SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2000
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-27592
TECH LABORATORIES, INC.
(Exact name of Small Business issuer in its charter)
New Jersey 22-1436279
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
955 Belmont Avenue, North Haledon, New Jersey 07508
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code: (973) 427-5333
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Check whether the issuer (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 [_]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form and no disclosure will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $1,017,518
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock, as of a specified date within the last 60
days. On March 21, 2001, the aggregate market value of voting stock held by non-
affiliates, based on the closing price as quoted on the OTC Bulletin Board under
the symbol "TCHL", was $3,217,031.
The number of shares of common stock outstanding as of April 2, 2001: 4,259,944
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TECH LABORATORIES, INC.
FORM 10-KSB
Table of Contents
Page
----
Part I ................................................................................. 1
Item 1. Description of Business ............................................... 1
Item 2. Description of Property ............................................... 6
Item 3. Legal Proceedings ..................................................... 6
Item 4. Submission of Matters to a Vote of Securityholders .................... 7
Part II ................................................................................. 7
Item 5. Market for Common Equity and Related Stockholder Matters .............. 7
Item 6. Discussion and Analysis or Plan of Operation .......................... 9
Item 7. Financial Statements .................................................. 11
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .................................................. III-1
Part III................................................................................. III-1
Item 9. Directors, Executive Officers, Promotors and Control Persons;
Compliance with Section 16(a) of the Exchange Act ..................... III-1
Item 10. Executive Compensation ................................................ III-2
Item 11. Security Ownership of Certain Beneficial Owners and Management ........ III-3
Item 12. Certain Relationships and Related Transactions ........................ III-4
Item 13. Exhibits and Reports on Form 8-K ...................................... III-5
Signature Page .......................................................................... III-6
TECH LABORATORIES, INC.
Form 10-KSB
Forward-looking Statements
Statements made in this Form 10-KSB that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
federal securities laws. These statements often can be identified by the use of
terms such as "may," "will," "expect," "anticipate," "estimate," or "continue,"
or the negative thereof. Such forward-looking statements speak only as of the
date made. Any forward-looking statements represent management's best judgment
as to what may occur in the future. However, forward-looking statements are
subject to risks, uncertainties, and important factors beyond the control of
Tech Labs that could cause actual results and events to differ materially from
historical results of operations and events and those presently anticipated or
projected. These factors include, but are not limited to, those discussed under
the caption "Factors That May Affect Future Events" in Item 6 of this Form
10-KSB. Tech Labs disclaims any obligation subsequently to revise any
forward-looking statements to reflect events or circumstances after the date of
such statement or to reflect the occurrence of anticipated or unanticipated
events.
Part I
Item 1. Description of Business.
BUSINESS
General
Tech Laboratories, Inc. manufactures and sells various electrical and
electronic components. During 2000, we marketed and continued to develop
DynaTraX(TM) high-speed digital switch matrix system, an electronic switching
unit. We believe that DynaTraX(TM) technology will enable us to become a
provider of multi-media digital network distribution, security and management
equipment for use in campus and building facilities. This equipment manages
voice, video and data transmissions on a network.
In addition, during the last three years, through our subsidiary, Tech
Logistics, Inc., we have been manufacturing and marketing under our exclusive
license, an infrared perimeter intrusion and anti-terrorist detection system or
"IDS." The IDS was originally designed for military applications, and we
currently market this product to government agencies and private industry for
use in nuclear, industrial and institutional installations.
Historical Business
We also manufacture and sell standard and customized transformers, test
equipment and rotary switches, the latter of which products permits an
electrical signal to be diverted from point A to point B. In addition, we act as
a contract manufacturer for other companies and produce on an OEM basis
electronic and electrical assemblies, printed circuit board assemblies, cable
and harness assemblies and specialized electronic equipment. Approximately 15%
of our products are manufactured for military applications.
We sell our switch, transformer and test equipment products in the
electronics and electrical industries, primarily as a contract manufacturer for
other companies or for inclusion in OEM products. We market our products in
these industries in the United States. This is a mature market. Competition is
on the basis of price and service. Pricing of our products is based upon
obtaining a margin above cost of production. The margin we will accept varies
with quantity and the channels of distribution.
It continues to be our intention to market our historical products over the
Internet, as well as through our distribution and outside sales agents. Our
website is currently on-line. Our website address is www.techlabsinc.com.
1
The DynaTraX(TM) Asset Acquisition - Material Terms of Purchase Agreement
On April 27, 1999, we completed the purchase of the DynaTraX(TM) product
from NORDX/CDT, Inc. for a purchase price of $500,000. In connection with the
acquisition of DynaTraX(TM) technology, we acquired certain inventory, patents
and patent applications, and other equipment related to the DynaTraX(TM)
product.
Industry
DynaTraX(TM) Networking Management and Maintenance Technology
We believe that the future potential and market for "digital" multi-media,
including Internet, high-speed data, digital voice and video, and information
equipment and systems is substantial. We are using our DynaTraX(TM) technology
to produce a line of standard, digital telecommunication distribution and
management equipment that OEM's and/or Value-Added-Resellers will be able to use
as a platform they can custom configure, through software, to supply a variety
of industry and customer-specific applications and functions.
We entered into an agreement in October 1999 with TravelNet Technologies,
Inc. to sell the "Data Valet" software system which runs on a Dynatrax(TM)
distributing switch system. This system provides high-speed, bundled,
multi-media Internet and video services to business travelers and hotel guests.
This integrated system also monitors and bills guests for services used. The
agreement expires on September 10, 2002.
The TravelNet Agreement provides that Tech Labs and TravelNet will jointly:
o promote DynaTraX(TM) and the Data Valet products in trade shows;
o share the costs of trade show participation;
o select and pay for retaining an advertising agency;
o training of sales personnel; and
o share information, literature, sales projections, sales leads and
technical support.
We are attempting to build industry recognition for producing private,
customer-premise (community, commercial, educational and hospitality complexes,
and residential buildings), high-speed Internet, Long Distance, Intranet
information distribution and management switching systems.
We continue to believe the future trend in communications is reselling
local loop services, which is the service connection between the local phone
company's local office and the telephone customer, using new digital
transmission technology and equipment to get around the present "de facto
monopoly" telephone and CATV companies maintain over local connection and
distribution services.
The DynaTraX(TM) product, we believe, offers a faster switch and a much
larger port size than any competing product and is not limited to a specific
type of network as with some competing products. Port size refers to the number
of network connections available for user equipment and for network distribution
equipment.
DynaTraX(TM) is being marketed for sale in the multi-media digital network
distribution and management equipment industry. The growth in digital networks
is clear as is the cost in supporting and maintaining these networks. We are
presently marketing the DynaTraX(TM) product in the eastern portion of the
United States with expansion to other markets over time. In addition, we are
presently site-testing the DynaTrax(TM) system at various locations.
Our goal is to have DynaTraX(TM) technology play a large role in helping
developers, builders and/or managers of private residential communities and
commercial, industrial, educational and hospitality complexes establish, own and
operate broadband bundled communications network facilities that will distribute
and manage high-speed digital Internet, Local and Long Distance, private WEB
based data and CATV services to tenants located on their properties. In essence,
Tech Labs' broadband bundled DynaTraX(TM) technology enables these property
owners to own and control the access to all communications services to be
distributed in their facilities by permitting users to bypass current telephone
and CATV companies' "Last Mile" connection service. "Last Mile" connection
service is the interconnection between a wide range of computing resources to
"Wide Area Network", and may allow these property owners to increase rents and
to make their properties more attractive to tenants.
In making progress towards that objective, we, through a subsidiary, in
June, 2000 acquired three contracts to provide residential bundled communication
services to property developments in Florida from M3Communications, Inc. Each of
the contracts is for a 10 year term. Two of the contracts are with NTS in
Orlando, Florida, representing 357 existing apartment units, and the third
contract is with Premier Properties in Ft. Myers, Florida, representing 300 new
apartments projected to be completed within the next six months. Tech Labs
Community Networks, Inc. ("TLCN"), a wholly-owned subsidiary of Tech Labs,
acquired the contracts through its subsidiary, Tech Labs Community Networks of
the Southeast, Inc. ("TLCN Southeast") As partial consideration for the sale, M3
was given a 20% stake in TLCN Southeast. TLCN retains the remaining 80% of TLCN
Southeast's outstanding shares. M3 will also receive 20% of the operating income
derived from the three contracts. Tech Labs also agreed to provide all
residential broadband-bundled servies in Virginia, South Carolina, Kentucky,
Tennessee, Georgia, Louisiana, Mississippi and Florida through TLCN Southeast.
We formed TLCN to be the holding company of regionally oriented
subsidiaries which would provide residential bundled communication services to
property developments. TLCN Southeast focuses on the southeastern region of the
United States. No other subsidiaries of TLCN have been formed to date.
There are at least four companies that have products that compete with the
DynaTraX(TM) product. However, we believe none of these competitors offer a
product with all of the features or capabilities of DynaTraX(TM).
2
We continue to believe that competition in the sale of our DynaTraX(TM)
products will be on the basis of price, features, service and technical support.
Pricing of our products is based upon obtaining a margin above cost of
production. The margin we will accept varies with quantity and the channels of
distribution.
Competition for network management products comes from several different
sources. One source of competition is the designated employees of large
organizations which have been hired to manage and maintain their internal
networks. However, we believe the growing need to control and reduce costs by
using technology such as DynaTraX(TM) to automate tasks otherwise performed by
expensive technical labor, will provide Tech Labs with market opportunities.
Another group of competitors which produces products to manage and maintain
the network physical layer consists of NHC, RIT and Cyteck. Of these three
companies, NHC is the only one that offers a product comparable to DynaTrax(TM),
but which is not as fast as DynaTraX(TM). In addition, V-LAN switching, which is
a technology utilized by a number of companies, can be regarded as a competing
technology. However, V-LAN switching is limited to a specific type of network,
i.e. Ethernet, and not able to support many tasks which our DynaTraX(TM)
technology is designed to complete. These tasks are:
o rearranging network physical layer connections e.g.s moves, adds and
changes of equipment such as computer terminals; fax machines; and
printers;
o testing circuits;
o managing and mainatining end-to-end network configuration, which is
the connection between different points on a network from the
telecommumunications closet to the user outlet; and
o maintaining asset inventory records.
We regard V-LAN as complementary to DynaTraX(TM) circuit switching since
they can work together to provide a more comprehensive network
management/maintenance solution. The four competitors all have greater financial
and other resources and currently account for substantially all of the existing
market.
Although we believe that the DynaTraX(TM) technology will serve as the
basis for new products in the area of multi-media, digital network distribution
and management equipment for use in campus and building facilities, our ability
to successfully market our products will depend upon several factors including,
among others:
o The development of an effective marketing and distribution network;
o The acceptance of our products by potential users; and
o Our ability to support existing products and develop and support new
products that are compatible with other systems in use by potential
customers and provide useful features that are user friendly.
Infrared Intrusion Detection System or "IDS"
In April 1997, we formed Tech Logistics, Inc., a joint venture subsidiary
owned at that time 80% by Tech Labs and 20% by Carmine O. Pellosie, Jr., a
director of our company and president of International Logistic, Inc., a
privately owned company that distributes police, security, safety and
communication security devices. In May 1998, we acquired Mr. Pellosie's interest
in Tech Logistics. The IDS, which is an active infrared sensor system able to
detect intrusions by humans or vehicles into protected areas, was originally
designed for military applications.
We have been marketing IDS to government agencies and private industry for
use in nuclear, industrial, and institutional installations. We also manufacture
and market products currently sold by International Logistics Inc., as well as
new security, police training, bomb detection and disposal equipment,
anti-terrorism countermeasures and lie detection devices. New devices are
intended to include hand-held letter bomb detectors, hand-held weapons
detectors, video surveillance equipment as well as integrated audio-visual
surveillance vehicles for government and police use.
We have entered into an agreement dated effective as of October 1, 1997
with EAG, W.T. Sports, Ltd. and FUA Safety Equipment. Under the terms of the
agreement we were granted an exclusive right until September 30, 2007 to
manufacture and sell in the U.S., Canada and South America the IDS products. The
agreement provides that until March 31, 2001 gross pre-tax profits will be
shared 70% to Tech Labs and 30% to FUA. From April 1, 2001 until September 30,
2007 the gross pre-tax profits in excess of 16% will be shared 70% to Tech Labs
and 30% to FUA. We will also pay FUA a royalty of 5% of the cost of any IDS
products we manufacture and sell. We also intend to market metal detection
equipment manufactured by EAG for use in security and industrial applications,
such as walk-through metal detectors and hand-held metal detectors.
We are marketing our IDS product to the security and anti-terrorist
industry. We believe this is a growing industry and that terrorist incidents and
security breaches serve to increase the demand for our products. We have
completed the sale of an IDS to Los Alamos National
3
Laboratories.
This industry has a number of different competing products and
technologies. Competition in the industry is partly based on price and partly on
other factors such as effectiveness of a product in the field, acceptable levels
of false alarms for a given application and service. We are marketing the IDS
product for global distribution. We have a number of competitors for the IDS
products offering competitive technology, many of whom have greater financial
and other resources.
In 1999 we received approval for the IDS from the U.S. Air Force for
inclusion in their Tactical Automated Security System program, which is a $500
million program to thwart enemy attacks on critical military installations
throughout the world. Subsequent to this approval, Tech Labs received a blanket
order to provide 50 IDS systems to the U.S. Air Force. Tech Labs has as of the
date of this annual report shipped 12 systems under its blanket order to the Air
Force prime contractor. Pricing of our products is based upon obtaining a margin
above cost of production. The margin we will accept varies with quantity and the
channels of distribution.
Marketing Strategies
Marketing. We are implementing a three-pronged marketing program consisting
of:
o Industry announcements and presentations through business and industry
trade groups;
o Establishing relationships with several industry recommenders and
specifiers, who are consultants and engineering companies to help
present our cable management and network physical layer solutions to
the end-users and their contract management or system integrators; and
o A promotional campaign of ads, mailings, and on-line Web site media,
targeted at the end-user communications managers, their consultants
and advisers.
Our initial focus is the communication/computer centers in the eastern part
of the United States. We are dividing this area into four sales regions:
o New England states;
o New York metropolitan area;
o Mid-Atlantic/Washington DC area; and
o Southeast Coast states.
We plan to set up several regional representatives, sales agents, and/or
certified value added resellers in each of the four regions. Our plan is to have
one representative and, initially, up to two VARs for each region. Whenever
possible, we plan to use former NORDX/CDT trained sales agents and certified
VARs. At present, we have only established an office and regional representative
in Florida.
Sales representatives will be commissioned sales agents. VARs will be
system integrators who will purchase DynaTraX(TM) products at a volume based
discount price for resale as part of a turn-key service in which the system
integrator designs the system, purchases the component products and installs and
maintains the system.
We also plan to expand on the initial program by opening up additional
sales areas in this country and overseas. We contemplate doing this by adding
regional representatives or agents, or through current VAR organizations that
have a national presence.
4
In the established East Coast area, we intend to establish up to three
regional sales/service centers:
o Massachusetts;
o Washington, DC; and
o Florida, where we have opened an initial office.
We will repeat the process in the other areas as they become established.
We plan to use our sales/service centers to introduce new, enhanced
versions of the DynaTraX(TM) system and to provide territory customer support
services. We also plan to set up a separate marketing campaign and sales
operations to build markets for our expanded high-speed, customer-premise
DynaTraX(TM) gateway networking switch.
In addition, working with VARs, we will focus on providing turn-key,
private customer-premise digital gateway exchange networking systems. We will
target real estate developers, builders and/or owners of private communities,
commercial community retail complexes and shared rental buildings to enable them
to control and resell Internet, long distance, CATV, and building automation
information services going into and out of their private facilities.
Source of Supply
Current inventory component purchases for all our products are made from
OEMs, brokers, and other vendors. We typically have more than a single source of
supply for each part, component, or service, but from time to time we may
utilize a single supplier for a particular part or component. During the year
ended December 31, 2000, Wiggins Plastics was our largest supplier with 7.4% of
our overall inventory purchases. These purchases were primarily used in the
manufacture of electromechanical switches. During the year ended December 31,
1999, Wiggins Plastics accounted for 7.4% of our supply of inventory. We have no
long-term agreements with any of our suppliers.
Order Backlog
The backlog of written firm orders for our products and services as of
December 31, 2000 and December 31, 1999, was as follows:
As of December 31, 1999: $742,765
As of December 31, 2000: $586,441
Patents
In connection with our acquisition of the DynaTraX(TM) assets, we acquired
certain patents and pending patent applications. Four patents have been granted
in Great Britain, which are listed below:
o Patent title: User Interface for Local Area Network. This patent covers
technology which allows communication between the user and the equipment
controlling the network. This patent expires in 2013.
o Patent title: Token Ring. This patent covers technology which transmits
information between devices on a network. This patent expires in 2013.
o Patent title: Half Duplex Circuit for Local Area Network. This patent
covers technology which allows one-way communication either to or from the
Local Area Network. This patent expires in 2013.
o Patent title: Matrix Switch Arrangement. This patent covers technology
which is a switch that can either connect or disconnect one or more devices
on a network. This patent expires 2015.
We also have patents pending in the United States and in the European
Common Market which cover aspects of the DynaTraX(TM) technology. In addition,
Tech Labs has a U.S. patent pending on new technology relating to protecting
computer networks from hacker attacks.
5
Employees
We have 16 full-time employees, including our officers, seven of whom were
engaged in manufacturing, one in repair services, one in administration and
financial control, two in engineering and research and development, and two in
marketing and sales, and three in management.
Item 2. Description of Property.
Our corporate headquarters and manufacturing facility is located in North
Haledon, New Jersey. Our primary manufacturing and office facility is a
one-story building that is adequate for our current needs. We lease this
facility of 8,000 square feet, from a non-affiliated person, under a lease that
ends in May, 2001. The annual base rent is $48,000 and includes property taxes
and other adjustments. We believe our premises are adequate for our current
needs and that if and when additional space is required, it would be available
on acceptable terms.
We are an integrated manufacturer and, accordingly, except for plastic
moldings and extrusions, produce nearly all major subassemblies and components
of our devices from raw materials. We purchase certain components from outside
sources and maintain an in-house, light machine shop allowing fabrication of a
variety of metal parts and castings, complete tool room for making and repairing
dies, a stamping shop and an assembly shop with light assembly presses. Our test
lab checks and tests our products at various stages of assembly and each
finished product undergoes a complete test prior to shipment.
We anticipate that we will either manufacture any new products ourselves or
subcontract their manufacture, in whole or in part, to others. We believe that
personnel, equipment, and/or subcontractors will be readily available as and
when needed.
We offer warranties on all our current products, including parts and labor
for one year.
Item 3. Legal Proceedings.
Litigation
We are involved in a lawsuit arising from a letter of intent relating to a
small potential transaction we did not complete because we believed there were
misrepresentations made to us. We believe that the outcome is likely to be
favorable, but that our maximum liability if we do not prevail would be $30,000.
The suit is pending in the Superior Court of New Jersey, Law Division, Passaic
County.
6
Item 4. Submission of Matters to a Vote of Securityholders.
None.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock has been trading publicly on the OTC Bulletin Board under
the symbol "TCHL" since 1994. The table below sets forth the range of quarterly
high and low closing sales prices for our common stock on the OTC Bulletin Board
during the calendar quarters indicated. The quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs, or conversion, and may not
represent actual transactions.
TCHL COMMON STOCK
CLOSING BID CLOSING ASK
----------------------- -------------------------
HIGH LOW HIGH LOW
---- --- ---- ---
YEAR ENDING DECEMBER 31, 2001
-----------------------------
First Quarter (through March 21) 1.625 0.71875 1.75 0.875
YEAR ENDING DECEMBER 31, 2000
-----------------------------
First Quarter................................... 10.00 4.1875 10.625 4.6875
Second Quarter.................................. 10.8125 5.1255 11.00 5.375
Third Quarter................................... 6.375 3.1875 7.375 3.50
Fourth Quarter.................................. 4.75 0.875 5.0625 1.00
YEAR ENDING DECEMBER 31, 1999
-----------------------------
First Quarter................................... $2.625 $1.0625 $3.00 $1.3125
Second Quarter.................................. 3.125 1.50 3.875 2.00
Third Quarter................................... 3.25 1.50 3.625 1.625
Fourth Quarter ................................. 3.87 1.00 4.12 1.25
As of March 26, 2001, there were 251 holders of record of our common stock.
We have never paid any cash dividends on our common stock and anticipate
that, for the foreseeable future, we will continue to retain any earnings for
use in the operation of our business. Payment of cash dividends in the future
will depend upon our earnings, financial condition, any contractual
restrictions, restrictions imposed by applicable law, capital requirements, and
other factors deemed relevant by our Board of Directors.
The transfer agent for our common stock is Interwest Transfer Co., Inc.,
P.O. Box 17136, Salt Lake City, Utah 84117.
On February 3, 2000, our registration statement, filed on Form SB-2, was
declared effective by the Securities and Exchange Commission. We closed on the
offering on May 3, 2000. We sold to the public an aggregate of 293,379 shares
for gross proceeds of $2,273,723.
On January 22, 2001, our registration statement filed on Form SB-2, was
declared effective by the Securities and Exchange Commission. We registered
5,306,816 shares, of which up to 4,619,316 may be sold upon conversion of
convertible notes and up to 412,500 may be sold upon the exercise of warrants
issued in connection with the convertible notes. The remaining 275,000 shares
may be sold upon the exercise of warrants issued to certain selling security
holders. Pursuant to the terms of the subscription agreement the Company entered
into with the holders of the convertible notes, the Company was required to
register 200% of the number of shares into which the notes may be converted.
On March 9, 2001 we filed a registration statement on Form S-8, which
registered 876,000 shares which (i) may issued upon the exercise of stock
options granted under our 1996 incentive stock option plan, (ii) may be issued
under free-standing stock options and (iii) shares and options which have been
and may be issued under a consulting agreement.
Recent Sales of Unregistered Securities
As listed below, the Company issued shares of its Common Stock, par value
$.01 per share, to the following individuals or entities for the consideration
as listed in cash or services. All sales
7
made within the United States or to United States citizens or residents were
made in reliance upon the exemptions from registration under the Securities Act
of 1933 as follows:
1. In March 2001 we issued to Ed Branca, an employee of Tech Labs Community
Networks of Southeast, Inc., 10,000 shares. The issuance of the shares was
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof. The shares were issued to Mr. Branca in consideration of his services.
Mr. Branca had complete access to all relevant information regarding Tech Labs.
2. In January 2001 we issued to Barry Bendett, a consultant to Tech Labs, 65,000
shares pursuant to terms of a consulting agreement. The issuance of the shares
was exempt from registration under the Securities Act pursuant to Section 4(2)
thereof. Mr. Bendett is a sophisticated investor and has complete access to all
relevant information regarding Tech Labs.
3. In November 2000 we issued to Barry Bendett, a consultant to Tech Labs,
options to purchase 100,000 shares at $4.00 per share. The issuance of the
options was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof. Mr. Bendett is a sophisticated investor and had complete
access to all relevant information regarding Tech Labs.
4. In October 2000 we issued a $1,500,000 principal amount convertible notes
which is due on October 13, 2002 to certain accredited investors. The issuance
of the note was made pursuant to Rule 506 of Regulation D under the Securities
Act.
5. In October 2000 we issued warrants to purchase 412, 500 shares of our common
stock to accredited investors in connection with the issuance of the convertible
notes described above in Item 1. The issuance of the warrants was made pursuant
to Rule 506 of Regulation D under the Securities Act.
6. In July 2000 we issued 25,000 shares and an option to purchase 100,000 shares
at $5.75 per share for a term of 3 years to m3communications, Inc. pursuant to
an asset purchase agreement between Tech Labs, Tech Labs Community Networks of
the Southeast, Inc., a subsidiary of Tech Labs, and the shareholders of
m3communications, Inc. The issuance of the securities was exempt from
registration under the Securities Act pursuant to Section 4(2) thereof.
7. In June 2000 we issued 25,000 shares to Nathan Perlmutter pursuant to a
convertible note agreement dated September 5, 1997 which note was issued as part
of a private placement conducted pursuant to Rule 504 of Regulation D in 1997.
8. In July 2000 we issued 20,000 shares to Louis Tomasella, who is a former
director of Tech Labs, pursuant to Mr. Tomasella's exercise of stock options
granted to him under Tech Labs stock option plan.
8
Item 6. Management's Discussion and Analysis or Plan of Operation.
General
We were incorporated in 1947 as a New Jersey corporation. Our focus has
historically been the design, manufacture, and sale of rotary switches. Switches
have been a significant part of our revenue for five decades. In 1995, to
augment revenues, we sought business in transformers and contract manufacturing.
In 1998, we made a shift to new product development. In 1998, we also made our
first sales of the IDS product, and in April of 1999, we completed the
acquisition of the DynaTraX(TM) switch and technology. We will continue to focus
on IDS and DynaTraX(TM) sales and development of additional products using these
technologies.
The following table sets forth the components of our revenues for each of
our major business activities in 1998, 1999 and 2000 and their approximate
percentage contribution to revenues for the period indicated:
PRODUCT TYPE 1998 % of Revenue 1999 % of Revenue 2000 % of Revenue
------------ ---- ------------ ---- ------------ ---- ------------
Switches $166,550 30.1% $269,739 39.1% $ 400,082 39.3%
IDS Sensors 254,900 46.2% 298,853 43.4% 472,374 46.4
Transformers/Coils 50,515 9.1% 46,786 6.8% 41,849 4.1%
Contract Manufacturing 80,520 14.6% 73,812 10.7% 103,213 10.2%
-------- ----- -------- ----- ---------- -----
Totals $552,485 100.0% $689,190 100.0% $1,017,518 100.0%
======== ===== ======== ===== ========== =====
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The following table sets forth the percentages of gross profit for each of
our major business activities in 1998, 1999 and 2000:
Year Ended
December 31,
------------------------------------------------------------
PRODUCT TYPE 1998 1999 Net Change 1999 2000 Net Change
------------ ---- ---- ---------- ---- ---- ----------
Switches 45.0% 45.0% -- 45.0% 79.3% 34.3%
IDS Sensors 52.0% 54.6% 2.6% 54.6% 55.5% 0.9%
Transformers/Coils 25.0% 25.0% -- 25.0% 49.1% 24.1%
Contract Manufacturing 22.8% 22.8% -- 22.8% 31.0% 8.2%
Unallocated company expenses,
including physical
inventory adjustments
and factory overhead (13.1%) (14.0%) (0.9%) (14.0%) (26.2%) (12.2%)
Total company gross profit % 30.1% 31.4% 1.3% 31.4% 36.0% 4.6%
We have begun to shift out of the subcontracting and transformer business
which provides low gross profit margins, for higher gross profit margin sales of
IDS and other new products. While rotary switches produce high gross profits,
demand for rotary switches is low.
We have gradually shifted our product offering from less profitable to more
profitable proprietary products.
Results of Operations
2000 compared to 1999
Sales of $1,017,518 for 2000 increased 47.6% over 1999 as a result of the
Company's continuing efforts to market our higher profit DynaTrax(TM) and IDS
Sensor products.
Cost of sales of $651,460 increased 37.7% due to higher sales of
DynaTrax(TM) and IDS Sensors which improved the Company's gross profit
percentage 4.6 percentage points, or an increase of 14.6% versus 1999.
Selling, general and administrative expenses declined only slightly to
$818,552 due to major marketing expansion efforts for our DynaTrax(TM) product
line.
The Company's loss from operations for 2000 was ($418,655), an improvement
of 36.1% versus 1999, caused by increased sales of our more profitable products
partially offsetting our market expansion cost.
1999 compared to 1998
Sales were $689,190 for 1999 as compared to $552,485 for the year ended
1998. The increase was due to growth in switch and sensor sales. We will
continue efforts in the future to increase sales of these high margin products.
Cost of sales of $472,790 for the year ended 1999 compared to $386,425 for
the year ended 1998 increased due to sales of IDS sensors to the Department of
Energy's Los Alamos facility, and increased switch sales.
Selling, general, and administrative expenses increased by $531,325 in 1999
as compared to the prior period in 1998 which resulted from higher than normal
expenses in 1999 due to professional fees associated with the acquisition of
DynaTraX(TM), and the fees incurred in connection with Tech Labs'
self-underwritten public offering.
Losses from operations of ($654,929) in 1999 increased by $485,825 compared
to losses of ($169,104) for the prior period as a direct result of higher
administrative expenses, due to the non-recurring DynaTraX(TM) acquisition fees
and legal fees, and self-underwritten public offering legal fees.
10
Liquidity and Capital Resources.
During the years ended December 31, 1998 and 1999 we have had difficulty
meeting our working capital requirements, which was a result of lower sales,
limited marketing efforts, and continued losses from operations. During the year
ended December 31, 1998, we completed sales of our common stock which raised
approximately $603,716 in 1998.
During calendar year 1999 we raised an additional $250,000 for the
acquisition of the DynaTraX(TM) assets and an additional $200,000 for working
capital. On October 25, 1999 Tech Labs borrowed $50,000 at 10% interest per year
pursuant to a promissory note and security agreement with the lender. Under the
terms of the security agreement, Tech Labs assigned a security interest in two
of Tech Labs' purchase orders totaling $543,000. Under the terms of the
promissory note, the $50,000 was to be repaid in full no later than December 24,
1999. The Note was extended to a due date of January 28, 2000 at an interest
rate of 14%. In addition, Tech Labs entered into three unsecured promissory
notes, as described below, in the amount of $50,000 each, at an interest rate of
10%. As of December 31, 2000, $150,000 of a total of $200,000 in promissory
notes has been repaid and $50,000 remains outstanding and is due by December 31,
2001.
During 2000 we completed two significant transactions that have improved
the Company's liquidity. On May 3, 2000 we completed an offering of our common
stock to the public pursuant to a registration statement on Form SB-2. We sold
to the public an aggregate of 293,379 shares for gross proceeds of $2,273,723.
Subsequently, on October 13, 2000 the Company completed a private placement,
pursuant to Rule 506 of Regulation D, of convertible promissory notes for gross
proceeds of $1,500,000.
During 1998 we also sold our first IDS products to the U.S. government Los
Alamos facility. Continued sales will, however, be dependent upon sustained
marketing efforts. Because sales from our historical lines of products have not
in the past, and are not in the future expected to generate sufficient revenue
to support our product development and marketing and sales efforts for our
DynaTraX(TM) and IDS products, we will be required to meet our capital needs to
finance our business plan through the sale of our shares of common stock.
Factors that May Affect Future Events.
The following factors, among others, could cause actual events and financial
results to differ materially from those anticipated by forward-looking
statements made in this Annual Report on Form 10-KSB and presented elsewhere by
management from time to time.
We have no patent or copyright protection on our current products, other
than aspects of the DynaTraX(TM) product and technology. Our ability to
compete effectively with other companies will depend, in part, on our
ability to maintain the proprietary nature of our technologies. Other than
with regard to the DynaTraX(TM) patents, which have been issued to date
only in England, we intend to rely substantially on unpatented, proprietary
information and know-how. We are also presently prosecuting the patent
applications filed in the United States and the European Common Market.
There is a risk that our current products may malfunction and cause loss
of, or error in, data, loss of man hours, damage to, or destruction of,
equipment or delays. Consequently, we, as the manufacturer of components,
assemblies and devices may be subject to claims if such malfunctions or
breakdowns occur. We are not aware of any past or present claims against
us. We cannot predict at this time our potential liability if customers
make claims against us asserting that DynatraX(TM), IDS or other new
products fail to function. Since we have no insurance we could incur
substantial expenses defending ourselves against a product liability claim.
We entered into an Amended Joint Marketing Agreement as of October 1, 1997
with Elektronik Apparatebau GmbH (EAG), W.T. Sports, Ltd. and FUA Safety
Equipment, AG and a Confidentialty and Manufacfuring Agreement with the
same parties and dated the same date, pursuant to which Tech Labs was
granted the exclusive right to manufacture in the U.S. and market and sell
in the U.S., Canada and South America the IDS products. The agreements
terminate on September 30, 2007 subject to automatic renewals for
successive one-year periods unless either party gives notice of
non-renewal. The agreements can be terminated earlier upon a default of any
material obligation. If the license is terminated, we would be unable to
use EAG's technology in our perimeter detection system products.
Our hospitality software sales are greatly dependent upon a Joint Marketing
Agreement we entered into on October 15, 1999 with TravelNet Technologies,
Inc., pursuant to which we were granted the right to sell the "Data Valet"
software system, which operates with the DynaTraX(TM) switch technology.
This integrated system provides high-speed Internet and bundled digital
services to business travelers and hotel guests. This agreement, which
terminates on September 10, 2002, can be renewed with the mutual consent of
both parties. It will be necessary at that time to negotiate a new
agreement or license or acquire a suitable replacement technology. If
replacement software is not available it could greatly harm our ability to
sell the DynaTraX(TM) switch technology in hospitality environments.
In connection with the acquistion of the DynaTraX(TM) technology, we
acquired digital switches, finished products and parts from NORDX/CDT. We
do not have insurance on that inventory. Damage or destruction of some or
all of the inventory by fire, theft or by acts of nature would result in
substantial losses and would harm our business.
Item 7. Financial Statements.
Report of independent certified public accountants F-1
Consolidated balance sheet for the years ended December 31, 2000,
1999 and 1998 F-2, F-3
Consolidated statements of operations for the years ended
December 31, 2000, 1999 and 1998 F-4
Consolidated statements of stockholders' equity for the years
ended December 31, 2000, 1999 and 1998 F-5
Consolidated statements of cash flows for the years ended
December 31, 2000, 1999 and 1998 F-6
Notes to consolidated financial statements F-7 - F-9
11
REPORT OF INDEPENDENT AUDITORS
Charles J. Birnberg, CPA
150 Overlook Avenue
Hackensack, New Jersey 07601
March 1, 2001
To The Board of Directors of Tech Laboratories, Inc.
I have audited the Balance Sheets of Tech Laboratories, Inc. as of December
31, 1998, 1999 and 2000 and the related Statements of Income and Retained
Earnings, and Cash Flows for the years then ended. These financial statements
are the responsibility of the company's management.
The audits were conducted in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that the audits provide a reasonable basis for my opinion.
Therefore, the financial statements in my opinion, present fairly the
financial position of Tech Laboratories, Inc. as of December 31, 1998, 1999 and
2000 and the results of operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
Sincerely,
/s/ Charles J. Birnberg
Charles J. Birnberg
Certified Public Accountant
Hackensack, New Jersey
F-1
TECH LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 1998, 1999 AND 2000
ASSETS
1998 1999 2000
---------- ---------- ----------
Current Assets:
Cash $ 532,780 $ 162,925 $2,523,446
Marketable Securities, at the Lower of
Cost or Market (Note 1) 56,693 61,453 64,333
Accounts Receivable, Net of Allowance
of $10,000 in 2000, 1999 and 1998 143,462 57,697 93,952
Inventories (Notes 1 & 2) 270,118 816,703 1,286,838
Prepaid Expense 3,357 4,055 4,055
---------- ---------- ----------
Total Current Assets $1,006,410 $1,102,833 $3,972,624
---------- ---------- ----------
Property, Plant and Equipment at Cost (Note 1)
Leasehold Improvements 2,247 2,247 2,247
Machinery, Equipment and Instruments 230,137 379,815 467,100
Furniture and Fixtures 67,425 75,899 81,603
---------- ---------- ----------
$ 299,809 $ 457,961 $ 550,950
Less: Accumulated Depreciation & Amortization 299,162 314,162 342,551
---------- ---------- ----------
Net, Property, Plant and Equipment $ 647 $ 143,799 $ 208,399
---------- ---------- ----------
Other Assets $ 11,540 $ 11,540 $ 12,059
---------- ---------- ----------
Total Assets $1,018,597 $1,258,172 $4,193,082
========== ========== ==========
The accompanying notes are an integral part of these financial statements
F-2
TECH LABORATORIES, INC.
BALANCE SHEETS
DECEMBER 31, 1998, 1999 AND 2000
LIABILITIES AND STOCKHOLDERS' INVESTMENT
1998 1999 2000
---------- ---------- ----------
Current Liabilities:
Current Portion of Long Term Debt (Note 5) $ 32,742 $ 28,559 $ 17,198
Short-Term Loans Payable (Note 6) 43,373 243,373 63,623
Accounts Payable and Accrued Expenses 42,155 260,745 32,961
Other Liabilities 36,600 3,190 8,375
---------- ---------- ----------
Total Current Liabilities $ 154,870 $ 535,867 $ 122,157
---------- ---------- ----------
Long Term Convertible Notes Payable $1,520,318
Stockholders' Investment:
Common Stock, $.01 Par Value;
10,000,000 Shares Authorized; $ 23,483 $ 36,507 $ 39,493
Less: 11,316 Shares Reacquired and
and Held in Treasury (113) (113) (113)
---------- ---------- ----------
$ 23,370 $ 36,394 $ 39,380
Capital Contributed in Excess of Par Value 1,315,833 1,816,316 4,060,287
Retained Earnings 0 0 0
Accumulated Deficit (475,476) (1,130,405) (1,549,060)
---------- ---------- ----------
$ 863,727 $ 722,305 $2,550,607
---------- ---------- ----------
Total Liabilities and Stockholders'
Investment $1,018,597 $1,258,172 $4,193,082
---------- ---------- ----------
The accompanying notes are an integral part of these financial statements
F-3
TECH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
----------- ----------- -----------
Sales $ 552,486 $ 689,190 $ 1,017,518
----------- ----------- -----------
Costs and Expenses:
Cost of Sales 386,425 472,790 651,460
Selling, General and Administrative
Expenses 329,849 861,174 818,552
----------- ----------- -----------
716,274 1,333,964 1,470,012
----------- ----------- -----------
Income/(Loss) From Operations $ (163,788) $ (644,774) $ (452,494)
----------- ----------- -----------
Other Income (Expenses):
Interest Income $ 1,654 $ 1,150 $ 63,543
Interest Expense (6,970) (11,305) (29,704)
----------- ----------- -----------
$ (5,316) $ (10,155) $ 33,839
----------- ----------- -----------
Income/(Loss) Before Income Taxes $ (169,104) $ (654,929) $ (418,655)
Provision for Income Taxes (Notes 1 & 4) -- -- --
----------- ----------- -----------
Net Income/(Loss) $ (169,104) $ (654,929) $ (418,655)
Accum. Earnings/(Deficit,) Beg. of Year $ (306,372) $ (475,476) $(1,130,405)
----------- ----------- -----------
Accum. Earnings/(Deficit,) End of Year $ (475,476) $(1,130,405) $(1,549,060)
----------- ----------- -----------
Primary EPS $ (0.06) $ (0.18) $ (0.10)
Fully Diluted EPS $ (0.05) $ (0.13) $ (0.08)
The accompanying notes are an integral part of these financial statements
F-4
TECH LABS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
YEARS 1998, 1999 AND 2000
COMMON STOCK CAPITAL IN
EXCESS OF ACCUMULATED
SHARES AMOUNT PAR VALUE DEFECIT TOTAL
----------- ----------- ----------- ----------- -----------
BALANCE
DECEMBER 31, 1998 2,869,943 $ 23,370 $ 1,315,833 $ (475,476) $ 863,727
STOCK ISSUED 780,717 13,024 500,483 513,507
NET INCOME/(LOSS) (654,929) (654,929)
----------- ----------- ----------- ----------- -----------
BALANCE
DECEMBER 31, 1999 3,650,660 $ 36,394 $ 1,816,316 $(1,130,405) $ 722,305
STOCK ISSUED 368,379 2,986 2,243,971 -- 2,246,957
NET INCOME/(LOSS) -- -- -- (418,655) (418,655)
----------- ----------- ----------- ----------- -----------
BALANCE
DECEMBER 31, 2000 4,019,039 $ 39,380 $ 4,060,287 $(1,549,060) $ 2,550,607
The accompanying notes are an integral part of these financial statements
F-5
TECH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
----------- ----------- -----------
Cash Flows From (For) Operating Activities:
Net Income/(Loss) From Operations $ (169,104) $ (654,929) $ (418,655)
Add/(Deduct) Items Not Affecting Cash:
Depreciation/Amortization (Note 1) 11,880 15,000 28,389
Unrealized (Gain)/Loss on Valuation of
Marketable Securities (Note 1) 3,357 470 --
Changes in Operating Assets and Liabilities:
Marketable Securities (2,650) (4,290) (2,880)
Accounts Receivable (52,728) 85,765 (36,255)
Inventories (909) (546,585) (470,135)
Accounts Payable and Accrued Expenses (40,249) 216,359 (227,784)
Other Assets and Liabilities 14,997 593 5,185
----------- ----------- -----------
Net Cash Flows For Operating Activities $ (235,406) $ (887,617) $(1,122,135)
----------- ----------- -----------
Cash Flows From (For) Investing Activities:
Increase in Fixed Assets $ 0 $ (158,152) $ (92,989)
----------- ----------- -----------
Net Cash Flows From (For) Investing Activities $ 0 $ (158,152) $ (92,989)
----------- ----------- -----------
Cash Flows From (For) Financing Activities:
Acquisition/(Repayment) of Short Term Debt $ (1,703) $ 162,407 $ 1,328,688
Issuance of Common Stock 603,716 513,507 2,246,957
----------- ----------- -----------
Net Cash Flows From (For) Financing Activities: $ 602,013 $ 675,914 $ 3,575,645
----------- ----------- -----------
Net Increase/(Decrease) in Cash $ 366,607 $ (369,855) $ 2,360,521
Cash Balance, Beginning of Year 166,173 532,780 162,925
----------- ----------- -----------
Cash Balance, End of Year $ 532,780 $ 162,925 $ 2,523,446
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements
F-6
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(1) Summary of Significant Accounting Policies
CASH - Includes Tech Labs' checking account at Hudson United Bank plus a
Money Market Account at Prudential Securities.
ACCOUNTS RECEIVABLE - Tech Labs recognizes sales when orders are shipped to
customers. The allowance for bad debts is accrued based on a review of customer
accounts receivables aging.
INVENTORIES - Inventories are valued at cost or market, whichever is lower.
The FIFO cost method is generally used to determine the cost of the inventories.
At December 31, 1998, 1999 and 2000 physical inventories were taken and tested.
PROPERTY AND DEPRECIATION - Additions to property and equipment are
recorded at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:
ASSETS ESTIMATED USEFUL LIVES
------ ----------------------
Machinery 5 to 7 years
Furniture & Fixtures 5 to 7 years
Maintenance and repairs are charged to expense as incurred. The cost of
betterments is capitalized and depreciated at appropriate rates. Upon retirement
or other disposition of property items, cost, and accumulated depreciations are
removed from the accounts and any gain or loss is reflected in the statement of
income.
INCOME TAXES - Income tax expense is based on reported income and deferred tax
credit is provided for temporary differences between book and taxable income.
MARKETABLE SECURITIES - The marketable securities are recorded at the lower of
cost or market. The cost of securities was $56,693 at December 31, 1998, $61,453
at December 31, 1999, and $64,333 at December 31, 2000
(2) Inventories:
Inventories at December 31, 1998, 1999 and 2000 were as follows:
1998 1999 2000
---- ---- ----
Raw Materials & Finished Components $202,359 $715,438 $ 912,358
Work in Process & Finished Goods $ 67,759 $107,265 $ 374,480
-------- -------- ----------
$270,118 $816,703 $1,286,838
-------- -------- ----------
(3) Income/(loss) Per Share:
Primary Income/(loss) per share was calculated on the weighted average number of
shares outstanding during the year ended December 31, 1998, 2,202,905, for the
year ended December 31, 1999, 3,650,660, and for the year ended December 31,
2000, 4,019,039.
Fully Diluted Income/(loss) per share was calculated on the weighted average
shares above plus 1,500,000 shares from the assumed conversion of convertible
debt which was issued in October, 2000.
F-7
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 and 2000
(4) Income Taxes:
At December 31, 1998, 1999 and 2000 the balance of operating loss carryforward
was $1,219,007, $1,873,936 and $2,292,591 respectively, which can be utilized to
offset future taxable income.
(5) Current Portion of Long-Term Debt:
Loans payable to banks were as follows for the years indicated:
CURRENT NON-CURRENT
YEAR ENDED PAYEE INTEREST RATE AMOUNT AMOUNT
---------- ----- ------------- ------- -----------
1998 Hudson United Bank Prime +1.5% $32,742
1999 Hudson United Bank Prime +1.5% $28,559
2000 Hudson United Bank Prime +1.5% $17,198
Certain Marketable Securities are pledged as collateral on the above loans.
(6) SHORT-TERM LOANS PAYABLE
Demand loans Payable include loans from stockholders, officers, members of the
Board of Directors and third parties. The outstanding loan balances due as of
December 31, 1998, December 31, 1999, and December 31, 2000 was $43,373 for
1998, $243,373 for 1999, and $63,623 for 2000 which includes accured interest
for all three years. The annual interest rate for these loans ranges between six
(6%) percent and ten (10%) percent. One loan in the principal amount of $11,500
together with accured interest of $7,267 at December 31, 2000 is secured by the
assets of Tech Labs. In October of 1999, three short-term loans for a total of
$200,000 at ten (10%) percent annual interest were completed. Certain
contractural revenues were pledged to secure these loans. As of December 31,
2000, $150,000 of such loans were repaid and $50,000 remains outstanding and is
due by December 31, 2001.
(7) COMMON STOCK
In 1999, Tech Labs filed a registration statement on Form SB-2 with the
Securities and Exchange Commission. The registration statement was declared
effective on February 3, 2000. The offering was completed on May 3, 2000 for
total proceeds of $2,273,723.
(8) COMMITMENTS AND CONTINGENCIES
Tech Labs entered into an exclusive agreement with Elektronik Apparatebau (EAG),
FUA Safety Equipment and Double T Sports LTD. whereby it received exclusive
rights to manufacture and market IDS products until September 30, 2007 in the
US, Canada, and South America. Gross profits will be calculated according to
GAAP and distributed quarterly 70% to Tech Labs and 30% to FUA until March 2001.
Thereafter, until 2007 quarterly distribution will be based on pretax profits in
excess of 16% being shared 70% to Tech Labs and 30% to FUA. In addition, FUA
will receive a 5% royalty based on the cost of any IDS products Tech Labs
manufactures and sells.
F-8
TECH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 and 2000
(9) MAJOR ACQUISITION:
On April 27, 1999, Tech Labs completed the purchase of existing inventories
and test equipment of the discontinued DynaTrax (TM) Product Line from NORDX/CDT
for $500,000. In accordance with the purchase price method of accounting, the
purchase price for the assets referenced above was allocated to the assets
acquired on the basis of fair market values. Results subsequent to the date of
acquisition will be included in Tech Labs' financial statements. Had the results
of the DynaTrax acqusition been included in our consolidated statements for
1998, and 1999, the effect would have been material.
DynaTrax Year Ended Year Ended
(Unaudited) December 31, 1998 December 31, 1999
----------- ----------------- -----------------
Net Sales $ 400,000 $ 100,000
Cost of Sales 300,000 20,000
----------- ---------
Gross Profit 100,000 80 000
Research/Dev 900,000 0
Selling & G&A Exp 1,700,000 50,000
----------- ---------
Pre-Tax Inc./(Loss) $(2,500,000) $ 30,000
Income Tax (Expense)/
Benefit-Pro-Forma 1,150,000 0
----------- ---------
Net Income/(Loss) $(1,350,000) $ 30,000
----------- ---------
Investment (Unaudited) Purchase Price*
---------------------- ---------------
Inventory $ 2,700,000 $ 400,000
Test Equipment 355,000 100,000
----------- ---------
Total $ 3,055,000 $ 500,000
=========== =========
* Included in December 31, 1999 Tech Labs balance sheet.
Effect on Tech Labs Inc. (Unaudited) Year Ended Year Ended
(Pro-Forma) December 31, 1998 December 31, 1999
------------------------ ---------------------- -----------------
Net Sales $ 952,486 $ 535,160
Net Income/(Loss) $(1,519,104) $(387,836)
----------- ---------
EPS $ (0.54) $ (0.14)
=========== =========
(10) LONG-TERM CONVERTIBLE DEBT
On October 13, 2000 Tech Labs completed a $1.5 million dollar financing of 6.5%
convertible promissory notes due October 15, 2002. Interest is payable quarterly
in cash or in shares of common stock at the option of the noteholders. The
Company disclosed all terms of this financing on Form 8-K filed on October 18,
2000.
F-9
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Directors, Executive Officers, and Key Consultants
Name Age Title
---- --- -----
Bernard M. Ciongoli 54 President, Treasurer, and Director
Earl M. Bjorndal 49 Vice President and Director
Carmine O. Pellosie, Jr. 58 Secretary and Director
Salvatore Grisafi 70 Director
Each director is elected for a period of one year and until his successor
is duly elected by shareholders and qualified. Officers serve at the will of the
board of directors.
Bernard M. Ciongoli became our president and a director in late 1992, and
became Treasurer in 1998. From 1990 through 1991 he served as president of
HyTech Labs, a company engaged in sales and servicing of electronic test
equipment. During the years of 1987 to 1990, he acted as the principal owner and
President of Bernco Developers, a real estate developer. Mr. Ciongoli holds a
degree in electronic engineering from Paterson Institute of Technology.
Earl M. Bjorndal has been with us in various capacities since 1981. He has
been a director since 1985, and became a vice president in 1992. He is a
graduate of the New Jersey Institute of Technology with both bachelor's and
master's degrees in industrial engineering.
Carmine O. Pellosie, Jr. has been a director since the formation of Tech
Logistics, Inc. in 1997 and has been our Secretary since April 1999. Since
January 1, 1999, he has been the Controller of the Passaic County Department of
Health and Human Services. Prior to January 1999, he was, for more than five
years, president of International Logistics, Inc.
Salvatore Grisafi has been a director since August of 2000. Mr. Grisafi is
president of MPX Network Solutions, a privately held telecommunications/
networking business development and marketing consulting company. Mr. Grisafi
has served as a consultant to the company since 1998, and assisted the company
in the acquisition of the Dynatrax(TM) technology from NORDX CDT and in
identifying other opportunities and business strategies. Mr. Grisafi is a
graduate of the New York Institute of Technology.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and officers and persons who own more than ten percent of its equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Directors, officers and greater
than ten-percent shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) reports filed.
All filing requirements applicable to its officers, directors and greater
than ten percent shareholders were complied with in a timely manner.
Involvement in certain legal proceedings.
During the past five years, no director or executive officer of Tech Labs
has been involved in legal proceedings of the nature required to be disclosed by
this item.
III-1
Item 10. Executive Compensation
The following table summarizes the compensation paid to or earned by our
president. No other officer has received compensation in excess of $100,000 in
any recent fiscal year.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
----------------------------------- -------------
Shares of
Common Stock
Issuable Upon
Name and 2000 Exercise of
Principal Position Year Salary($) Bonus($) Options
------------------ ---- --------- -------- -------
Bernard M. Ciongoli 2000 $125,000 0 250,000
President, Treasurer 1999 $125,000 0 0
1998 $125,000 0 300,000
The following table sets forth information relating to all options granted
to named executive officers:
Option Grants in Fiscal Year 2000
Percent of
Number of Total Options
Securities Underlying Granted to Employees Exercise Expiration
Name Options Granted in Fiscal Year (%) Price Date
---- --------------- ------------------ ----- ----
Bernard M. Ciongoli 111,000 40.36 $2.68125 1/02/06
139,000 50.00 $2.4375 1/02/06
We have an employment contract with Mr. Ciongoli that commenced October 1,
1998. The contract was amended June 18, 1999 and subsequently on February 21,
2001 to extend the initial term of Mr. Ciongoli's employment. The contract, as
amended, expires on September 30, 2005. Mr. Ciongoli is compensated at the base
salary rate of $125,000 per annum. Mr. Ciongoli is also entitled to receive two
(2%) percent of our sales in excess of $1,000,000 during any year he is employed
by us. In addition, Mr. Ciongoli was also granted an option, pursuant to terms
of Mr. Ciongoli's employment contract, exercisable for five (5) years from date
of grant to purchase 300,000 shares of stock at $.50 per share, such option to
vest in increments of 100,000 shares per annum on each anniversary date of the
agreement commencing October 1, 1998.
In 2000 we granted to Mr. Ciongoli an option to purchase up to 111,000
shares of common stock under our 1996 stock option plan exercisable for five (5)
years at $2.68125 per share and which vests over a period of three (3) years. We
also granted to Mr. Ciongoli a non-plan option, subject to the approval of
shareholders, in consideration and in recognition of his services to Tech Labs
to purchase up to 139,000 shares exercisable over (5) years at $2.4375 and which
vests over the course of three (3) years from the date of grant.
III-2
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table describes the beneficial ownership of our common stock
by:
o persons known to us to own more than 5% of such stock, and
o the ownership of common stock by our directors, and by all officers
and directors as a group.
Number of
Shares Owned % of
Name Beneficially Common Stock
---- ------------- ------------
Bernard M. Ciongoli 907,000 19.51%
Earl Bjorndal 248,444 5.76%
Carmine O. Pellosie, Jr. 80,000 1.86%
Salvatore Grisafi 50,000* 1.17%
Libra Finance, S.A. 275,000 6.15%
Celeste Trust Reg 495,948 9.99%
The Endeavour Capital Investment
Fund, S.A. 495,948 9.99%
Esquire Trade & Finance 495,948 9.99%
All officers and directors as a 1,285,444 28.30%
group (4 persons)
* These shares are owned by Mr. Grisafi's wife.
** Pursuant to the rules and regulations of the Securities and Exchange
Commission, shares of common stock that an individual or entity has a right
to acquire within 60 days purusant to the exercise of options or warrants
are deemed to be outstanding for the purposes of computing the percentage
ownership of such individual or entity, but are not deemed to be
outstanding for the purposes of computing the percentage ownership of any
other person or entity shown in the table.
o The information for Mr. Ciongoli includes 137,000 shares that may be
acquired within 60 days pursuant to the exercise of options granted under
our 1996 stock option plan and 300,000 shares issuable upon exercise of
options earned under our employment agreement with Mr. Ciongoli.
o The information for Mr. Bjorndal includes 75,000 shares that may be
acquired within 60 days pursuant to the exercise of options granted under
our 1996 stock option plan.
o The information for Mr. Pellosie includes 20,000 shares issuable upon the
exercise of immediately exercisable options granted under our 1996 stock
option plan.
o The number of shares beneficially owned by each of Celeste Trust Reg, The
Endeavour Capital Investment Fund, S.A., and Esquire Trade & Finance may
not exceed, by the terms of their Subscription Agreement with Tech Labs,
9.99% of the outstanding number of shares of common stock of Tech Labs.
Beneficial ownership is calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3
thereunder. Based on a conversion price for the notes of $0.738446, no more
than an amount equal to 495,948 shares may be converted by each of Celeste
Trust Reg, The Endeavour Capital Investment Fund, S.A., and Esquire Trade &
Finance at any one time; provided, however, each of the above mentioned
parties is not precluded from converting the maximum amount permissible
under the notes, immediately disposing of some or all of those shares and
subsequently converting additional amounts remaining under the notes.
III-3
Item 12. Certain Relationships and Related Transactions.
There were no transactions of the nature required to be disclosed by this
item during the period covered by this annual report.
III-4
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed herewith or have been previously
filed with the Securities and Exchange Commission and are incorporated by
reference herein.
EXHIBIT INDEX
3.1 Certificate of Incorporation.(1)
3.2 By-Laws of Tech Labs.(1)
10.1 Amended Joint Marketing Agreement and Confidentiality and Manufacturing
Agreement dated as of October 1, 1998 between Tech Labs and Elktronic
Apparutebau Gmbh (EAG), W.T. Sports, Ltd. and FVA Safety Equipment,
AG.(1)
10.2 Employment Agreement between Tech Labs and Bernard M. Ciongoli.(1)
10.3 First Amendment to Employment Agreement between Tech Labs and Bernard
M. Ciongoli.(2)
10.4 Second Amendment to Employment Agreement between Tech Labs and Bernard
M. Ciongoli dated February 21, 2001.
10.6 Patent and Trademark assignments.(1)
10.7 Consulting Agreement dated March 10, 1999 between Tech Labs and Mint
Corporation.(2)
10.8 Consulting Agreement dated March 22, 1999 between Tech Labs and MPX
Network Solutions.(2)
10.9 Consulting Agreement dated June 2, 1999 between Tech Labs and Coby
Capital Corporation.(2)
10.10 Assignment of Lease dated May 1, 1992 between William Tanis as
Landlord, Forsee Corporation as Assignor and Tech Labs as Assignee.(2)
10.11 Asset Acquisition Agreement dated as of March 12, 1999 by and between
NORDX/CDT, Inc. and Tech Labs.(2)
10.12 Tech Labs Stock Option Plan.(2)
10.13 Stock Option Agreement dated June 3, 1999 between Tech Labs and Coby
Capital Corporation.(2)
10.14 Stock Option Agreement dated March 10, 1999 between Tech Labs and Mint
Corporation.(2)
10.15 Stock Option Agreement dated March 10, 1999 between Tech Labs and Mint
Corporation.(2)
10.16 Joint Marketing Agreement dated October 15,1999 between Tech Labs and
TravelNet Technologies, Inc.(3)
10.17 Promissory Note and Security Agreement dated October 25, 1999 between
Tech Labs and Peter B. Hirschfield, Trustee, Olive Cox-Sleeper Trust
dated 10/3/58 f/b/o Bert L. Atwater.(4)
10.18 Promissory Note dated December 13, 1999 between Tech Labs and Campbell
Steward.(5)
10.19 Promissory Note dated December 15, 1999 between Tech Labs and Herbert
L. Camp, Esq.(5)
10.20 Promissory Note dated December 20, 1999 between Tech Labs and Thomas
McKean, Esq.(5)
10.21 Shareholders Agreement dated June 23, 2000 by and between Tech Labs
Community Networks, Inc., the Shareholders of M3Communications, Inc.
and Tech Labs Community Networks of the South East, Inc.(5)
10.22 Warrant Agreement dated June 23, 2000 executed by Tech Labs and
delivered to m3communications, Inc.(5)
10.23 First Amendment to Asset Purchase Agreement dated June 9, 2000 entered
into by and between Tech Labs, M3communications, Inc. and the
shareholders of M3.(5)
10.24 Consulting Agreement dated as of November 13, 2000 by and between Barry
Bendette and Tech Labs.(5)
10.25 Subscription Agreement entered into between the subscribers and Tech
Labs dated October 13, 2000.(6)
10.26 Common Stock Purchase warrant entered into between the warrant holders
and Tech Labs dated October 13, 2000.(6)
21.1 Subsidiaries of the Company.
(1) Incoporated by reference from the Registrant's Registration Statement on
Form SB-2, File No. 333-82595, effective February 3, 2000, filed on July 9,
1999.
(2) Incorporated by reference from Amendment No. 1 Registrant's Registration
Statement on Form SB-2, File No. 333-82595, effective February 3, 2000,
filed on October 18, 1999.
(3) Incorporated by reference from Amendment No. 2 to Registrant's Registration
Statement on Form SB-2, File No. 333-82595, effective February 3, 2000,
filed on November 19, 1999.
(4) Incorporated by reference from Amendment No. 3 to Registrant's Registration
Statement on Form SB-2, File No. 333-82595, effective February 3, 2000,
filed on December 17, 1999.
(5) Incorporated by reference from the Registrant's Registration Statement on
form SB-2, File No. 333-50158, effective January 22, 2001, filed on
November 17, 2000.
(6) Incorporated by reference from Amendment No. 5 to Registrant's Registration
Statement on Form SB-2, File No. 333-82595, effective February 3, 2000,
filed on January 28, 1999.
(b) Reports on Form 8-K.
On October 13, 2000 the company filed a Current Report (Item V) on
Form 8-K reporting that it completed a $1.5 million dollar private
placement financing.
On May 1, 2000 the company filed a Current Report (Item V) on Form 8-K
reporting that it sold 293,379 shares of its common stock under its
self-underwritten public offering pursuant to a prospectus dated
February 3, 2000.
III-5
TECH LABORATORIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 2, 2001 TECH LABORATORIES, INC.
By: /s/ Bernard M. Ciongoli
-------------------------
Bernard M. Ciongoli
President
III-6