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.
[X] Transition Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended November 30, 1997.
Commission File Number 33-36198
NET/TECH INTERNATIONAL, INC.
-------------------------------------------
(Name of Small Business Issuer in its charter)
DELAWARE 22-3038309
- ------------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization). Identification No.)
1 WEST FRONT STREET, SUITE 30, RED BANK, NEW JERSEY 07701
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (732) 345-1100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether Issuer: (1) has filed all reports required to be filed by section
13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12
months and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form or any amendment to this Form
10-KSB. [ ]
Issuer's Revenues for its most recent fiscal year: $0.
As of January 31, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Issuer was $13,202,823. The market value of Common Stock
of the Issuer, par value $.01 per share, was computed by reference to the
average of the closing bid and asked prices of one share on such date which was
3.
The number of shares outstanding of the Issuer's Common Stock, par value $.01
per share, as of January 31, 1998: 6,824,210.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference: The information required by Part III
of Form 10-KSB is incorporated by reference to the Issuer's definitive proxy
statement relating to the 1998 Annual Meeting of Shareholders which is expected
to be filed with the Securities and Exchange Commission on or about March 30,
1998.
2
<PAGE>
PART 1
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW OF BUSINESS
Net/Tech International Inc. (the "Company"), a Delaware Corporation,
develops and distributes health and food safety products and solutions to the
food manufacturing, food service and health care industries. Net/Tech's premier
product is the patented Hygiene Guard/TM/, which prompts and monitors employee
hand washing in any facility where hygiene is a priority. The Company's product
line is designed to help satisfy federal, state and local health and food safety
regulatory compliance.
During 1997, the Company designed and manufactured Hygiene Guard/TM/
prototypes and began initial beta testing of the systems within the hospitality
and healthcare industries. The Hygiene Guard/TM/ is an innovative, potentially
life saving technology used to monitor employee hand washing at any hand washing
station. The system can be utilized in the food service, food processing, health
care and child care industries as well as any environment where hygiene and
control of the spread of infectious disease is a priority.
In May of 1997, the Company introduced the Hygiene Guard/TM/ system at the
National Restaurant Association show, which resulted in national and
international media attention including a segment on CNN. The Hygiene Guard was
also featured in over 500 publications in both the United States and foreign
newspapers and magazines.
The Company is currently testing the Hygiene Guard/TM/ system at the
Tropicana Hotel and Casino, Arby's fast food chain, William Beaumont Army
Medical Center, and is scheduled to begin field tests at Kentucky Fried Chicken
and a Nestle food manufacturing plant in March and April 1998 respectively. The
field test on the Series 4000 Hygiene Guard are scheduled to be completed in
April with simultaneous availability of production units. The Company is also
engineering additional series of the Hygiene Guard/TM/ systems in order to be
able to meet customer needs for different applications and price points.
As a result of the Company's purchase in November 1997, of Hospitality
Marketing & Purchasing Corporation (HMP) and the appointment of Ronald J. Heagle
as President and Chief Operating Officer, the Company has expanded its plans and
vision to become a complete health and food safety solutions company. The
Company now plans to offer a variety of health and food safety products and
services in addition to the proprietary Hygiene Guard technology.
Net/Tech intends to offer the hospitality and health care industries the
most innovative and affordable hand wash monitoring and hand washing systems in
the marketplace. The Company is also developing a food and health safety
reference guide and catalog, which will offer approximately 50 to 75 health and
food safety products. The Company is currently negotiating with manufacturers to
distribute these products in the Net/Tech catalog. Net/Tech's strategy is to
become the leading provider for health and food safety solutions.
GENERAL DEVELOPMENT OF BUSINESS
Net/Tech International was founded in 1990. Prior to April 1996, the
Company was focused on commercializing its patented technology for water
dispersible products. The Company developed a prototype of the water dispersible
product, which was successfully tested by the US Military. At that time the
product could not be produced cost effectively enough to be competitive with
styrofoam. Net/Tech intends to renew activities in this field when management
determines the timing and market conditions are appropriate.
In April of 1996, the Company decided to focus its efforts on the Hygiene
Guard, after identifying significant market potential for products relating to
health and food safety. The Company believes that its established product base,
experienced sales and marketing organization, growing network of manufacturers
and
3
<PAGE>
distributors and rapidly growing concerns for health and food safety solutions,
are critical elements of its potential for future success.
PRODUCTS
The Company's premiere product is the patented Hygiene Guard/TM/, which
prompts and monitors employee hand washing in any facility where hygiene is a
priority. During the Hygiene Guard/TM/ field test process the Company has
received feed back which has led to the design of a complete line of Hygiene
Guard/TM/ products and systems.
The Company was recently chosen as master distributor for the Food
Fresh/TM/ line of products. The Food Fresh product line is used in walk in and
reach in coolers to help lower their temperature and moisture levels, thereby
reducing the levels of mold, mildew and bacteria growth. The reduction of
moisture also helps the unit's compressors operate more cost efficiently and can
help reduce slip and fall injuries. In addition, the Company is currently in
negotiations to distribute a variety of innovative hand washing and food safety
related products and systems.
Through its comprehensive health and food safety catalog Net/Tech's
products will help meet customers need for USDA, FDA and state health and food
safety regulatory compliance.
Currently the Company plans to offer approximately 50 to 75 products that
are grouped into five categories:
a. Reference and training solutions
b. Personal hygiene
c. Food safety and regulatory compliance
d. Quality assurance
e. General employee and public safety items
DISTRIBUTION
The Company's 3-tier distribution strategy will include:
1. Direct sales force
2. International and domestic distributors
3. Manufacture and licensing
(1) Direct Sales Force: Net/Tech's direct sales effort will be focused by
region and managed by six regional vice presidents. The Company plans to add two
additional direct sales persons each quarter throughout the year 2000.
(2) International and Domestic Distributors: The Company has identified
strategic distributors in the United States and abroad, and is currently in
negotiations with distributors in the food service and sanitation industries who
have expressed strong interest in distributing the Hygiene Guard/TM/ and/or the
Company's complete health and food safety line of products.
(3) Manufacturers: Net/Tech intends to secure strategic alliances with key
industry manufacturers in the food service equipment and sanitation industries
which will allow the Company to penetrate a greater portion of our core
marketplace. These companies will manufacture and distribute the Hygiene
Guard/TM/ product line under their own name.
4
<PAGE>
IMPACT OF REGULATORY ENVIRONMENT ON COMPANY GROWTH PROSPECTUS
There are approximately 2.5 million retail food establishments throughout
the United States. All of these businesses are regulated by state or local food
codes. In order to assure the regulations have a basis in science and promote a
unified code, the United States Public Health Service of the FDA produces a
model Food Code for state and local adoption. Individual states and localities,
(where applicable), adopt the model code largely by reference, adding provisions
for enforcement procedures to reflect local statutes or ordinances. The
Company's food safety experts have surveyed state and metropolitan regulatory
authorities regarding their plans to adopt the Food Code. There is a consensus
among regulatory authorities, and the Company's experts estimate that 37 states,
and the majority of metropolitan areas, will have adopted the Food Code by the
end of 1998. This accounts for over 83% or 2,075,000 retail establishments.
Section 3--301.00 (A) and (B) of Food Code 1997 states that all food
employees shall wash their hands in a specified manner (A) and (B) "Except when
washing fruits and vegetables as specified under Section 3-302.15 or when
otherwise approved, food employees may not contact exposed, ready to eat food,
with their bare hands and shall use suitable utensils such as dell tissue,
spatulas, tongs, single use gloves, or dispensing equipment."
This regulation has been controversial because it precluded food employees
from handling food with their bare hands unless approved. The standards are for
"when otherwise approved" but were not defined and resulted in confusion.
On November 14, 1997, as result of public input and FDA advice, the State
of Florida adopted and published Regulation 61C-4.010 in the Florida
Administrative Weekly defining "when otherwise approved". It is generally
recognized as the basis for other state regulations currently in review, i.e.
Ohio and Texas.
Regulation 61C-4.010 allows operators to permit food employees to use
direct bare hand contact with ready to eat food that will be eaten within four
hours of preparation as long as the establishment:
/BULLET/ Maintains a written operational plan
/BULLET/ Trains food employees according to the plan
/BULLET/ Monitors hand washing by electronic or paper based
methods
/BULLET/ Excludes or restricts employees with specific acute
symptoms from handling food.
The Net/Tech Hygiene Guard/TM/ system can be an integral component of a
food safety solution-based system because it meets or exceeds retail food
regulatory standards and subsequently can allow bare hand contact with ready to
eat food.
MANUFACTURING
The Company has contracted with both Infrared of New Jersey and Precision
Flow Technologies to design and manufacture the complete Hygiene Guard/TM/
product line. Infrared of New Jersey designs and manufactures the infrared
circuit boards and components, as well as the software which runs the Hygiene
Guard/TM/ system. Precision Flow Technologies has designed all of the component
enclosures and will be responsible for assembly and testing for production
manufacturing.
Net/Tech is currently in the design stage of additional Hygiene Guard/TM/
products and expects the continued involvement of both Infrared of New Jersey
and Precision Flow Technologies throughout that process.
The Company has recently hired an expert engineer, George Bucci, who will
be responsible for ongoing review of the overall and specific component designs
in an effort to maximize engineering and manufacturing efficiencies. Mr. Bucci's
company can also provide manufacturing capabilities, if necessary.
5
<PAGE>
PATENTS
On April 30, 1990, the Company filed for US patent protection on the
water-dispersible technology (No. 5,110,525, granted May 5, 1992), useful in
manufacturing rigid containers for use in the medical and food industries. The
inventors, William H. Hale and Roger E. Kolsky, have assigned the patent rights
to the Company. Agricultural and process patent applications have been filed.
On January 18, 1991, the Company filed for US patent protection on the
Hygiene Guard/TM/ invention. A patent was granted on April 13, 1993 (No.
5,202,666). All patent rights have been assigned to the Company by the
inventors, Daniel D. Richard and Herman Knippscheer. The Company intends to
filed additional US and International patents for the different variations and
applications of the Hygiene Guard systems it intends to manufacture.
The Company was issued a patent (Patent No. 5,135,721, granted August 4,
1992) for a sterilization apparatus called Steril-Eze. All patent rights have
been assigned by the inventor to the Company.
The Company was issued a usage patent on the water-dispersible technology
(Patent No. 5,335,449, granted August 9, 1994) for the agriculture market. All
patent rights have been assigned by the inventor to the Company.
Net/Tech was issued a process patent on the water-dispersible technology
(Patent No. 5,346,449, granted September 13, 1994). This patent covers the
process required to produce the material and the ability to vary dispersal
times. All patent rights have been assigned by the inventors to the Company.
COMPETITION
The Company has identified at least one other manufacturer of a hand wash
monitoring system, and believes the unique Hygiene Guard/TM/ product line offers
features and cost savings currently unavailable in the marketplace. Net/Tech
will be adapting and updating the Hygiene Guard/TM/ products to meet the rapidly
growing needs of the hospitality and health care industries.
In order to offer the customer the most complete package of hand wash
monitoring and hand wash systems, the Company is currently in discussion with
other manufacturers to distribute their hand wash related products.
RESEARCH AND DEVELOPMENT
The Company has spent approximately $391,939 in 1997 on research and
development to prepare the Hygiene Guard Series 4000 for production and
manufacturing. Ongoing engineering expenses are anticipated to complete design
of additional Hygiene Guard series products.
EMPLOYEES
In addition to marketing, technical, and financial relation consultants,
the Company currently has eight full-time and two part-time employees. The
Company plans to add two additional direct sales persons each quarter throughout
the year 2000.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate office occupies approximately 3,300 square feet in
Red Bank, New Jersey, with an annual rent of $47,724 and the Company has the
ability to expand its current location to include an additional 1,500 square
feet, if necessary. The current lease expires March 2001. The Company also
leases research and development space as part of its design and manufacturing
relationship with Precision Flow Technologies located in West Hurley, New York.
6
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
NONE
7
<PAGE>
ITEM 4. SUBMISSION OF MATTER TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the last quarter of the fiscal year ending November 30, 1997.
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Company's Common Stock has been trading on the Over-the-Counter
market since January 10, 1992, the date of the Company's initial public
offering. The following table shows for the calendar periods indicated the high
and low closing bid quotation for the Company's Common Stock. The quotations,
from Dow Jones Retrieval Service, represent inter-dealer prices without retail
mark-up, mark-down or commission and may not represent actual transactions.
1997 HIGH BID LOW BID
---- -------- -------
First Quarter 2 3/4 2
Second Quarter 3 3/8 1 7/16
Third Quarter 3 3/16 1 3/4
Fourth Quarter 4 2 1/4
1996
----
First Quarter 1 1/4
Second Quarter 3 3/4 1/4
Third Quarter 3 3/4 1 3/4
Fourth Quarter 2 1/2 1 3/4
(b) As of January 31, 1998, there were approximately 196 record holders of
the Company's Common Stock. In addition, there are 250 shareholders in street
name whose shares are held in the name of other nominees.
(c) There have been no dividends declared or paid by the Company on its
Common Stock during the past two years.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information included in this discussion contains forward looking
statements that are based on current expectations and beliefs and involve
numerous risks and uncertainties that could cause actual results to differ
materially. Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date hereof.
RESULTS OF OPERATIONS
Net/Tech International Inc. is a development stage which is the process of
positioning itself as a complete health and food safety solutions Company. The
Company's primary products are its patented Hygiene Guard/TM/ series which
prompts and monitors employee hand washing in any environment where hygiene is a
priority. In the current year, the management team has made a concerted effort
to utilize its financial resources to develop and promote the Hygiene Guard
products.
The Company made significant expenditures for research, development and
related engineering costs during fiscal 1997 as compared to fiscal 1996. This
reflected the Company's contract with the supplier of its printed circuit
assembly components. These expenditures paid for working engineering model
systems with a personal computer based system controller capable of remote
access, field testing of the model systems, production of beta test and field
testing units. The Company also incurred engineering costs with the company
assembling the Hygiene
8
<PAGE>
Guard/TM/ to develop the Badge to be worn by employees, the Soap and Employee
Monitoring Units, the system interface, and the tooling charges to manufacture
these products. These costs totaled $391,939 in fiscal 1997. In fiscal 1996, the
Company was in a management transitional phase and the sole research and
development expense consisted of $8,000 expended for an engineering feasibility
study.
Marketing, general and administrative expenses increased due to the
expansion of staff as the Company added sales, marketing, and technical support
staff in connection with the seven beta test sites in process or scheduled for
installation in the first quarter of 1998 and numerous trade shows attended to
promote the product. These beta test sites will provide full end-user feedback
prior to the full-scale manufacturing planned to commence in fiscal 1998. The
Company also incurred a $125,000 charge in November 1997 in connection with a
stock for stock purchase of Hospitality Marketing and Purchasing Corporation
owned by Ron Heagle. This transaction, along with Mr. Heagle's appointment as
President and Chief Operating Officer, gives the company the ability to offer
the Hygiene Guard along with other products and services to the contacts and
accounts previously serviced by the officer in his position as Vice President of
National Accounts for an international provider of sanitation products and
service to the hospitality and chain restaurant industries.
In addition, during fiscal 1997, the Company incurred costs for printing
promotional brochures, travel to trade shows and memberships in numerous food
processing and food sanitation associations, and costs related to establishing
strategic alliances or licensing agreements with selected distributors which
will allow these companies to offer the full range of the Company's health and
food safety solutions to their customers. Fiscal 1996 costs consisted primarily
of costs incurred in restructuring the Company, working to raise funds through
various financing arrangements and the promotional, consulting and professional
fee costs incurred.
Abandonment of Patents: The Company sustained a loss in fiscal 1996 on the
abandonment of patents and patent applications that it no longer deemed worthy
of pursuing as the focus of the management shifted toward the Hygiene Guard.
LIQUIDITY AND CAPITAL RESOURCES
The Company has had no sources of recurring revenue and has incurred
operating losses since inception. The Company has financed it operations with
public and private offerings of securities and options. The Company anticipates
its capital requirements to range from $3,000,000 to $9,000,000 depending on
sales and production levels. The Company plans to enter the global market with a
full line of products and systems for the health care and food service safety
markets, continue research and development programs for new and improved
products and systems, acquire existing businesses and form strategic alliances,
expand sales, marketing and technical support staff and create awareness of the
magnitude of food safety problems and their solutions.
The Company had working capital of $770,079 as of November 30, 1997, the
assets consisting primarily of cash equivalents of $832,502. Management believes
that existing cash combined with various funding options will be sufficient to
support operations until the planned commercialized operations of the Hygiene
Guard/TM/ commence in fiscal 1998. The Company anticipates commercialization of
its products and the offering to its client base of a Health and Food Safety
Products catalog that is basic to the client's compliance with Government
regulations.
The Company is continuing to actively pursue funding options including the
sale of additional options, equity or a secondary offering to obtain the
additional funding necessary to continue the research and development necessary
to complete the development of its product line and bring them to commercial
markets. There can be no assurance that such financing, if required, will be
available on satisfactory terms, if at all.
During fiscal 1997, the Company raised capital of $1,322,750 through the
issuance of 991,998 shares of common stock subject to the restrictions of Rule
144 of the Securities and Exchange Commission. The Company also raised $470,000
through sale of restricted options in its common stock. During fiscal 1996 the
Company raised $225,407 through issuance of common stock and the exercise of
stock warrants.
9
<PAGE>
RISK FACTORS
The Company's business, results of operations and financial condition are
subject to the following risk factors:
LIMITED OPERATING HISTORY: SIGNIFICANT AND CONTINUING LOSSES. Although the
Company was formed in 1990, as far as the development, manufacture and sale of
the Hygiene Guard/TM/ product series is concerned, it has limited operational
history upon which investors may base an evaluation of its performance or any
assumption as to the likelihood that the Company will be profitable. The
Company's prospects must be considered in light of the risks, expenses, delays,
problems, and difficulties frequently encountered in the establishment of a new
business and the development and commercialization of new products based on
innovative technology. There can be no assurance that the Company will be able
to generate significant revenues or achieve profitability.
TECHNOLOGICAL FACTORS. The Company's development efforts relating to the Hygiene
Guard/TM/ are substantially complete. However, the Company is continually
seeking to refine and improve it and develop other new products necessary to
become a complete resource for food and health safety. The Company's efforts
remain subject to risks inherent in new product development, including
unanticipated technical or other delays in product development or
commercialization. The Company's success will depend on such products meeting
targeted product costs and sales performance targets. There can be no assurance
that unanticipated problems will arise with respect to technologies incorporated
into products. In the event that the Company is required to remedy defects in
its products after commercial introduction, the costs to the Company could be
considerable and have an adverse effect on its financial condition.
MARKET ACCEPTANCE. The Company Hygiene Guard/TM/ has been well received by
potential customers within the hospitality and healthcare industry. Although the
Company is confident of receiving orders, as in the case of any emerging
product, demand and market acceptance for newly introduced products is subject
to a high level of uncertainty.
DEPENDENCE ON MANAGEMENT. The Company is dependent on the expertise and
experience of Glenn Cohen, Chief Executive Officer and Ron Heagle, President and
Chief Operating Officer for its operations. The loss of any of the Company's key
management personnel could seriously inhibit the Company's operations. The
Company is exploring the option of obtaining "key man" life insurance on its
Management.
NEED FOR ADDITIONAL FINANCING. As of fiscal year end cash on hand would be
sufficient to fund the Company`s proposed operations for a period of one year.
This estimate is based on certain assumptions and there can be no assurance that
unanticipated, unbudgeted costs will not be incurred. Future events, including
the problems, delays, expenses and difficulties frequently encountered in
establishing a substantial market for the Company's product line could make the
net proceeds from exercise of options insufficient to fund the Company's
proposed operations. The Company is dependent on obtaining future financing and
there is no assurance that additional financing will be available. The Company
has no established borrowing arrangements or available line of credit.
10
<PAGE>
ITEM 7 FINANCIAL STATEMENTS
The financial statement and supplementary data listed in the accompanying
Index to Financial Statements are attached as part of this report.
NET/TECH INTERNATIONAL, INC.
LIST OF FINANCIAL STATEMENTS
The following financial statements of Net/Tech International, Inc. are included
in Item 7:
Report of Independent Public Auditors 12
Balance Sheets F-1
Statements of Loss F-3
Statements of Cash Flows F-4
Statements of Shareholders' Equity - Inception
Through November 30, 1997 F-7
Notes to Financial Statements F-11
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Net/Tech International, Inc.
We have audited the accompanying consolidated balance sheets of Net/Tech
International, Inc. (a development stage company) as of November 30, 1997 and
1996, and the related consolidated statements of loss and cash flows for the
years ended November 30, 1997 and 1996 and for the period from September 11,
1989 (inception) through November 30, 1997 and consolidated statements of
stockholders' equity and deficit accumulated during the development stage from
inception through November 30, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Net/Tech International, Inc. as of November 30, 1997 and 1996 and the
consolidated results of operations, cash flows and statements of stockholders'
equity and deficit accumulated during the development stage from inception
through November 30, 1997 in conformity with generally accepted accounting
principles.
MIRSKY, FURST & ASSOCIATES, P.A.
Fort Lee, New Jersey
March 13, 1998
12
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
NOVEMBER 30, NOVEMBER 30,
1997 1996
------------ ----------
<S> <C> <C>
CURRENT ASSETS
- --------------
Cash $ 832,502 $ 77,560
Inventory 41,479 --
---------- ----------
Total Current Assets 873,981 77,560
---------- ----------
FIXED ASSETS
- ------------
Leashold improvements 10,126 6,019
Furniture and fixtures 35,494 2,357
Machinery and equipment 73,146 11,623
---------- ----------
118,766 19,999
Less: Accumulated Depreciation 20,096 6,460
---------- ----------
98,670 13,539
---------- ----------
INTANGIBLE ASSETS
- -----------------
Patent application costs (net of accumulated 59,942 64,352
amortization of $13,834 and $9,424 respectively)
---------- ----------
59,942 64,352
---------- ----------
OTHER ASSETS
- ------------
Security deposits 4,044 22,034
---------- ----------
TOTAL ASSETS $1,036,637 $ 177,485
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
NOVEMBER 30, NOVEMBER 30,
1997 1996
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
- -------------------
Accounts payable $ 80,582 $ 22,939
Accrued expenses and interest 21,815 4,625
Obligations under capital lease-current portion 1,505 1,287
----------- -----------
Total Current Liabilities 103,902 28,851
----------- -----------
Accrued compensation 125,000 --
Obligations under capital lease 1,759 3,264
STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------------
Common stock, $.01 par value; 20,000,000
authorized; 6,689,210 and
5,697,212 shares issued and outstanding,
respectively 66,892 56,972
Additional paid-in capital 4,538,589 2,661,759
Deficit accumulated during the development stage (3,799,505) (2,573,361)
----------- -----------
Total Stockholders' Equity 805,976 145,370
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,036,637 $ 177,485
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF LOSSES
JANUARY 10,
1990
FOR THE YEAR FOR THE YEAR (INCEPTION)
ENDED ENDED THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
COSTS AND EXPENSES:
Marketing, general & administrative expenses 814,604 141,635 2,666,163
Research, development and related expenses 391,939 8,000 962,781
Depreciation and amortization 18,974 6,222 70,415
----------- ----------- -----------
OPERATING LOSS ($1,225,517) ($ 155,857) ($3,699,359)
OTHER (INCOME) AND EXPENSE:
Interest income -- -- (24,162)
Interest expense 627 7,106 60,062
Loss on abandonment of assets -- 1,603 571
Loss on abandonment of patents -- 33,675 33,675
Write-off of investment -- -- 30,000
----------- ----------- -----------
627 42,384 100,146
NET INCOME (LOSS) ($1,226,144) ($ 198,241) ($3,799,505)
NET INCOME (LOSS) PER SHARE ($ 0.20) ($ 0.04)
=========== ===========
Number of Shares Used In Computation 6,024,262 5,486,393
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
JANUARY 10,
1990
(INCEPTION)
THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
FISCAL YEAR ENDED 1997 1996 1997
- ----------------- ----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Profit (Loss) ($1,226,144) ($ 198,241) ($3,799,505)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES
Depreciation 14,564 2,098 53,411
Amortization of intangible assets 4,410 4,124 14,751
Write-off of patents and trademarks -- 33,675 35,927
Loss on disposal of assets -- 1,603 1,603
Decrease in accrued expenses from Initial
public offering -- -- 30,500
Compensation and services paid in Common Stock 219,000 -- 219,250
Investment -- -- 30,000
Interest to affiliate paid in Common Stock -- 6,856 6,856
Accounts receivable -- 4,500 --
Inventory (41,479) (41,479)
Prepaid expenses -- 500 --
Security deposits 17,990 (21,800) (3,960)
Accounts payable 57,643 12,112 88,582
Accrued expenses and interest 17,190 (175) 67,346
----------- ----------- -----------
Total Adjustments 289,318 43,493 502,787
----------- ----------- -----------
NET CASH (USED IN)
OPERATING ACTIVITIES (936,826) (154,748) (3,296,718)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment-net (99,695) (15,636) (153,684)
Patent and trademark acquisitions -- -- (82,704)
----------- ----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES ($ 99,695) ($ 15,636) (236,388)
----------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
JANUARY 10,
1990
(INCEPTION)
THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
FISCAL YEAR ENDED 1997 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 1,312,750 37,500 1,768,985
Loan proceeds from affiliate 187,907 634,182
Repayment of debt to affiliate -- (169,357) (169,357)
Financing via capital leases -- 4,551 4,551
Other -- -- (16)
Proceeds from debt -- -- 130,000
Deferred public offering costs -- -- (84,496)
Issuance of common stock net of offering costs -- -- 1,054,078
Proceeds from options sold 480,000 -- 480,000
Principal payments under capital lease (1,287) -- (1,287)
Proceeds of warrants exercised -- 187,343 548,968
----------- ----------- -----------
NET CASH PROVIDED BY 1,791,463 247,944 4,365,608
FINANCING ACTIVITIes -- -- --
Net Increase (Decrease) in Cash and Cash Equivalents 754,942 77,560 832,502
----------- ----------- -----------
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 77,560 -- --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS END OF YEAR $ 832,502 $ 77,560 $ 832,502
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
JANUARY 10,
1990
(INCEPTION)
THROUGH
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
FISCAL YEAR ENDED 1997 1996 1997
- ----------------- ------------- ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest $ 627 $ - $ 627
Income Taxes $ - $ - $ -
</TABLE>
Supplemental schedule of noncash investing and financing activities:
The Company recognized compensation expense of $125,000 for common stock to be
issued in connection with the acquisition of Hospitality Marketing and
Purchasing Corporation.
The Company recognized $94,000 in compensation based on the intrinsic value of
options granted to employees/ directors.
Additional common stock was issued upon the conversion of $130,000 of
convertible loans payable.
A company was issued 2,000 shares at $4 per share for promotional services.
The Company purchased Pressure Point Technologies in exchange for 25,000 shares
of common stock.
Additional common stock was issued upon the conversion of the affiliate note
payable ($464,825) and accrued interest ($52,836).
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
INCEPTION THROUGH NOVEMBER 30, 1997
DEFICIT TOTAL
ACCUMULATED SHARE-
DURING THE HOLDERS'
COMMON STOCK ADDITIONAL PAID DEVELOPMENT EQUITY
SHARES AMOUNT IN CAPITAL STAGE (DEFICIT)
--------- ----------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
JANUARY 10, 1990 (INCEPTION)
Shares issued at $.01 per unit
For cash-private placement 3,162,500 $ 31,625 -- $ 31,625
For promotional service provided 25,000 250 -- 250
For subscription receivable 750,000 7,500 -- 7,500
For organizational costs provided 100,000 1,000 -- 1,000
For patent assignment 200,000 2,000 -- 2,000
Shares issued at $1.00 per unit
For cash-private placement 130,000 1,300 $ 128,700 130,000
Exercise of options 30,000 300 29,700 30,000
Net (Loss) $ (154,151) (154,151)
----------- ----------- ----------- ----------- -----------
BALANCE NOVEMBER 30, 1990 4,397,500 43,975 158,400 (154,151) 48,224
DECEMBER 1, 1990 TO NOVEMBER 30, 1991
Net (Loss) (144,403) (144,403)
----------- ----------- ----------- ----------- -----------
BALANCE NOVEMBER 30, 1991 4,397,500 43,975 158,400 (298,554) (96,179)
DECEMBER 1, 1991 TO NOVEMBER 30, 1992
Shares issued at $7.00 per share
For cash - IPO 149,110 1,491 1,042,279 1,043,770
Shares issued at $2.33 per share
For Convertible Note 55,787 558 129,426 129,984
Shares issued at $2.00 per share
For Inside A Warrants 10,000 100 19,900 20,000
Shares issued at $2.67 per share
For Inside B Warrants 10,000 100 26,600 26,700
Reduction of deferred offering costs -- -- (212,813) (212,813)
Net (Loss) (662,629) (662,629)
----------- ----------- ----------- ----------- -----------
BALANCE NOVEMBER 30, 1992 4,622,397 $ 46,224 $ 1,163,792 ($ 961,183) $ 248,833
=========== =========== =========== =========== ===========
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
INCEPTION THROUGH NOVEMBER 30, 1997
DEFICIT TOTAL
ACCUMULATED SHARE-
ADDITIONAL DURING THE HOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE (DEFICIT)
------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
DECEMBER 1, 1992 TO NOVEMBER 30, 1993
Shares issued at $7.50 per share
For - IPO A Warrants 33,230 $ 332 $ 248,893 -- 249,225
Shares issued at $4.66 per share
For Convertible Note A Warrants 500 5 2,325 -- 2,330
Shares issued at $2.00 per share
For Inside A Warrants 25,000 250 49,750 -- 50,000
Shares issued at $2.67 per share
For Inside B Warrants 5,000 50 13,320 -- 13,370
Proceeds from private placement:
Shares issued at $2.50 per share 60,000 600 148,386 -- 148,986
Shares issued at $6.00 per share 3,000 30 17,870 -- 17,900
Shares issued at $2.42 per share 92,000 920 222,080 -- 223,000
Shares issued at $2.33 per share 10,000 100 23,250 -- 23,350
Shares issued at $4.00 per share
For Professional Services 2,000 20 7,980 -- 8,000
Net (Loss) (656,814) (656,814)
----------- ----------- ----------- ----------- -----------
BALANCE NOVEMBER 30, 1993 4,853,127 48,531 1,897,646 (1,617,997) 328,180
December 1, 1993 to November 30, 1994
Proceeds from private placement:
Shares issued at $2.75 per share 2,000 20 5,480 -- 5,500
Net (Loss) (521,615) (521,615)
----------- ----------- ----------- ----------- -----------
BALANCE NOVEMBER 30, 1994 4,855,127 $ 48,551 $ 1,903,126 ($2,139,612) ($ 187,935)
=========== =========== =========== =========== ===========
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
INCEPTION THROUGH NOVEMBER 30, 1997
DEFICIT TOTAL
ACCUMULATED SHARE-
ADDITIONAL DURING THE HOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE (DEFICIT)
----------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
DECEMBER 1, 1994 TO NOVEMBER 30, 1995
Net (Loss) (235,508) (235,508)
----------- -----------
BALANCE NOVEMBER 30, 1995 4,855,127 48,551 1,903,126 (2,375,120) (423,443)
----------- ----------- ----------- ----------- -----------
DECEMBER 1, 1995 TO NOVEMBER 30, 1996
Shares issued at $1.25 per share for 149,874 1,499 185,844 -- 187,343
Inside A & B Warrants
Proceeds from private placement:
Shares issued at $0.25 per share 150,000 1,500 36,000 -- 37,500
Shares issued at $1.00 per share
to acquire Pressure Point Tech 25,000 250 24,750 -- 25,000
Shares issued at $1.00 per share
for Convertible Loan 517,211 5,172 512,039 -- 517,211
Net (Loss) -- (198,241) (198,241)
----------- ----------- ----------- ----------- -----------
BALANCE NOVEMBER 30, 1996 5,697,212 $ 56,972 $ 2,661,759 ($2,573,361) $ 145,370
----------- ----------- ----------- ----------- -----------
DECEMBER 1, 1996 TO NOVEMBER 30, 1997
Proceeds from private placement:
Shares issued at $1.25 per share 626,000 6,260 776,240 -- 782,500
Sale of options for $1.00 per option -- -- 200,000 -- 200,000
with an exercise price of $2.50
Sale of options for $.25 per option -- -- 270,000 -- 270,000
with an exercise price of $2.50
Shares issued at $1.50 per share upon 349,998 3,500 521,500 -- 525,000
exercise of stock options
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
INCEPTION THROUGH NOVEMBER 30, 1997
DEFICIT TOTAL
ACCUMULATED SHARE-
ADDITIONAL DURING THE HOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE (DEFICIT)
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Shares issued upon exercise of
stock options 16,000 $ 160 $ 15,090 -- $ 15,250
Compensation expense for issuance -- -- 94,000 -- 94,000
of stock options
Net (Loss) -- -- -- (1,226,144) (1,226,144)
----------- ----------- ----------- ----------- -----------
BALANCE NOVEMBER 30, 1997 6,689,210 $ 66,892 $ 4,538,589 $(3,799,505) $ 805,976
=========== =========== =========== =========== ===========
</TABLE>
Share prices are rounded to the nearest penny.
The accompanying notes to financial statements are an integral part of these
statements.
F-10
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 1. - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Company was incorporated in Delaware on January 10, 1990. The
Company develops and distributes health and safety products and solutions to the
food manufacturing, food service and health care industries. The Company's
premier product is the patented Hygiene Guard(TM), which prompts and monitors
employee hand washing in any facility where hygiene is a priority. The Company's
product line is designed to help satisfy federal, state and local health and
food safety regulatory compliance.
In 1993, the Company formed Multi-Monitoring Systems, Inc., a Delaware
Corporation. As of November 30, 1995, no shares have been issued and the company
has no financial activity, therefore, it is not consolidated with Net/Tech. In
October, 1995, the Company acquired Pressure Point Technologies (see Note 3).
The financial statements include the accounts for this subsidiary from the date
of acquisition.
CASH EQUIVALENTS:
Cash and equivalents consist of highly liquid investments with a
maturity date at acquisition of three months or less.
INVENTORY
Inventory consists of the components of the Hygiene Guard which will be
available for sale upon completion of beta testing. The inventory is stated at
the lower of cost or market.
PROPERTY AND EQUIPMENT:
Property and Equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful life of the asset.
Leasehold Improvements are amortized over the shorter of the respective life of
the lease or the useful life of the improvements.
Upon the sale or retirement of depreciable assets, the cost and related
accumulated depreciation will be removed from the accounts and resulting profit
or loss will be reflected in income. Expenditures for maintenance and repairs
are charged to income as incurred.
Estimated useful lives are as follows:
Machinery and Equipment 5 - 10 years
Furniture and Fixtures 5 - 7 years
INTANGIBLE ASSETS:
Costs incurred in connection with filing patent and trademark
applications are being capitalized. Patents and trademarks granted are amortized
on a straight line basis over a lifetime of 10 and 3 years, respectively.
Abandoned patents are expensed in the year of abandonment.
F-11
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 1. - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of " ("SFAS 121"). Long lived assets and
identifiable intangibles to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Impairment is measured by comparing the carrying value
of the long-lived asset to the estimated undiscounted future cash flows expected
to result from uses of the assets and their eventual disposition. The adoption
of SFAS No. 121 did not have a material impact on the results of operations or
financial position of the Company.
ORGANIZATION COSTS:
Organization costs were capitalized and are being amortized over a five
year period.
RESEARCH AND DEVELOPMENT COSTS:
Research, development and related engineering costs are expensed as
incurred.
LOSS PER COMMON AND COMMON EQUIVALENT SHARE
The loss per common share for the fiscal years 1997 and 1996 were
computed by dividing net loss by the weighted average number of common shares
outstanding during such periods. Common stock equivalents were not included in
the computation of weighted average shares outstanding because their inclusion
would be anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which replaces current Earnings Per Share (EPS)
reporting for interim and annual periods ending after December 15, 1997 and
requires a dual presentation of basic and diluted EPS. Adoption of SFAS No. 128
is not expected to have a material impact on the Company's per share data.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Actual results
could differ from those estimates.
EMPLOYEES STOCK PLANS
The Company accounts for its stock options in accordance with the
provisions of the Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." In accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company continues to apply the provisions of APB
No. 25 for purposes of determining net income and has adopted the pro forma
disclosure requirement of SFAS No. 123 effective December 1, 1996.
F-12
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components in a complete set of
general purpose financial statements; and SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for a Company's business segments and related
disclosures about it's products, services, geographic areas and major customers.
Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years beginning
after December 15, 1997. The Company believes that the adoption of the new
standards will not have a material effect on the financial statements.
NOTE 2. - LIQUIDITY AND BUSINESS RISKS
The Company currently has no sources of revenues and has incurred an
operating loss since inception. At November 30, 1997, the Company had an
accumulated deficit of $3,799,505. Such losses have resulted principally due to
the expenditures for research, development and engineering costs, as well as,
the expansion of the Company's staff including sales, marketing and technical
support. Management believes that existing cash combined with various funding
options will be sufficient to support operations until the planned
commercialized operations of the Hygiene Guard(TM) commence in fiscal 1998. Any
delay in the implementation of this plan would adversely affect the Company's
business, financial position and result of operations. During fiscal 1997, the
Company raised capital of $1,312,750 through the issuance of 991,998 shares of
common stock subject to the restrictions of Rule 144 of the Securities and
Exchange Commission. The Company also received $480,000 from the sale of
1,880,000 options to purchase its common stock at $2.50 per share. These options
are valid for a period of two years. Exercise of these options would result in a
cash infusion of $4,700,000 to the Company. Stock issued will be subject to Rule
144 restrictions.
NOTE 3. - ACQUISITIONS
In November, 1997, the Company acquired Hospitality Marketing and
Purchasing Corp., (HMP) for 100,000 authorized but unissued shares of common
stock in exchange for 100% of the stock of HMP. HMP is a Florida Corporation
formed by Ron Heagle, the new President and Chief Operating Officer of Net/Tech.
HMP assets consisted principally of a Health and Food safety reference guide
catalogue and the industry acumen of Mr. Heagle. Furthermore, as part of an
employment contract connected with the acquisition (which has not been
finalized), Mr. Heagle may receive contingent consideration of up to 300,000
options if the Company achieves certain levels of profitability. (100,000
options per year if the Company achieves profits of $1,000,000, $2,000,000 and
$3,000,000 respectively over the first three year period) Accordingly, the
shares issued to HMP were accounted for as an incentive signing bonus for the
personnel services of Mr. Heagle and were charged to the statement of operations
in the amount of $125,000. The shares were not issued until December 1997, the
resulting expense and liability have been accrued. The shares were valued at the
value ascribed to other Rule 144 stock issued in the period of the acquisitions.
In October 1996, the Company acquired 100% of the common stock in
Pressure Point Technologies, Inc., in a transaction accounted for under the
purchase method. The Company issued 25,000 shares of authorized but unissued
stock in consideration for the stock acquired. Pressure Point Technologies was
incorporated in Michigan in 1996 and the assets of the company consisted
primarily of the technology for a battery less remote control for which a patent
has been applied for. The Company is currently awaiting official notification of
the
F-13
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 3. - ACQUISITIONS (CONTINUED)
patent number and issue. The acquisition cost of $25,000 has been allocated to
patents and will be amortized upon the issuance of the patent.
NOTE 4. - CONVERSION OF DEBT TO AFFILIATE
Beginning in April 1994, the Company borrowed capital for operations
from its affiliate CRYO-CELL International, Inc. The amounts borrowed were in
the form of convertible notes due on demand at an interest rate of 10% per
annum. The notes were convertible into the common stock of Net/Tech
International, Inc. at CRYO-CELL's discretion. All of the Company's patent
rights were assigned to CRYO-CELL as collateral for the notes.
On November 1, 1995, both boards of directors of the respective
companies resolved to convert the notes into shares of restricted common stock
valued by the Company at $1. The Company issued 517,211 shares which satisfied
$52,386 in accrued interest and the remaining $464,825 principal amount due.
NOTE 5. - ACCRUED EXPENSES
At November 30, accrued expenses consisted of:
1997 1996
------- ------
Wage and benefits payable $21,815 $4,625
======= ======
Non-current accrued compensation at November 30, 1997 consists of stock
owed pursuant to the acquisition described in Note 3.
NOTE 6. - PATENTS
Patents have been granted on the Hygiene Guard(TM) and water
dispersible technology.
The patent applications and rights were assigned by the co-inventors to
the Company. The assignments included rights to all related developments,
modifications and improvements. In consideration of the assignments each of the
co-inventors received 100,000 shares of common stock of the Company, valued at
$1,000, which approximates costs incurred by the co-inventors. The patent rights
were capitalized and recorded as an asset.
NOTE 7. - WARRANTS
The Company issued 160,000 shares with detachable Class A warrants at
$1.00 per share prior to the public offering. The IPO consisted of 149,110
shares with detachable Class A warrants exercisable at $7.50 per share. In
addition, the Company issued 55,790 shares with detachable Class A warrants
exercisable at $2.33 per share (conversion price) for the $130,000 convertible
note (See Note 12). All of the Class A warrants were exercisable to purchase one
share of common and one Class B warrant. The Class B warrants were exercisable
to purchase one share of common stock.
F-14
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 7. - WARRANTS (CONTINUED)
Class A warrants issued prior to the public offering originally could
be exercised at $2 per share and Class B warrants at $2.69 per share. Class A
warrants issued in the public offering were exercisable at $7.50 per share and
Class B warrants at $10 per share. Class A warrants issued from the conversion
of the note were exercisable at $4.66 per share and Class B warrants at $6.20
per share. All of the common stock issued prior to the public offering from the
convertible loan were subject to Rule 144 under the Securities Act of 1933,
restricting the sale of stock.
All of the warrants issued by the Company expired on August 27, 1997.
The following table summarizes the Company's outstanding warrants at November
30:
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
A B A B
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Warrants outstanding and exercisable at
the beginning of year (number of shares) 115,880 33,230 296,167 53,730
Exercised 0 0 (149,874) 0
Terminated (115,880) (33,230) (30,413) (20,500)
-------- -------- -------- --------
Warrants outstanding and exercisable at
the end of the year 0 0 115,880 33,230
======== ======== ======== ========
Price range of warrants (n.m - no market) -- -- $ 7.50 $ 10.00
</TABLE>
NOTE 8. -OPTIONS
In 1992 the Company adopted an Employee Incentive Stock Option Plan
providing for 250,000 shares to be available and the Company has set aside a
reserve of shares of that amount for this purpose. In addition, the Company has
issued Non-Employee Stock Options to individuals whose contribution and
assistance is of benefit to the Company.
F-15
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 8. -OPTIONS (CONTINUED)
Stock option activity was as follows for the two years ended November 30, 1997:
WEIGHTED AVERAGE
NO. OF SHARES EXERCISE PRICE
------------- ----------------
Outstanding at November 30, 1995 243,000 $ 2.46
Granted 170,000 1.21
Exercised 0
Terminated 228,000 2.56
Outstanding at November 30, 1996 185,000 $ 1.19
Granted and purchased 2,302,500 $ 2.02
Exercised 365,000 $ 1.48
Terminated 0
Outstanding at November 30, 1997 2,122,500 $ 2.04
Significant option groups outstanding at November 30, 1997 and related
price and life information follows:
WEIGHTED AVERAGE
RANGE OF EXERCISE WEIGHTED AVERAGE REMAINING
PRICE OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE
- ----------------- ----------- -------------- ----------------
$0.50 to $1.25 532,500 1.10 1.5
$1.26 or more 1,590,000 2.36 4.0
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its stock options. Accordingly, in fiscal 1997, $94,000 in
compensation expense has been recognized for its stock-based compensation. Had
compensation cost for the options been determined based upon the fair value at
the grant date consistent with the alternative fair value accounting provided
for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," the
Company's net loss and net loss per share would have been $1,708,719 and $.28
for the year ended November 30, 1997, and $273,041 and $.05 for the year ended
November 30, 1996. The weighted average fair value of each option granted during
fiscal 1997 is estimated at $1.36 at the date of grant using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
6.3%, expected life of 1.2 years, expected volatility of 133%, and no dividend
yield. The weighted average fair value of each option granted during fiscal 1996
is estimated at $0.44 at the date of grant using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of 6.0%,
expected life of 1.8 years, expected volatility of 104%, and no dividend yield.
F-16
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 8. -OPTIONS (CONTINUED)
Weighted average grant date fair values are shown below for groups
where the stock price equals, exceeds and is less than the Exercise Price.
<TABLE>
<CAPTION>
WEIGHTED AVG FAIR VALUE/SH WTD AVG EXERCISE PRICE/SH
-------------------------- -------------------------
1997
- ----
<S> <C> <C>
Stock Price /greater than/ Exercise Price $2.02 $1.22
Stock Price /less than/ Exercise Price $1.02 $1.25
1996
- ----
Stock Price /less than/ Exercise Price $0.44 $1.21
</TABLE>
The pro forma effect on net income is not representative of the pro
forma effect on net income in future periods because it does not take into
consideration pro forma compensation expense related to grants made in prior
periods.
NOTE 9. - STOCKHOLDERS' EQUITY
Other stock reserved for future issuance is as follows:
DESCRIPTION NUMBER OF SHARES EXPIRATION
- ----------- ---------------- -------------
Reserve for options granted for
non-employees 197,500 09/98 - 07/99
Reserve for options purchased by
non-employees 1,530,000 01/99 - 01/00
Reserve for granted employee
options 350,000 01/99 - 01/00
*250,000 shares of the Company's stock has been put into reserve for an
Employee Stock Option Plan (the Plan). Employee Options granted under the Plan
are exercisable at 100% of the current market price and have a term of five
years from the date of grant. The options immediately terminate on the
employee's termination or in the case of permanent and total disability, the
options are exercisable for a period of 30 days after termination.
NOTE 10. - RELATED PARTY TRANSACTIONS
CRYO-CELL International, Inc. owns 28.2% of the Company's issued and
outstanding stock. As of November 30, 1996, CRYO-CELL owned 35.8% of the
Company's issued and outstanding stock.
F-17
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 11 - SERVICES CONTRIBUTED
a) In 1990, promotional services were provided by an independent contractor in
consideration for 25,000 shares of the Company's common stock. The Company had
negotiated the fair value of the promotional services rendered under the terms
of the agreement to be $250. The Company has recorded the shares issued at the
fair market value of the service and expensed the promotion fees.
b) In 1990, organization costs were provided by an independent contractor in
consideration for 100,000 shares of the Company's common stock. The Company had
been billed $1,000 and determined the fair value of the costs incurred to be
$1,000. The Company had recorded the shares issued at the fair market value of
the costs and capitalized the organization costs (see Note 1).
c) In 1993, a company was issued 2,000 shares of common stock at $4.00 per share
for promotional services.
NOTE 12 - CONVERTIBLE LOANS
In May and June, 1991, the Company entered into convertible loan
agreements totaling $130,000 with nine individuals unaffiliated with the
Company. Each agreement stipulated that the individuals had the choice of being
repaid with interest at two percent over prime or converting the loan into
restricted common stock at one-third the per share price established in the
Company's Initial Public Offering at $7.00.
As of April 1992, all participants had converted their loan values at
$2.33 per unit into 55,790 shares of restricted common stock and warrants.
NOTE 13. - COMMITMENTS AND CONTINGENCIES
The Company entered into a lease for office space in Red Bank, New
Jersey. The following schedule summarizes future minimum lease payments required
under a non-cancelable operating lease as of November 30, 1997:
1998 $ 43,725
1999 48,488
2000 49,582
2001 12,530
Rent expense for the periods ending November 30, 1997 and November 30,
1996, was $25,015 and $2,833, respectively.
The Company has entered into employment agreements which expire at
various dates through 2002 for certain key employees.
F-18
<PAGE>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 14. - INCOME TAXES
No provisions for income taxes was recorded for the two fiscal years
ended November 30, 1997 and 1996 due to net operating losses incurred. Net
operating loss carry forwards for Federal tax purposes of approximately
$3,400,000 expire from 2005 through 2012.
The company's gross deferred tax assets of $1,290,000 and $1,007,000 at
November 30, 1997 and 1996 respectively, represent the tax effect of net
operating loss carry forwards. Based upon the Company's earnings history, a
valuation allowance equal to the amount of the deferred tax assets is required
to reduce the Company's deferred tax assets to the amount realizable at present
(0).
NOTE 15. - CAPITAL LEASES
The Company leases certain equipment under a capital lease. Leased property
under capital leases include:
1997 1996
------ ------
Equipment $4,551 $4,551
At November 30, 1997 the future minimum lease payments required under capital
leases are as follows:
FISCAL YEAR ENDING
November 30, 1998 $1,913
November 30, 1999 1,754
------
$3,667
Less: Imputed interest 403
------
Present value of minimum
lease payments $3,264
======
NOTE 16. - INITIAL PUBLIC OFFERING
In January 1992, the Company successfully completed its initial public
offering in which the Company raised $1,043,770 from the sale of 149,110 units
at $7.00 per unit. After expenses, this resulted in a cash flow to the Company
of approximately $885,000.
F-19
<PAGE>
<TABLE>
<CAPTION>
NET/TECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS
NOVEMBER 30, 1997
NOTE 17. - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST 2ND 3RD 4TH
1997 QUARTER QUARTER QUARTER QUARTER
- ---- --------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
Net Loss $ 56,338 $ 158,678 $ 197,868 $ 813,260
=============== =============== ============== ==========
Loss per Share $ .01 $ .03 $ .03 $ .12
=============== =============== ============== ==========
Shares used in
Computation 4,860,806 5,855,417 5,924,009 6,677,034
=============== =============== ============== ==========
1ST 2ND 3RD 4TH
1996 QUARTER QUARTER QUARTER QUARTER
- ---- --------------- -------------- -------------- ----------
Net Loss $ 16,212 $ 16,417 $ 53,413 $ 112,199
=============== =============== ============== ==========
Loss per Share $ 0 $ .01 $ .01 $ .02
=============== =============== ============== ==========
Shares used in
Computation 4,860,806 5,521,925 5,565,753 5,697,212
=============== =============== ============== ==========
</TABLE>
Fourth quarter 1997 was adversely affected by accounting for the purchase of HMP
as employee compensation in the amount of $125,000 and significant research and
development cost incurred.
F-20
<PAGE>
PART III
Documents incorporated by reference: The information required by Part III of
Form 10-KSB is incorporated by reference to the Issuer's definitive proxy
statement relating to the 1998 Annual Meeting of Shareholders which is expected
to be filed with the Securities and Exchange Commission on or about March 30,
1998.
13
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8 - K
(a) Exhibits
3.1 Certificate of Incorporation
3.2 By-Laws (1)
4.1 Underwriter's Option (1)
10.2 Agreement with CRYO-CELL (1)
10.3 Long term Scientific Consultation Contract dated February
11, 1992 between the Company and Dr. Charles L. Beatty and
Polymer Products and Services Co., including assignment of
all patent rights by Consultant (2) 10.4 Agreement with
Valgene Associates, Dated August 6, 1992 (3) 10.41
Agreement with Human Services Risk Management, Inc. dated
May 28, 1993 (3)
10.5 Employment Agreement dated June 17, 1991 between the
Company and Joseph Knauer (2)
10.51 Employment Agreement dated December 28, 1993 between the
Company and Robert Anthony Fenno (3)
10.6 Convertible Note to CRYO-CELL International, Inc. dated
November 30, 1994 (3)
10.7 Convertible note to CRYO-CELL International, Inc. dated
November 30, 1995 (4)
10.8 Agreement with Pressure Point Technologies, dated Oct. 29,
1996 (5)
10.9 Agreement with Stainless Design Corporation, dated April
4, 1996 for Phase I development of Hygiene Guard (5)
10.10 Agreement with Stainless Design Corporation, dated Oct.
31, 1996 for Phase II development of Hygiene Guard (5)
10.11 Agreement between the Company and Glenn E. Cohen (5)
21 List of Subsidiaries (5)
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter
on the fiscal year ended November 30, 1997
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (No.33- 36198).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended November 30, 1991.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended November 30, 1994.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended November 30, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended November 30, 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 16th day of
March, 1998.
NET/TECH INTERNATIONAL, INC.
By: /s/GLENN E. COHEN
------------------------
Chairman, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 16, 1998 by the following persons in
the capacities indicated:
/s/FREDERICK WILHELM Director
- --------------------
Frederick Wilhelm
/s/RONALD HEAGLE President and Chief
- -------------------- Operating Officer
Ronald Heagle
/s/DANIEL D. RICHARD Director
- --------------------
Daniel D. Richard
/s/KNUD GOTTERUP Director
- --------------------
Knud Gotterup
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<CASH> 832,502
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 41,479
<CURRENT-ASSETS> 873,981
<PP&E> 118,766
<DEPRECIATION> 20,096
<TOTAL-ASSETS> 1,036,037
<CURRENT-LIABILITIES> 103,902
<BONDS> 0
0
0
<COMMON> 66,892
<OTHER-SE> 4,538,589
<TOTAL-LIABILITY-AND-EQUITY> 1,036,637
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,225,517
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 627
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,226,144)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
