of June 30, 2001,
the Company exercised its entire available purchase rights and purchased an
aggregate of rights to purchase 5,950,000 shares under the Lazar Warrant at an
aggregate exercise price of $204,167.
On April 5, 2001 the Company and Fuel Cell Companies, Inc., a privately held
Nevada corporation, ("FCCI"), entered into an Agreement and Plan of Merger, (the
"Merger Agreement") pursuant to which the Company was to merge a wholly-owned
subsidiary of the Company with and into FCCI in a stock-for-stock
transaction,(the "Merger").
On August 2, 2001, the Company, FCCI and certain executive officers of FCCI
entered into an Exchange Agreement dated July 31, 2001 (the "Exchange
Agreement") pursuant to which the Merger Agreement was terminated by mutual
consent and the Company acquired from FCCI all of the capital stock of Micro
Fuel Cell Systems, Inc., ("MFCS") SOFC Energy, Inc., ("SOFC Energy") and Clean
Power Industries, Inc., (CPI")owned by FCCI including all such capital stock
previously owned, directly and indirectly by the executive officers of FCCI,
representing approximately 82%, 84% and 100% of the outstanding equity of
MFCS, SOFC Energy and CIP, respectively. As a result of this transaction, the
Company is now in the fuel cell technology business.
SOFC Energy is a company strategically partnered with Adelan, Ltd. ("Adelan"),
which is located in Birmingham, England. SOFC Energy is a Solid Oxide Fuel Cell
commercialization company developing proprietary systems and products related to
the portable, automotive, residential, and commercial sectors utilizing Adelan's
Solid Oxide Fuel Cell technology. As a result of the strategic relationship with
Adelan, SOFC Energy holds worldwide exclusive rights to all exploitation of
Adelan's Solid Oxide Fuel Cell technologies related to Adelan's Solid Oxide Fuel
Cell fuel processing and its patents pending. Early commercialization
applications where Solid Oxide Fuel Cells are expected to find dominant and
competitive positions include portable power systems and auxiliary power units
for trucks, automobiles and recreational vehicles.
MFCS is a company enrolled in the Technology Affiliates Program with the
California Institute of Technology ("CalTech"), and the Jet Propulsion
Laboratory ("JPL"), a federally funded research and development facility managed
by CalTech for the National Aeronautics and Space Administration ("NASA"). As a
result of the affiliate relationships with JPL and CalTech, MFCS holds exclusive
rights to all exploitation of the micro DMFC technologies that are currently
patent pending to JPL and CalTech. To date, JPL and CalTech have filed the first
of what is expected to be multiple patents for micro DMFC related technologies
and processes. Micro DMFCs produce electricity from the simple components of
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methanol, water and air. The DMFC converts the energy in methanol into an
electric current, and will be used to power portable electronic devices such as
cell phone, PDAs, laptops, and other small electronic devices.
The Company acquired FCCI's equity interests in SOFC Energy and MFCS in exchange
for the Company's purchase and cancellation of notes (the "FCCI Notes") of FCCI
for loans in the aggregate principal amount of $700,000, together with accrued
interest thereon. The loans to FCCI were made by a New York lender ("the
Lender") in which a Company Director is a founding partner. The Company issued
to the Lender a promissory note ("the Company Promissory Note") for $725,866,
representing principal plus accrued interest on the FCCI Notes as of the date of
the transaction. The Company Promissory Note has an interest rate of 8% and is
due and payable on or before October 29, 2001. In connection with the
transaction, the Lender assigned all of its interest in the Company Promissory
Note to TechTron which was the 100% participant in the loans to FCCI made by the
Lender.
Pursuant to the Exchange Agreement, the Company issued 780,000 shares of common
stock to FCCI with an approximate value of $1,021,800, or $1.31 per share, which
was the fair market value of the Company's common stock on the date of the
transaction. The 780,000 shares represent consideration paid by the Company to
secure the additional stock interests in SOFC Energy and MFCS held by FCCI's
executive officers and to secure certain non-competition covenants of FCCI and
its executive officers and agreements necessary for the Company to properly
consummate the transaction.
PART II
ITEM 1 - LEGAL PROCEEDINGS
In connection with the Company's sale of assets to IHS of New York ("IHS") in
October 1997, an escrow account was created to secure the indemnity obligation
of the Company to IHS. IHS asserted a claim against the escrow of approximately
$142,000 for indemnification of certain liabilities not assumed by IHS as part
of the IHS Purchase Agreement. The Company responded and defended against the
claim and in September 2000 the Company filed a lawsuit in the Supreme Court of
New Jersey against IHS seeking the release of certain funds from escrow to the
Company and seeking to recover $162,000 in unpaid consulting fees due to the
Company from IHS pursuant to a consulting agreement with IHS dated October 8,
1997.
In June 2001, the Company executed a Settlement Agreement and General Release
(the "Settlement Agreement") by and among the Company, Alpha Administration
Corp. ("Alpha"), a former consulting customer of the Company, and IHS. Under the
Settlement Agreement, IHS paid the Company $75,000 in satisfaction of all unpaid
consulting fees pursuant to the consulting agreement and agreed to the release
of the balance of the escrow account to the Company in exchange for
indemnification by Alpha for certain liabilities. The Company received the
$75,000 consulting payment and the balance of $141,290 in the escrow account was
released to the Company in July 2001.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K.
On April 30, 2001, the Company filed with the SEC a Current Report on Form 8-K
reporting an event under Item 5 - Other Events.
On May 4, 2001, the Company filed with the SEC an Amendment to a Current Report
on Form 8-K/A amending the Current Report on Form 8-K filed with the SEC on
April 30, 2001 reporting an event under Item 5 - Other Events.
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SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TECHSYS, INC.
Date: August 14, 2001 By: /s/ Steven L. Trenk
- ------------------------ -----------------------
Steven L. Trenk
Chairman and President
(Principal Executive Officer)
Chief Operating Officer
Director
Date: August 14, 2001 /s/ Mark N. Raab
- ------------------------ ----------------
Chief Financial Officer
Principal Financial Officer
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