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 SEPTEMBER 30, 2000
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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.)
44 ASPEN DRIVE
LIVINGSTON, NEW JERSEY 07039
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(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, Including Area Code (973) 422-1666
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N.A.
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report:
CONTINENTAL CHOICE CARE, INC.
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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes _____ No _____
Applicable only to corporate issuers.
Shares outstanding as of October 24, 2000, 3,923,544 shares of common
stock, no par value.
Transitional Small Business Disclosure Format: Yes ____ No X
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<PAGE>
TECHSYS INC. AND SUBSIDIARIES
FORM 10-QSB
SEPTEMBER 30, 2000
This Report on Form 10-QSB contains "forward-looking statements" that
are based on management's assumptions, estimates and projections. Although these
statements may appear throughout this report, we specifically direct your
attention to the portion of this report entitled "Management's Discussion and
Analysis." Forward-looking statements are generally accompanied by words such as
"believe", "intend", "anticipate", "estimate", "expect" and similar words. The
Company's actual results could differ materially from the results anticipated in
such forward-looking statements as a result of known and unknown risks,
uncertainties and other factors as set forth in the Company's registration
statement (No. 333-45492) filed with the Securities and Exchange Commission on
September 8, 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 as of September 30, 2000 and for the three and nine-month periods
ended September 30, 2000 and 1999 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/A filed with the Securities and Exchange
Commission.
<PAGE>
<TABLE>
<CAPTION>
TECHSYS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS SEPT. 30, 2000 DEC. 31, 1999
-------------- -------------
Current Assets:
<S> <C> <C>
Cash and cash equivalents .................................... $ 711,206 $ 118,245
Investments in U.S. Government securities .................... 500,000 1,580,220
Accounts receivable, less allowance for doubtful
accounts of $7,119 at September 30, 2000 and
$13,543 at December 31, 1999 ............................ 104,449 83,038
Amount due from affiliates ................................... 557,042 504,567
Other current assets ......................................... 172,968 223,239
Notes receivable ............................................. -0- 1,027,000
Pine Tree escrow deposit ..................................... -0- 915,000
----------- -----------
Total current assets ................................... 2,045,665 4,451,309
Note receivable .............................................. 527,000 -0-
Amounts due from officer ..................................... 330,000 330,000
Investment in Technology Keiretsu, LLC ....................... 1,065,251 -0-
Investment in SupportScape, Inc. ............................. 250,000 -0-
Property and equipment, at cost,
less accumulated depreciation ........................... 139,052 134,592
Goodwill and other intangibles,
less accumulated amortization ........................... 186,160 198,214
Other assets ................................................. 112,509 50,579
----------- -----------
$ 4,655,637 $ 5,164,694
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit ............................................... $ 102,500 $ 70,000
Accounts payable ............................................. 465,657 771,773
Accrued expenses ............................................. 764,103 1,560,429
----------- -----------
Total current liabilities ........................... 1,332,260 2,402,202
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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,
3,903,544 shares issued and outstanding at
September 30, 2000 and 3,267,500 at December 31, 1999 .. 8,494,881 5,645,061
Subscription receivable ...................................... (1,050,000) --
Paid-in capital .............................................. 1,255,152 --
Accumulated deficit .......................................... (5,376,656) (2,882,569)
----------- -----------
Total stockholders' equity ............................. 3,323,377 2,762,492
----------- -----------
$ 4,655,637 $ 5,164,694
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.
2
<PAGE>
<TABLE>
<CAPTION>
TECHSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 2000 SEPT. 30, 1999
-------------- -------------- -------------- --------------
Revenues from continuing operations
<S> <C> <C> <C> <C>
Dry cleaning services ................... $ 256,684 $ 290,679 $ 842,682 $ 1,133,760
Consulting services ..................... -0- 83,331 166,662 249,993
----------- ----------- ----------- -----------
256,684 374,010 1,009,344 1,383,753
Costs of services ........................... 230,325 265,141 679,218 904,613
General and administrative expenses ......... 1,235,880 604,542 3,722,091 2,035,478
Depreciation and amortization ............... 15,894 46,454 45,529 146,466
Settlement costs ............................ -0- -0- 322,609 -0-
Interest income, net ........................ (31,275) (2,861) (95,170) (41,450)
Other income ................................ -0- -0- (755,764) -0-
Loss on sale of businesses .................. -0- 427,665 -0- 427,665
Costs of failed acquisition ................. -0- 393,409 -0- 393,409
----------- ----------- ----------- -----------
Total costs and expenses ......... 1,450,824 1,734,350 3,918,513 3,866,181
----------- ----------- ----------- -----------
Loss from continuing operations ............. (1,194,140) (1,360,340) (2,909,169) (2,482,428)
Income from discontinued operations, less
applicable income taxes of $-0- for three
and nine months ended Sept. 30, 2000
and 1999, respectively .................. -0- -0- 415,082 -0-
----------- ----------- ----------- -----------
Net loss .................................... (1,194,140) (1,360,340) (2,494,087) (2,482,428)
(Accumulated deficit) retained earnings,
Beginning of period ...................... (4,182,516) (1,121,099) (2,882,569) 989
----------- ----------- ----------- -----------
End of period ............................ $(5,376,656) $(2,481,439) $(5,376,656) $(2,481,439)
=========== =========== =========== ===========
Basic and diluted (loss) income per share:
Continuing operations .................... $ (.32) $ (.42) $ (.82) $ (.76)
Discontinued operations .................. -0- -0- .12 -0-
----------- ----------- ----------- -----------
Net loss per share ....................... $ (.32) $ (.42) $ (.70) $ (.76)
=========== =========== =========== ===========
Basic and diluted weighted average shares
outstanding .............................. 3,744,436 3,267,500 3,555,017 3,260,687
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
TECHSYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPT. 30,
2000 1999
---------- ----------
(unaudited) (unaudited)
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss ....................................... $(2,494,087) $(2,482,428)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................. 50,283 181,549
Provision for doubtful accounts ................ -0- 15,000
Loss on equity investment ...................... 18,076 -0-
Income from discontinued operations ............ (415,082) -0-
Stock based compensation expense ............... 2,033,152 120,500
Stock issued in settlement ..................... 325,000 -0-
Loss on sale of businesses ..................... -0- 427,665
Changes in operating assets and liabilities:
Increase in accounts receivable, net .... (21,411) (72,541)
(Increase) decrease in other assets ..... (11,659) 59,038
Increase in amounts due from affiliates . (52,475) (73,994)
(Decrease) increase in accounts payable . (306,116) 615,523
Decrease in accrued expenses ............ (796,326) (65,080)
Repayments from Officer ................. -0- 50,000
----------- -----------
Net cash used in operating activities ................ (1,670,645) (1,224,768)
----------- -----------
Cash Flows From Investing Activities:
Repayment of notes receivable .................. 500,000 -0-
Repayment of PineTree deposit .................. 915,000 -0-
Amounts repaid by consulting customers ......... 415,082 -0-
Investment in SupportScape ..................... (250,000) -0-
Investment in Technology Keiretsu, LLC ......... (500,000) -0-
Issuance of notes receivable ................... -0- (1,027,000)
Amounts held in escrow ......................... -0- (915,000)
Purchases of U.S. Government securities ........ (400,000) (4,493,522)
Proceeds from sale of U.S. Government securities 1,480,220 5,000,000
Purchases of property and equipment ............ (42,689) (17,055)
----------- -----------
Net cash provided by (used in) investing activities .. 2,117,613 (1,452,527)
----------- -----------
Cash Flows From Financing Activities:
Net borrowings under line of credit ............ 32,500 228,419
Proceeds from exercise of stock options ........ 63,493 -0-
Proceeds from private placement ................ 50,000 -0-
Principal payments on notes payable ............ -0- (11,887)
----------- -----------
Net cash provided by financing activities ............ 145,993 216,532
----------- -----------
Net increase (decrease) in cash and cash equivalents . 592,961 (2,460,763)
Cash and cash equivalents, beginning of year ......... 118,245 3,058,676
----------- -----------
Cash and cash equivalents, end of period ............. $ 711,206 $ 597,913
----------- ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes ..................... $ 5,682 $ 5,141
=========== ===========
Cash paid for interest ......................... $ 3,901 $ 12,896
=========== ===========
</TABLE>
4
<PAGE>
Non-Cash Disclosures:
In 2000, the Company issued 30,000 shares of common stock to an outside
consultant valued at $180,000 and warrants to purchase 175,000 shares of
the Company's common stock to financial services providers in
consideration of professional services valued at $284,943.
In 2000, the Company issued 181,485 shares of common stock valued at
$1,108,500 in connection with the cashless exercise of stock options.
In 2000, the Company issued 100,000 shares of common stock valued at
$325,000 in connection with a settlement of a failed acquisition.
In 2000, the Company issued warrants to purchase 330,000 shares of the
Company's common stock to members of the Company's Board of Advisors in
consideration of services valued at $459,709.
In 2000, the Company issued 66,666 shares of common stock valued at
$583,327 in connection with the Technology Keiretsu, LLC transaction.
In 2000, the Company issued 200,000 shares of common stock in connection
with the Lazar & Co. IG., LLC transaction.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
5
<PAGE>
TECHSYS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS:
TechSys, Inc., (the "Company"), is currently engaged in the dry cleaning
service business and provides consulting services under agreement. On July 18,
2000, the Company announced the reorganization and reorientation strategy of the
Company to focus on investing in and acquiring information technology
businesses, with particular emphasis on India.
(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 employee stock options and awards,
if dilutive.
For the three and nine months ended September 30, 2000, the basic and
diluted weighted average common shares outstanding were 3,744,436 and 3,555,017,
respectively. For the three and nine months ended September 30, 1999, the basic
and diluted weighted average common shares outstanding were 3,267,500 and
3,260,687. As of September 30, 2000, there were 2,871,100 of outstanding stock
options and warrants issued to employees, officers and Directors of the Company,
as well as 7,500,000 warrants issued to outside services providers and members
of the Company's Board of Advisors, which were excluded from basic and diluted
net income (loss) per share for the period because the effect would be
antidilutive.
(3) LEGAL PROCEEDINGS
The Company has filed a lawsuit against IHS of New York, Inc.("IHS") seeking to
recover approximately $162,000 in unpaid consulting fees due the Company from
IHS pursuant to a Consulting Agreement with IHS dated October 8, 1997. In
addition, upon the sale of assets to IHS an escrow account was created to secure
the indemnity obligations of the Company to IHS. IHS asserted a claim 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 has filed a lawsuit to have certain funds in the escrow
account be released to the Company.
(4) SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2000 Annual Meeting of Shareholders on August 16,
2000. At the meeting, Alvin S. Trenk and Jeffrey B. Mendell were re-elected for
a three-year term as Class III Directors. The Class I Directors, Martin G.
Jacobs, M.D. and Stanley B. Amsterdam are each currently serving three year
terms expiring in 2001. The Class II Director, Steven L. Trenk, is currently
serving a three-year term expiring in 2002. There were 3,384,837 votes approving
the re-election of the Class III Directors while 7,800 abstained.
In addition, four other items were submitted and approved at the Company's
2000 Annual Meeting. The following is a brief description of each matter voted
upon and the corresponding results of voting.
6
<PAGE>
1. To approve the sale and issuance of 200,000 shares of the Company's Common
Stock and a warrant to purchase up to 6,800,000 shares of additional Common
Stock to Lazar & Co. I.G., LLC.
For - 1,761,002, Against - 14,500, Abstain - 13,500
2. To approve the issuance of warrants to purchase up to an aggregate of
1,350,000 shares of Common Stock to certain key employees and officers.
For - 1,618,602, Against - 169,100, Abstain - 1,300
3. To approve the adoption of the Company's 2000 Incentive Compensation Plan.
For - 1,635,352, Against - 152,050, Abstain - 1,600
4. To approve the Amendment to the Company's Certificate of Incorporation to
change the name of the Company to TechSys, Inc.
For - 3,387,937, Against - 3,800, Abstain - 900
(5) RELATED PARTY TRANSACTIONS:
As of December 31, 1999, the Company had advanced $504,567 to TechTron,
Inc. ("TechTron") During 2000, an additional $52,475 was advanced to TechTron.
The Company has obtained 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 has notified the
Company that it has received proceeds from settled litigation and intends to
repay the Company for advances made by the Company to TechTron. Repayment is
anticipated within the next twelve months.
Several promissory notes and associated guarantees of related parties were
in default under the original terms of the notes. As of September 30, 2000,
amounts due the Company from TechTron totaled $557,042. All amounts due from
TechTron are guaranteed by Certain Executive Officers as defined below. Of this
amount, $125,868 was secured by a promissory note dated August 9, 1994. Under
the original terms of this note, principal and interest were due and payable by
December 31, 1996. The terms of the note were amended by the Company to become
due and payable on demand. Any demand for payment under the personal guarantees
will have to be made by the Company's Board of Directors. The Company's Board of
Directors does not currently intend to make demand for payment.
On November 16, 1999, the Company sold its majority interest in United Dry
Cleaning, LLC ("United") to UDC Acquisition Corp, Inc. ("UDC"), an Arizona
corporation, pursuant to terms of a Stock Purchase Agreement. The majority of
the outstanding common stock of UDC is owned by Jeffrey M. Trenk, brother of
Steven L. Trenk, the Company's Chairman and President, son of Alvin S. Trenk,
the Company's Chairman of the Executive Committee, and Martin G. Jacobs, the
Company's Medical Director, collectively, the Certain Executive Officers. The
aggregate purchase price for the Company's stock interest, $10,000, was offset
against amounts due to Jeffrey M. Trenk from the Company.
7
<PAGE>
Under the terms of the sale, UDC acquired substantially all of the assets
and liabilities of United at the time of sale. The Company recognized a gain
related to the transaction of $755,764 in the second quarter of 2000, not
previously recognized due to pending litigation by Ultimate Cleaners, Inc. to
foreclose on the assets which it sold to United. The Company has been notified
by UDC that it has executed a settlement agreement with Ultimate Cleaners, Inc.
The sale to UDC 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 gain
of $755,764 is included in other income in the accompanying Consolidated
Statements of Operations. As of September 30, 2000, the Company has advanced
$19,084, net of repayments, to UDC. The Company has obtained demand promissory
notes for the advances. The notes bear interest at a rate of 8% per annum and
have been guaranteed by Jeffrey M. Trenk, President of UDC.
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. 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.
(6) 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
("Merger Agreement") to merge the two companies in a stock-for-stock transaction
(the "Merger"). On September 21, 1999, the Company terminated the Merger
Agreement upon determining that financing for the proposed transactions would
not be available on terms acceptable to the Company. During 1999, the Company
recorded $272,173 in failed acquisition costs consisting primarily of legal and
accounting expenses relating to the merger.
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. The notes bore interest at a rate of 12% per annum and were
due and payable on April 30, 2000.
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.
8
<PAGE>
At a closing 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 America
and various other 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 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 the second
anniversary of the note date, then 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.
At the closing, 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.
In connection with the above, the Company became obligated at the time of
closing to issue 100,000 shares of the Company's common stock 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. The 100,000 shares of common stock were issued by the Company on
April 21, 2000 and valued at $325,000 based on the fair market value of the
common stock issued.
(7) ALLIANCE WITH ALLIANT TECHNOLOGIES, INC.
On March 22, 2000, the Company formed a strategic alliance with 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.
On August 31, 2000, the Company purchased a 2% equity interest in
Technology Keiretsu, LLC ("TK"), Alliant's parent company, pursuant to a
Purchase Agreement. 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. Under the terms of the Agreement, the Company is
entitled to purchase an additional 1% equity in TK subject to certain
conditions.
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.
(8) PURCHASE AGREEMENT
On August 21, 2000, the Company sold Lazar & Company I.G., LLC ("Lazar"), a
New York limited liability company, 200,000 shares of the Company's common stock
and a warrant to purchase 6,800,000 additional shares of the Company's common
stock at an exercise price of $3.00 per share, pursuant to a Purchase Agreement.
The rights to purchase the shares vest in five portions based upon targets
relating to the market capitalization of the Company.
9
<PAGE>
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. The purchase price for the warrant was $350,000, for an
aggregate purchase price of $1,100,000 (the "Purchase Price"). Lazar paid the
Company $50,000 in cash, and delivered a $1,050,000 secured recourse promissory
note with an interest rate of 7% per annum as payment of the Purchase Price.
In addition to the Purchase Agreement, the Company 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.
(9) INVESTMENT IN SUPPORTSCAPE, INC.
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.
(10) OTHER MATTERS
On January 3, 2000, the Company granted a warrant to purchase up to an
aggregate of 100,000 shares of its common stock to a financial services provider
in which the Chairman of the Executive Committee is a founding partner at an
exercise price of $2.00, which was the fair market value of the Company's common
stock on the date of grant. The warrant has an estimated value of $62,300 based
on the Black- Scholes option pricing model and such amount has been expensed in
the accompanying Consolidated Statements of Operations.
On March 22, 2000, the Company granted a warrant to purchase up to an
aggregate of 50,000 shares of its common stock to Alliant, at an exercise price
of $3.00. The warrant has an estimated value of $176,200 based on the
Black-Scholes option pricing model and such amount has been expensed in the
accompanying Consolidated Statements of Operations.
During 2000, the Company issued 181,485 shares of its common stock in
connection with the cashless exercise of stock options issued under the
Company's 1994 Long-Term Incentive Award Plan and the 1997 Equity Incentive Plan
as well as 53,393 shares in connection with the exercise of warrants issued to a
professional services provider in 1997. The Company recorded $1,108,500 in stock
option compensation expense relating to the issuance of these shares in the
accompanying Consolidated Statements of Operations.
On May 3, 2000, the Company received an additional payment of $415,082 from
Upper Manhattan Dialysis Center, Inc. ("UMDC"), a New York corporation to which
the Company provided consulting and administrative services. The Company
recorded such amount as additional revenues from 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.
10
<PAGE>
On July 6, 2000, the Company granted a warrant to purchase up to an
aggregate of 25,000 shares of its common stock to a financial services provider.
The warrant has an estimated value of $46,443 based on the Black-Scholes option
pricing model and such amount has been expensed in the accompanying Consolidated
Statements of Operation.
During 2000, the Company granted as warrant to purchase up to an aggregate
of 330,000 shares of its common stock to the Company's newly formed Board of
Advisors. The warrants have exercise prices ranging form $4.00 to $8.25. The
warrants are being accounted for over the vesting period utilizing variable plan
accounting. The warrants have been valued at $459,709 utilizing the Black-
Scholes option pricing model.
(11) SUBSEQUENT EVENTS
On October 16, 2000, the Company signed a letter of intent to acquire a
controlling interest in an India-based software services Company which also has
a U.S. presence. Consummation of the transaction is dependent upon the
completion of a definitive agreement and related financing. No assurance can be
given that the Company will be able to obtain financing for the transaction, or,
if financing is obtained on terms acceptable to the Company, that the
transaction will otherwise be consummated.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000 Compared with Nine Months Ended
September 30, 1999.
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 nine months ended September 30, 2000 and 1999, the Company
recognized $166,662 and $249,993, respectively, for consulting services under
this agreement. The Company has not recognized revenues of $83,331 for
consulting services provided for the three month period ended September 30, 2000
due to IHS's failure to make payment. IHS is currently in default under the
terms of the Consulting Agreement. The Company has instituted legal action
against IHS to demand all amounts due the Company (See Item (3) Legal
Proceedings).
Beginning 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 provided 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.
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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., pursuant to terms of a Stock Purchase Agreement.
In November 1999, the Company formed a new subsidiary, Valet-USA, Inc.
("Valet"), to provide dry cleaning services to focus primarily on the
hospitality industry in the Phoenix, Arizona area. As of October 31, 2000, Valet
provides guest, drapery and linen dry cleaning services to approximately 146
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. Further, management believes 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.
REVENUES
The Company's dry cleaning operation recognized revenues of $842,682 and
$1,133,760 in 2000 and 1999, respectively. Revenues in 2000 are lower than in
1999 due to the Company divesting itself of the retail dry cleaning business
during 1999. Of these amounts, approximately $154,788 and $559,271 or 18% and
49% in 2000 and 1999, respectively, related to dry cleaning services provided
relating to the retail operation. The remaining $687,894 and $574,489 related to
dry cleaning services provided to hotel customers. The Company anticipates that
hotels will continue to be the major source of 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.
In 2000, the Company recorded $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 $679,218 and $904,613 or 81% and 80% of revenues
attributable to the Company's dry cleaning business in 2000 and 1999,
respectively. Expenses in 2000 are lower than in 1999, due to the Company
divesting itself of the retail dry cleaning business during 1999. Cost of
services is mostly comprised of $487,802 and $727,555 in salaries and other
payroll expenses as well as $94,476 and $128,429 for supplies in 2000 and 1999,
respectively. Management continues to seek ways to reduce Valet's costs and to
increase revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $3,722,091 in 2000, as compared
with $2,035,478 in 1999. The net increase of $1,686,613 is primarily comprised
of an increase of approximately $235,000 in legal expenses, the issuance of
30,000 shares of common stock valued at $180,000 to an outside consultant (See
Note 3 to the Consolidated
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Financial Statements), warrants to purchase the Company's common stock
issued to financial services providers and the Company's Board of Advisors
valued at $744,652 and $1,108,500 in compensation expense related to the
cashless exercise of stock options, offset by a decrease of $432,266 related to
the Company's closing and sale of dry cleaning businesses in 1999 and $156,445
related to salaries and other office expenses due to a reduction in corporate
staff resulting from the IHS transaction.
STOCK OPTION EXPENSE
Stock option expense of $1,108,500 was recorded in 2000. The expense
related to the issuance of 181,485 shares in connection with the cashless
exercise of stock options issued under the Company's 1994 Long Term Incentive
Award Plan and the 1997 Equity Incentive Plan.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense for 2000 and 1999 totaled $50,283
and $181,549. The decrease of $131,266 from 1999 resulted from the sale of
assets in connection with the sale of dry cleaning stores and plants to their
original owners in 1999, as well as the sale of the Company's majority interest
in United to UDC Acquisition in November, 1999.
INTEREST INCOME AND INTEREST EXPENSE
Net interest income was $95,170 and $41,450 in 2000 and 1999, respectively.
The net increase of $53,720 from 1999 resulted from the reduction of interest
expense related to the release of obligations under the purchase price
promissory notes executed in connection with the original purchase of retail dry
cleaning facilities.
INCOME TAXES
All of the Company's deferred tax assets as of September 30, 2000 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 $592,961 for the nine
months ended September 30, 2000. Net cash used in operating activities of
$1,670,645 related primarily to the net loss of $2,494,087, the income from
discontinued operations of $415,082 and the decrease in accrued expenses of
$796,326 offset by non-cash stock based compensation expense of $1,527,000 and
stock issued in settlement of $325,000. Net cash provided by investing
activities of $2,117,613 reflects the proceeds from the sale of U.S. Government
securities as well as repayments of amounts loaned to TelaLink and receipt of
amounts held in escrow relating to the Pine Tree Telephone and Telegraph Company
("PTCC") Stock Purchase Agreement, offset by minority interest investments in
Information Technology companies. Net cash provided by financing activities of
$145,993 related primarily to proceeds from the exercise of stock options as
well as a private placement of the Company's common stock.
The Company has made advances to certain affiliates and consulting
customers. As of December 31, 1999, the Company had advanced $504,567 to
TechTron. During 2000, the Company advanced an additional $52,475 to TechTron.
The Company has obtained demand promissory notes from
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TechTron for all of the advances, of which the majority of notes issued
bear an 8% rate of interest. Interest of approximately $105,000 has accrued
through September 30, 2000, but has not been recorded. 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 within the next twelve months. 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 expects that the repayment of amounts due the Company from
TechTron, amounts due from UMDC for unpaid consulting and administrative
services, its cash, cash equivalents and investments in U.S. Government
securities will be sufficient to fund the Company's operations through September
30, 2001. The Company expects to receive amounts due from UMDC following the
second RRI closing where RRI is expected to pay the remainder of the purchase
price for the assets of UMDC sold to RRI in January 1998 pursuant to an Asset
Purchase Agreement. There can, however, be no assurance that the second RRI
closing will be consummated or that the other payments will be made. If the
transaction is not consummated, or the other payments not received, the Company
may require additional financing to fund its operations.
In 1999, the Company arranged for a $100,000 line of credit to fund its
dry cleaning operation. The line bore interest at a rate of 8% per annum and was
payable on demand. The line of credit was with a company owned by the Chairman
of the Company's Executive Committee. In 1999, the Company arranged for a
$250,000 line of credit for Valet to fund the daily operations. The line bears
interest at a rate of 8% per annum and is payable on demand. The line of credit
is also with a company owned by the Chairman of the Company's Executive
Committee. As of September 30, 2000, $147,500 of debt availability remained on
the line.
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Employment Agreement dated as of September 5, 2000 by and between
TechSys, Inc. and H. William Gordon (incorporated by reference to the
Company's Current Report on Form 8K filed on September 22, 2000.)
10.71 Office lease Agreement between G.S.505 Park, LLC and
Continental Choice Care, Inc. for the lease of premises located at
505 Park Avenue, New York, New York.
10.72 Agreement dated September 21, 2000 between TechSys, Inc. and
Ryan Beck.
10.73 Agreement dated September 21, 2000 among TechSys, Inc.,
Josephthal, Lyon & Ross, Inc., Randy F. Rock, Mark E. Brett, Jerald
Belofsi and John E. D'Elise.
(b) A report on Form 8-K was filed by the Company on October 12, 2000
relating to an Exchange Agreement between the Company and Technology
Keiretsu, LLC whereby the Company exchanged its interest in Little
Universe, LLC for an increase in the Company's interest in Technology
Keiretsu, LLC.
A report on Form 8-K was filed by the Company on September 22, 2000
relating to the Company entering into an employment agreement with H.
William Gordon to serve as the Company's Chief Executive Officer.
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A report on Form 8-K was filed by the Company on September 7, 2000
relating to the Company's purchase of a 2% interest in Technology
Keiretsu, LLC.
A report on Form 8-K was filed by the Company on September 5, 2000
relating to the Company's sale of securities to Lazar & Company,
I.G., LLC.
A report on Form 8-K was filed by the Company on August 24, 2000
relating to the Company's name change and Nasdaq symbol change.
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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: November 14, 2000 By: /s/Steven L. Trenk
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Steven L. Trenk
President, and Chief Operating Officer
Date: November 14, 2000 /s/ Mark N. Raab
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Mark N. Raab
Chief Financial Officer
Principal Financial Officer
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