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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended November 30, 1999 Commission file number: 000-28433
NUPRO INNOVATIONS INC.
(Name of small business issuer in its Charter)
Delaware 86-0893269
(State or other jurisdiction (IRS Employer
of incorporation) Identification Number)
5151 E. Broadway Blvd., Suite 730
Tucson, Arizona 85711
(Address of Principal Executive Offices)
(520) 571-0900
(Registrant's Telephone Number, Including Area Code)
Securities registered under section 12(g) of the act:
Common stock, par value $.001 Per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form,
10-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $114,891
The number of shares of Common Stock outstanding as of January 14, 2000 was
12,617,217. The aggregate market value of the Common Stock of the registrant
held by non-affiliates as of January 14, 2000 was approximately $17,972,950
based on the average bid and asked prices for such Common Stock as reported on
the OTC Bulletin Board.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement relating to its 2000 Annual
Meeting of Shareholders to be held on March 30, 2000 are incorporated by
reference into Part III, Items 9, 10, 11, and 12.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Description of Business.................................................. 1
2. Description of Property.................................................. 8
3. Legal Proceedings........................................................ 8
4. Submission of Matters to a Vote of Security Holders...................... 8
PART II
5. Market for Common Equity and Related Stockholder Matters................. 9
6. Management's Discussion and Analysis or Plan of Operation................ 12
7. Financial Statements..................................................... 20
8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................................. 20
PART III
9. Directors, Executive Officers, Promotions and Control Persons;
Compliance With Section 16(a) of the Exchange Act........................ 20
10. Executive Compensation................................................... 20
11. Security Ownership of Certain Beneficial Owners and Management........... 21
12. Certain Relationships and Related Transactions........................... 21
13. Exhibits, List and Reports on Form 8-K................................... 21
Financial Statements.....................................................F-S
Signatures............................................................... 23
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PART I
NUPRO(TM) AND NUPRO INNOVATIONS(TM) ARE TRADEMARKS OR TRADE NAMES OF THE COMPANY
This Annual Report on Form 10-KSB contains express or implied
forward-looking statements. Additional written or oral forward-looking
statements may be made by the Company from time to time in filings with the
Securities and Exchange Commission, in its press releases, quarterly conference
calls or otherwise. The words "believes," "expects," "anticipates," "intends,"
"forecasts," "projects," "plans," "estimates" and similar expressions identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and financial performance or operations and speak
only as of the date the statements are made. Such forward-looking statements
involve risks and uncertainties and readers are cautioned not to place undue
reliance on forward-looking statements. The Company's actual results may differ
materially from such statements. Factors that cause or contribute to such
differences include, but are not limited to, the Company's limited operating
history, unpredictability of operating results, intense competition in various
aspects of its business, the risks of rapid growth, the Company's dependence on
key personnel, uncertainty of product acceptance, changes in laws and
regulations, changes in economic conditions and an inability to obtain
financing, as well as those discussed elsewhere in this Form 10-KSB. Although
the Company believes that the assumptions underlying its forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to publicly update, review or revise any forward-looking statements
to reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statements is
based.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
NuPro Innovations Inc. was incorporated in the Canadian Province of Ontario
on November 27, 1996 as TracTop Distributing Inc. On August 7, 1997, TracTop
Distributing Inc. was domesticated in the State of Delaware in the United States
under the name "NuPro Innovations Inc." When used in this registration
statement, unless the context requires otherwise, the term "Company" refers to
NuPro Innovations Inc., a Delaware corporation (formerly known as TracTop
Distributing Inc., an Ontario, Canada corporation), and NuPro Innovation Mexico
S.A. de C.V., which is a majority owned subsidiary of NuPro Innovations Inc.
incorporated under the laws of the United Mexican States. The Company is a
development stage corporation with its principal offices located at 5151 East
Broadway Blvd., Suite 730, Tucson, Arizona, 85711. The Company's telephone
number is (520) 571-0900 and its web site is www.nuproinnovations.com.
Information on the Company's web site does not constitute part of this
registration statement.
On December 1, 1998, the Company acquired the use of and the right to
commercialize a composite industrial engineering material (the "NuPro Material")
with the acquisition (the "TrucTech Acquisition") of substantially all of the
assets and liabilities of TrucTech, Inc., a Georgia corporation ("TrucTech").
Under the terms of the TrucTech Acquisition, the Company acquired TrucTech's
assets and assumed TrucTech's liabilities in exchange for $5,500,000 of the
Company's common stock, par value $0.001 per share ("Common Stock"), valued at
$0.75 per share, or an aggregate of 7,333,333 shares, which represented
approximately 73% of the Company's outstanding Common Stock immediately
following the TrucTech Acquisition. Certain directors, officers, employees, and
stockholders of the Company were also directors, officers, employees, and
stockholders of TrucTech. See "Certain Relationships and Related Transactions."
The Company does not currently anticipate any additional significant corporate
acquisitions or dispositions in the next 12 months.
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NUPRO MATERIAL
The NuPro Material is a polyester/epoxy hybrid created by the reactions of
several primary chemical compounds facilitated by chemical inhibitors,
accelerators, catalysts, and promoters. The NuPro Material can be made in a
variety of formulations to generate differing properties, which enables it to be
used in a number of different product applications. The Company believes that
the NuPro Material represents an advancement in polyurea technology because the
processing of the hybrid composite material does not require either external
heat or a high-pressure environment.
The NuPro Material, which is composed of certain chemicals that are
structured to be receptive to combining with other chemical compounds to create
stronger and more complete molecular structures with varying properties, is
characterized by certain high performance mechanical properties that allow it to
compete with steel, alloys, wood, plastic, fiberglass, and plastic foam in many
product applications. The Company believes that a significant cost advantage of
the NuPro Material may result from the elimination of a standard plastics
manufacturing step - the interim process of compounding the raw feeds of
petrochemical derivatives into raw plastics, and continuing the process by
reheating, pressing, and reforming the compounds into a finished product. With
the NuPro Material, the finished products are derived directly from the chemical
reaction of certain raw liquid feedstocks. As a result, the Company believes
that the production process for product applications with the NuPro Material is
more simple and inexpensive than the manufacturing process of product
applications with many of the competing industrial materials.
Krida Overseas Investment Trading Limited, an entity incorporated in Cyprus
("Krida Overseas"), which is controlled by Luba Veselinovic, President and Chief
Executive Officer of the Company, owns the technology relating to the NuPro
Material and licenses to the Company the right to use and market the NuPro
Material in its operations pursuant to a Technology License Agreement (the
"Krida License") between the Company and Krida Overseas. See "Certain
Relationships and Related Transactions."
BUSINESS STRATEGY
The focus of the Company will be to provide unique platform technology and
solutions for the challenges faced by manufacturers with respect to the
materials used for various industrial applications. The Company believes that
customers that manufacture products with the NuPro Material may realize certain
competitive advantages with respect to product performance and costs of
production.
The Company's business strategy includes (i) identifying large-scale
manufacturing, industrial, and commercial market segments in which the
substitution of the NuPro Material for existing conventional materials will
provide the user with a higher quality product at a lower price, (ii) furnishing
the Company's customers with turnkey manufacturing packages, including, without
limitation, training with respect to the manufacturing process, for a particular
product application of the NuPro Material, and (iii) supplying its proprietary
materials, which are the chemicals necessary for creating the NuPro Material,
for the manufacturing process. The Company anticipates that the proprietary
materials necessary to create the NuPro Material will initially be manufactured
in Mexico.
In implementing its business strategy, the Company has identified the
following areas of emphasis:
* DEVELOP AND INTRODUCE NEW PRODUCT APPLICATIONS. The Company believes
that it must continue to develop and offer manufacturers new product
applications for the NuPro Material.
* EVALUATE ACQUISITION OR STRATEGIC ALLIANCE OPPORTUNITIES. The Company
evaluates acquisition opportunities and potential strategic alliances
on an on-going basis and at any given time may be engaged in
discussions with respect to possible acquisitions or strategic
alliances. The Company may seek strategic acquisitions or create
strategic alliances that could complement the Company's current or
planned business activities. The Company, however, does not currently
anticipate any additional significant corporate acquisitions in the
next 12 months.
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* INTEGRATE ACQUISITIONS AND STRATEGIC ALLIANCES. The Company must
integrate the entities or assets that it has acquired into its
business and coordinate its operations with other entities as part of
any strategic alliance.
MANUFACTURING PROCESS OF NUPRO MATERIAL
The NuPro Material is a polyurethane/epoxy or polyester/epoxy hybrid
created by the chemical reactions of several primary compounds facilitated by
chemical inhibitors, accelerators, catalysts, and promoters. The NuPro Material
is produced directly from its chemical constituents without the need to create
an intermediate plastic medium as is required for most conventional plastics. By
varying the proportions of the primary compounds, the Company is able to
determine the nature of the composite material produced. By controlling the rate
at which the chemical reactions occur and the points at which they are stopped
with certain chemical facilitators, the Company may define the physical and
performance characteristics of the material, which allows the Company to tailor
the properties of the NuPro Material to the specific product application for
which it will be used.
The NuPro Material is produced by mixing various chemical components in a
multi-step process. The Company anticipates that the production process will be
performed at different facilities. First, the Company will pre-mix the
proprietary component of the NuPro Material at its facilities. During this
pre-mixing process, the chemical combination and inhibitors produce and release
heat. With the manipulation of the free radicals in the chemical components, the
Company can create different formulations of the NuPro Material with differing
properties for different product applications. Second, various generic chemical
components will be mixed at the manufacturing facility where the manufacture of
the final product containing the NuPro Material will occur. Certain chemical
components will serve as catalysts, promoters, and accelerators and will cause a
reaction to produce the NuPro Material. At the manufacturing facility, the
liquid components of the NuPro Material will be stored in separate conventional
storage tanks. Conventional low-pressure liquid pumps will be used to pump the
liquid components through hoses to a mixing head and nozzle at the site of the
molds to be filled.
Products made with NuPro Material may be formed by casting in a closed mold
or by spraying the chemicals into an open mold. The molds may be constructed
with a wide range of materials depending on the product application. The casting
is known as a low-pressure cold molding process because neither high pressure
nor heat is applied to effectuate the chemical reactions that form the NuPro
Material. High clamping forces are not required for the molds because the
injection process of the liquid components of the NuPro Material into the molds
occurs at a low pressure. Even after the initial curing process, the NuPro
Material is still soft and pliable. Final curing occurs after the product is
removed from the mold and placed on a curing buck, which is identical in shape
to the mold. During the final curing, the chemical reaction of the chemical
components locks the molecular structure of the product into final form. Any
required trimming or finishing of the product can be completed during the final
curing. Because of this process, molds for the NuPro Material may be light,
compact, and low in cost relative to molds required for the conventional plastic
injection molding processes.
PRODUCT APPLICATIONS
The Company is in the process of establishing customer relationships for
the development of several product applications for the NuPro Material. Such
development will include feasibility studies, product design and engineering,
prototype model and mold fabrication, prototype manufacture, testing, and
customer approval. To date, prospective customers for pallets, deck boards, golf
drivers, and food processing trays have funded all or a portion of the
development process for their respective product applications. In addition, the
Company is developing applications for the NuPro Material for a truck bed
enclosure ("TracTop") and a pallet top. The Company anticipates that it will
begin manufacturing certain product applications by the end of the fourth
quarter of fiscal 2000.
TRACTOP. TracTop is a permanently installed retractable, self-storing
truck-bed enclosure that enables its users to make fast and easy conversion
between covered and open-bed operation. The Company plans to offer TracTop in
different sizes and designs to allow for the use of TracTop in many different
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makes, models, and sizes of trucks. TracTop's key features include accessibility
to truck-bed, security and protection of cargo, ease of operation, and
attractiveness of design.
The Company's TracTop product application is subject to a perpetual patent
agreement, as amended, dated as of August 10, 1988, that assigns the U.S. patent
and other rights related to the TracTop product application to the Company and
permits the Company to manufacture and sell the TracTop product. In connection
with the patent agreement, the Company must pay a royalty fee of $5.00 per unit
of TracTop product and an amount equal to $150,000 less all royalties paid under
the patent agreement prior to December 30, 1990, to certain independent third
parties. To date, the Company has no sales of its TracTop product and, as a
result, has paid no royalties pursuant to the patent agreement.
The Company intends to develop a distribution network for TracTop, either
directly or through strategic alliances in the United States. In the Mexican
market, the Company anticipates that the TracTop product will be manufactured
pursuant to an oral agreement with TopTrac S.A. de C.V., an entity incorporated
under the laws of the United Mexican States, which is a strategic partner of the
Company located in Mexico and controlled by Ernesto Zaragoza de Cima, a Vice
President and director of the Company.
Through the product development of TracTop, the NuPro Material has been
internally tested over a nine-year period under real world conditions. Although
the Company has internally performed the testing of the NuPro Material and
product applications of the NuPro Material in an effort to safeguard the
Company's proprietary knowledge, the Company's testing procedure was partly
created by an independent consultant from Ontario, Canada. As part of the
testing process, TracTop and its inherent production material have been
evaluated under severe cold, hot, and humid conditions. To date, the NuPro
Material has provided satisfactory results according to the Company, in its
TracTop application in road testing on a variety of different makes, models, and
sizes of trucks. The manufacturing process for the TracTop product application
for the NuPro Material has also been tested on a full production scale and has
achieved satisfactory results to date.
PALLETS. The first pallet prototype made with the NuPro Material (the
"NuPro Pallet") has been completed and internal testing has begun achieving
favorable results to date. Based on the results of testing to date, the Company
believes the established performance, weight, and price standards of the NuPro
Pallet makes it competitive in the industry. As testing continues, certain
engineering and design modifications may be made to enhance the performance of
the NuPro Pallet.
In August 1997, Canada Pallet Corp. of Campbellford, Canada ("Canada
Pallet") contributed $25,000 towards the cost of designing and prototyping the
NuPro Pallet. Canada Pallet and the Company have agreed to suspend Canada
Pallet's arrangement to purchase a turnkey manufacturing line for the NuPro
Pallet until pallet production with the NuPro Material begins. In addition,
negotiations are currently in progress with several other parties for the
purchase of turnkey manufacturing lines with respect to the pallet product
application for the NuPro Material. The Company anticipates that it will begin
providing turnkey manufacturing lines and the NuPro Material to manufacturers
for the production of pallets with the NuPro Material by the fourth quarter of
fiscal year 2000.
DECK BOARDS. In February 1998, the Company entered into an oral agreement
with Erwin Industries Inc. ("Erwin Industries") of Atlanta, Georgia, for the
design, feasibility study, engineering, and prototyping of an innovative design
for a deck board at a cost of $30,000. The Company is negotiating a contract
with Erwin Industries relating to the manufacture of deck boards with the NuPro
Material, which the Company believes may consist of approximately $2,200,000 for
two turnkey manufacturing lines and up to $15,000,000 annually for the supply of
chemicals to such manufacturing lines operating at full production levels after
start-up phase-in based upon Erwin Industries manufacturing projections and
initial specifications of one 16-foot deck board per minute and a 24-hour per
day manufacturing schedule. Certain production scale manufacturing tests with a
full-size production mold must be completed prior to contract finalization.
Pricing of this production mold design, engineering, and manufacturing is being
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completed for submission to Erwin Industries for approval and payment. There is
no assurance that the Company and Erwin Industries will be able to reach a final
agreement with respect to the manufacturing of the deck boards with NuPro
Materials on terms that will be favorable to the Company if at all. The Company
anticipates that it will begin providing turnkey manufacturing lines and the
NuPro Material to manufacturers for the production of deck boards with the NuPro
Material by the fourth quarter of fiscal year 2000.
NUPRO GOLF DRIVER. The Company entered into an oral agreement with
Strategic Machinery Solutions of Atlanta, Georgia, in June 1998 (the "Strategic
Machinery Agreement") for the prototyping of a golf club with the head to be
manufactured with the NuPro Material. The Company has delivered first and second
prototypes to the developer and are currently undergoing field testing and
evaluation. Initial performance of the NuPro Material and the driver technology
appears to be meeting the requirements for this application. The Strategic
Machinery Agreement provides for the golf club to be manufactured by the Company
at its Mexico plant as a joint venture with Strategic Machinery Solutions, on
terms to be determined. In consideration for the Company's manufacture of the
golf club, the golf club which will be initially limited to golf drivers, will
be marketed under the name of the NuPro Driver.
PALLET TOP. The Company is negotiating an agreement with NRPP Inc. of
Atlanta, Georgia, a material handling sales and consulting organization, for the
development of a pallet top product application of the NuPro Material.
Consummation of an agreement with NRPP Inc. will not occur until the Company
provides samples of the Pallet Top produced with the NuPro Material, which the
Company does not expect to occur prior to the third quarter of fiscal 2000. To
date, initial design and market evaluation have been completed.
FOOD PROCESSING TRAYS. A project for the manufacture of food processing
trays has been prototyped and field tested. To date, the Company has been
satisfied with the performance of such food processing trays. Production molds
have been produced and product manufacturing of a small initial order for
Nautico S.A. de C.V. of Guaymas, Mexico, a shrimp and seafood processing plant,
has commenced.
CUSTOMERS; SALES AND MARKETING
The Company anticipates that its customers will be manufacturers of
different products developed with composite industrial materials. The Company
expects that products developed with the NuPro Material will be distributed by
such manufacturers to consumers. The Company plans to market the NuPro Material
and its turnkey manufacturing packages to both existing manufacturers with
established manufacturing operations and new manufacturers in need of a turnkey
approach to the production process.
To date, the Company has not incurred any expenses relating to the direct
marketing and advertising of the NuPro Material and the Company's turnkey
manufacturing packages. Instead, the Company's marketing strategy is to focus on
establishing customer relationships and strategic partnerships with
manufacturers at the outset of the Company's development of a specific product
application of the NuPro Material. In some cases, the Company will seek funding
from its strategic partner for the development process, which includes
feasibility studies, product design and engineering, prototype model and mold
fabrication, prototype manufacture, testing, and customer approval. After the
development process is complete, the Company will provide the turnkey
manufacturing process and proprietary chemicals for the manufacture of the
product application with the NuPro Material. In certain cases in which the
Company has received funding for the development costs of a particular product
application from a strategic partner, the Company may provide exclusive rights
to such partner for the use of the NuPro Material with respect to such
particular product application.
Although the Company has established several strategic relationships to
develop certain product applications with the NuPro Material, the Company has no
sales to date. The Company anticipates that all sales by the Company will be on
a negotiated price basis. The Company does not expect to experience seasonable
fluctuations in operations because sales of industrial materials are not
seasonal in nature.
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SUPPLIERS
The production of the NuPro Material requires the supply of several primary
chemical compounds, primarily raw petro-chemical feedstocks, that the Company
believes are available from a number of suppliers in adequate supplies to meet
the Company's expected needs. The Company has identified sources from Mexico,
Venezuela, and Romania that it anticipates will be the primary suppliers for the
Company, however, the Company currently has no supply contracts for the purchase
of such chemical compounds. The Company will require high-grade chemicals with
specific properties for the NuPro Material. Accordingly, the Company expects to
monitor shipments of chemicals closely for compliance with the Company's
standards. Although the Company has had no difficulty in obtaining adequate
supplies of chemicals to date, the Company anticipates that its needs for such
chemicals will increase significantly when it begins to supply manufacturers
with the proprietary chemicals necessary for the Company's turnkey manufacturing
packages. The Company's inability to obtain high-grade chemicals would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
COMPETITION
The Company competes with other manufacturers of composite industrial
materials such as steel, plastics, fiberglass, and wood. While some of the
Company's competitors compete only on a regional basis due to the significant
relative impact of freight costs, the Company anticipates that it will initially
attempt to market and sell the NuPro Material to manufacturers throughout the
United States and Mexico. While many of the Company's competitors limit their
services to one or more of the following: (i) design and prototype; (ii)
producing machinery and tooling; or (iii) providing raw materials, the Company
expects to provide all such services. The Company believes that it will compete
with companies that serve existing manufacturers with established manufacturing
operations seeking a less expensive manufacturing process or higher quality
product, or new manufacturers in need of a turnkey manufacturing package for
production.
The Company's success requires its continued development of product
applications and its sales and marketing of the NuPro Material to manufacturers.
The Company's competitors in the steel, plastics, fiberglass, and wood
businesses, among others, are more established and have greater name recognition
and marketing resources than the Company. In addition, while the competing
industrial materials have achieved market acceptance, the NuPro Material is
still being commercialized and there is no assurance that it will be able to
achieve and maintain market acceptance. See "Management's Discussion and
Analysis or Plan of Operation - Factors that May Affect Future Operating Results
- - Uncertainty of Acceptance of the NuPro Material." The Company's competitors
also have greater financial resources than those available to the Company and
certain competitors spend substantially greater amounts for advertising and
promotion.
The Company anticipates that it will compete principally through product
quality and price. The Company believes that the NuPro Material's principal
competitive strengths are (a) its variety of formulations that allow it to
generate differing properties to address the different needs of varying product
applications, such as durability, strength, and maleability, and (b) its cold
molding production process that allows it to be manufactured in a more
inexpensive manner than the standard plastics manufacturing process.
REGULATION AND ENVIRONMENTAL CONSIDERATIONS
The Company is currently not subject to any environmental proceedings.
During the year ended November 30, 1999, the Company did not make any material
expenditures for environmental control facilities, nor does it currently
anticipate any such future expenditures. Actions by international, federal,
state, and local governments concerning environmental matters could result in
laws or regulations that could increase the cost of producing the NuPro Material
or otherwise adversely affect the demand for the Company's product applications.
At present, during the Company's early stage of development, environmental laws
and regulations do not have a material adverse effect upon the demand for the
products made with the NuPro Material. However, certain of the Company's
operations are subject to international, federal, state, and local environmental
laws and regulations that impose limitations on the discharge of pollutants into
the air and water and establish standards for the treatment, storage, and
disposal of solid and hazardous wastes. While the Company has not had to make
significant capital expenditures for environmental compliance, it cannot predict
with any certainty its future capital expenditure requirements relating to
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environmental compliance because of continually changing compliance standards
and technology. The Company does not have insurance coverage for environmental
liabilities and does not anticipate obtaining such coverage in the future. See
"Management's Discussion and Analysis or Plan of Operation - Factors that May
Affect Future Operating Results - Environmental Liabilities."
The Company is also subject to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar state
laws which impose liability without regard to fault or to the legality of the
original action, on certain classes of persons (referred to as potentially
responsible parties or "PRPs") associated with the release or threat of release
of certain hazardous substances into the environment. The Company has not been
classified as a PRP under CERCLA. See "Management's Discussion and Analysis or
Plan of Operation - Factors that May Affect Future Operating Results -
Environmental Liabilities."
RESEARCH AND DEVELOPMENT
The Company maintains a continuing development program devoted to the NuPro
Material and its product applications. Development activities include designing
new and improved products and product applications, testing and enhancing
chemical formulations to generate differing properties in the NuPro Material and
prototype model and mold fabrications. The Company's development,
pre-production, and administration expenditures were approximately $649,479 and
$679,980 for fiscal years 1998 and 1999, respectively. The Company anticipates
that it will incur approximately $676,000 in research and development expenses
over the next 12 months, including $500,000 in additional development expenses
by the end of the first quarter of fiscal year 2000 on product testing and
capital expenditures for research and development equipment. The Company is
currently in the process of constructing new administrative and research and
development offices in Tucson, Arizona, consisting of approximately 12,000
square feet. See "Management's Discussion and Analysis or Plan of Operation -
Plan of Operation - Plant and Equipment."
INTELLECTUAL PROPERTY
The Company's success depends, in part, upon its intellectual property
rights relating to its production process and other operations. The Company
anticipates that it will rely on a combination of trade secret, nondisclosure,
and other contractual arrangements, confidentiality procedures, and patent,
copyright, and trademark laws, to protect its proprietary rights. The Company
has filed applications for the federal registration of its NuPro(TM) and NuPro
Innovations(TM) marks.
The Company uses proprietary technology for manufacturing the NuPro
Material. The Company believes that the non-patented proprietary NuPro Material
will be protected under trade secret, contractual, and other intellectual
property rights that do not afford the statutory exclusivity possible for
patented products and processes. To protect its proprietary technology, the
Company mixes the proprietary component of the NuPro Material in a secure
environment at one of its facilities. The production processes to manufacture
products from the NuPro Material are not proprietary; however, there is a
certain amount of "know-how" that the Company has gained which would hinder a
person taking the NuPro Material and introducing it into the conventional
manufacturing environment.
EMPLOYEES
As of November 30, 1999, the Company had nine full-time employees, of whom
four had executive or managerial responsibilities. None of the Company's
employees are represented by a union. The Company considers its relations with
its employees to be good.
The Company anticipates that its potential growth may place significant
demands on its managerial resources. The potential success of the Company's
business is substantially dependent on the services of its senior management
team and the services of Mr. Luba Veselinovic and Mrs. Elke Veselinovic. The
Company does not currently have employment agreements with any of its executive
officers or other key personnel. The loss of the services of its executive
officers or other key personnel could have a material adverse effect on the
Company. To address these risks, the Company must, among other things, continue
to attract, retain and motivate qualified personnel. While the Company has been
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successful in attracting qualified personnel to date, there can be no assurance
that the Company will be successful in attracting and retaining qualified
personnel in the future.
INSURANCE
The Company maintains general liability, automobile liability, and umbrella
coverage insurance in amounts that it believes are customary for a company of
its size engaged in a comparable industry. The Company is in the process of
obtaining worker's compensation and directors and officers liability insurance.
There is no assurance that the Company will not be subject to claims in the
future that its insurance may not cover or as to which its coverage limits may
be inadequate.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal administrative offices are located in approximately
1,272 square feet of space in Tucson, Arizona. The Company occupies these
premises under a lease agreement expiring on March 31, 2000, and providing for
rent at a rate of $2,014 per month. The Company also leases prototyping, tool
modeling, and administrative facilities in Guaymas, Sonora, Mexico consisting of
2,482 square feet from Ernesto Zaragoza de Cima, a director and Vice-President
of the Company, at a rate of $1,015.50 per month. See "Certain Relationships and
Related Transactions." The Company is in the process of constructing two
manufacturing facilities in Guaymas, Sonora, Mexico, consisting of approximately
186,000 square feet and new administrative and research and development offices
in Tucson, Arizona, consisting of approximately 12,000 square feet. The Company
anticipates that the land and construction costs of (i) the first phase of the
manufacturing facilities will be approximately $1,235,600 and (ii) the
administrative and research and development offices will be approximately
$1,200,000. The Company anticipates that the construction of the first phase of
its manufacturing facilities, which includes approximately 32,000 square feet,
and its administrative and research and development offices will be completed by
the end of the second quarter of fiscal year 2000. The Company considers its
current and planned facilities to be sufficient for its current and anticipated
operations.
ITEM 3. LEGAL PROCEEDINGS.
All legal proceedings and actions involving the Company are of an ordinary
and routine nature incidental to the operations of the Company. Management
believes that such proceedings should not, individually or in the aggregate,
have a material adverse effect on the Company's business or financial condition
or results of operations. None of the Company's officers, directors, or
beneficial owners of 5% or more of the Company's outstanding securities is a
party adverse to the Company nor do any of the foregoing individuals have a
material interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
GENERAL
The Company's Common Stock has been quoted on the OTC Bulletin Board under
the symbol NUPP since August 21, 1998. The following sets forth the range of
high and low bid quotations for the periods indicated as reported by National
Quotation Bureau, Inc. Such quotations reflect prices between dealers, without
retail mark-up, markdown or commission and may not represent actual
transactions.
HIGH BID LOW BID
-------- -------
December 1, 1999 through January 15, 2000 $3.1563 $2.4375
September 1, 1999 through November 30, 1999 $3.0000 $1.3125
June 1, 1999 through August 31, 1999 $2.1250 $0.7500
March 1, 1999 through May 31, 1999 $1.0000 $0.2500
December 1, 1998 through February 28, 1999 $1.1250 $0.6250
September 17, 1998 through November 30, 1998 $1.1250 $0.6250
As of January 14, 1999, there were approximately 174 holders of record of
the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock. For the
foreseeable future, the Company intends to retain all of its future earnings to
finance its operations and does not anticipate paying cash dividends.
PENNY STOCK
The Company's Common Stock will be subject to the provisions of Section
15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the "penny
stock rule." Section 15(g) sets forth certain requirements for transactions in
penny stocks and Rule 15g-9 (d) (1) incorporates the definition of penny stock
that is found in Rule 3a51-1 of the Exchange Act.
The SEC generally defines penny stock to be any equity security that has a
market price less than $5.00 per share, subject to certain exceptions. If the
Company's Common Stock is deemed to be a penny stock, trading in the shares will
be subject to additional sales practice requirements on broker-dealers who sell
penny stocks to persons other than established customers and accredited
investors. Accredited investors are persons with assets in excess of $1,000,000
or annual income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such security and must have the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks held in account
and information on the limited market in penny stocks. Consequently, these rules
may restrict the ability of broker-dealers to trade and/or maintain a market in
the Company's Common Stock and may affect the ability of stockholders to sell
their shares.
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OTC BULLETIN BOARD ELIGIBILITY RULES
In January 1999, the SEC granted approval of amendments to the NASD OTC
Bulletin Board Eligibility Rules 6530 and 6540 (the "Eligibility Rules"). The
Eligibility Rules now require a company listed on the OTC Bulletin Board to be a
reporting company with the SEC to maintain the listing of its stock on the OTC
Bulletin Board. The Eligibility Rules required the Company to become fully
compliant by February 24, 2000. Accordingly, on December 6, 1999, the Company
filed a registration statement on Form 10-SB. On February 6, 2000, the Company
filed Amendment No. 1 to the Form 10-SB in response to comments by the SEC on
the Company's original Form 10-SB. The Company's Form 10-SB, as amended, became
effective on February 6, 2000 pursuant to section 12(g)(1) of the Securities and
Exchange Act of 1934, as amended. However, the Eligibility Rules require that
the SEC come to a position of no further comment regarding any registration
statement on Form 10-SB before the NASD considers a company compliant. The SEC
is in the process of reviewing the Company's Amendment No. 1 to the Form 10-SB
and, therefore, the Company has not cleared all SEC comments by February 24,
2000. Accordingly, the Company's Common Stock has been removed from the OTC
Bulletin Board and the Company has moved its listing to the National Quotation
Bureau's Pink Sheets pending final review of the Company's Form 10-SB, as
amended, by the SEC and its clearance of any comments related thereto. The
Company cannot assure that the SEC will come to such a position in regards to
the Company's registration statement on Form 10-SB, as amended.
SHARES AVAILABLE FOR FUTURE SALE
Of the 12,617,217 shares of Common Stock outstanding, 959,255 shares of
Common Stock are freely tradable without restriction in the public market unless
the shares are held by "affiliates," as that term is defined in Rule 144(a)
under the Securities Act. For purposes of Rule 144 under Securities Act ("Rule
144"), an "affiliate" of an issuer is a person that, directly or indirectly
through one or more intermediaries, controls, or is controlled by or is under
common control with, the issuer. Such shares are unrestricted as a result of
being issued pursuant to rule 504 of Regulation D promulgated under the
Securities Act ("Rule 504") prior to recent amendments to such rule that now
make shares issued under Rule 504 restricted securities. The remaining shares of
Common Stock outstanding are "restricted securities" under the Securities Act
and may be sold in the public market upon the expiration of the holding periods
under Rule 144, described below, subject to the volume, manner of sale, and
other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
* 1% of the then outstanding shares of the Company's Common Stock
(approximately 126,172 shares); or
* the average weekly trading volume during the four calendar weeks
preceding filing of notice of the sale of shares of Common Stock.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A stockholder who is deemed not to have been an "affiliate" of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned restricted shares for at least two years, would be entitled
to sell shares under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, or public information requirements.
In addition, as of January 14, 2000, there were outstanding warrants to
purchase 1,525,000 shares of Common Stock and options to purchase 275,000 shares
of Common Stock, all of which were fully vested. Sales of substantial amounts of
the Company's Common Stock (including shares issued upon the exercise of
outstanding warrants and options) in the public market in the future could
adversely effect the market price of the Company's Common Stock. These sales may
also make it more difficult for the Company to sell equity or equity related
securities in the future at a time and price that the Company believes is
appropriate.
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RECENT SALES OF UNREGISTERED SECURITIES
The following provides information concerning all sales of securities by
the Company within the last three years that were not registered under the
Securities Act.
From August 7, 1997 to May 31, 1998, the Company issued shares of Common
Stock to 122 investors at a price ranging from $0.366 to $0.533 per share for a
total of $488,984 (the "Original Rule 504 Offering"). Such shares were issued
without registration pursuant to an exemption from registration under Rule 504.
From August 1997 to May 1998, the Company issued an aggregate of 455,028
shares of Common Stock worth a total of $180,890 to certain insiders of the
Company in connection with remuneration for services rendered and the conversion
of certain indebtedness owed to such insiders. Of the total $180,890, (i)
$43,000 in Common Stock was issued as payment for consulting fees and management
services, (ii) $103,600 in Common Stock was issued as payment of certain loans
to the Company from affiliates of Gary Fitchett, former President and Chief
Executive Officer of the Company, the proceeds of which were used for various
capital expenditures of the Company, and (iii) $34,300 in Common Stock resulted
from the exercise of a warrant received as part of the loan described in (ii)
above. All such shares were issued without registration pursuant to an exemption
from registration under Section 4(2) of the Securities Act as private
transactions not involving a public distribution.
During the period from June 1, 1998 to August 6, 1998, the Company issued
shares of Common Stock to 24 investors for a total of $504,162. Such shares were
issued without registration pursuant to an exemption from registration under
Rule 504. The foregoing offering was integrated with the Original Rule 504
Offering.
From June 1, 1998 to August 6, 1998, the Company issued an aggregate of
15,000 shares of Common Stock worth a total of $15,000 to Ernesto Zaragoza de
Cima, a Vice President and director of the Company, in connection with rent owed
by the Company. Such shares were issued without registration pursuant to an
exemption from registration under Section 4(2) of the Securities Act as a
private transaction not involving a public distribution.
On May 31, 1999, the Company issued warrants to purchase an aggregate of
25,000 shares of Common Stock to the Company's legal counsel in consideration of
services rendered. Such shares were issued without registration under Section 4
(2) of the Securities Act as a private transaction not involving a public
distribution.
In July 1999, the Company issued units priced at $100,000 per unit, or a
total of $6,000,000. Each unit consisted of (i) 25,000 shares of Common Stock
valued at $2.00 per share, (ii) a $50,000 unsecured convertible debenture
bearing interest at ten (10) percent per annum and maturing on December 31,
2004, and (iii) warrants to acquire 25,000 shares of Common Stock at a price of
$2.50 per share exercisable at any time prior to December 31, 2000. Several
investors chose to convert their debentures into shares of Common Stock
immediately following the Regulation S Offering. As a result, the Company issued
775,000 shares upon such conversions. In the aggregate, the Company issued
1,500,000 shares of Common Stock at $2.00 per share, $3,000,000 of convertible
debentures of which $1,050,000 of remain outstanding, and warrants to purchase
$1,500,000 additional shares at $2.50 per share. The units were sold to 17
investors in Germany, New Zealand, and Switzerland and were issued without
registration pursuant to an exemption from registration under Regulation S
promulgated under the Securities Act.
On July 18, 1999, the Company closed the acquisition of (the "TrucTech
Asset Acquisition") substantially all of the assets and liabilities of TrucTech,
Inc., a Georgia corporation ("TrucTech"), pursuant to an Asset Purchase
Agreement between the Company and TrucTech effective as of December 1, 1998 (the
"TrucTech Asset Purchase Agreement"). The total consideration for the TrucTech
Asset Acquisition was US $5,500,000, which was satisfied by the issuance of
7,333,333 shares of Common Stock, valued at US $0.75 per share. Such shares were
issued without registration under Section 4(2) of the Securities Act and Rule
506 of Regulation D promulgated under the Securities Act.
On July 30, 1999, the Company completed a supplemental offering of Common
Stock for no additional consideration in connection with the Company's issuance
of stock under the Original Rule 504 Offering. After the Company determined that
certain investors paid more than the intended stock price for shares in the Rule
504 offerings, the Company made the supplemental offering with shares, which
were originally issued in the Rule 504 offerings but subsequently transferred to
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the Company's treasury, to reflect the Company's original intention to sell
shares of stock at a price ranging from $0.366 to $0.533 per share in its Rule
504 offerings. As a result, the Company issued an aggregate of 460,887
additional shares of Common Stock to approximately 59 investors who participated
in the Company's Rule 504 offerings. Such shares were issued without
registration under Rule 504.
From August 7, 1998 to July 1, 1999, the Company issued an aggregate of
289,113 shares of common stock worth a total of $289,113 to certain insiders of
the Company. Of the $289,113, $85,305 worth of common stock was issued to four
creditors for conversion of loans to the Company, and $203,808 worth of stock
was issued to three persons for services rendered to the Company. Such shares
were issued without registration pursuant to an exemption from registration
under Section 4(2) of the Securities Act as private transactions not involving a
public distribution.
In each of the private transactions above, the Company believes that each
purchaser (i) had access to or was provided information regarding the Company;
(ii) was aware that the securities had not been registered under federal
securities laws; (iii) acquired the securities for his/her/its own account for
investment purposes; (iv) understood that the securities would need to be
indefinitely held unless registered or an exemption from registration applied to
a proposed disposition; and (v) was aware that the certificate representing the
securities would bear a legend restricting its transfer. The Company believes
that, in light of the foregoing, the sale of the Company's securities to the
respective acquirers did not constitute a sale of an unregistered security in
violation of the federal securities laws and regulations by reason of the
exemptions provided under Section 3(b) or 4(2) of the Securities Act, and the
rules and regulations promulgated thereunder.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
STATEMENTS REGARDING FUTURE EVENTS AND THE COMPANY'S PLANS AND EXPECTATIONS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS THAT RELATE TO THE COMPANY'S FUTURE PERFORMANCE. SEE "SPECIAL NOTE ON
FORWARD-LOOKING STATEMENTS."
PLAN OF OPERATION
The Company has not had any revenues from operations since its inception.
The Company believes that it has sufficient funds to satisfy its cash
requirements for the next 12 months as a result of its offering in July 1999 of
securities in units that included shares of Common Stock, unsecured convertible
debentures, and warrants pursuant to Regulation S promulgated under the
Securities Act (the "Regulation S Offering"). The Company received $6,000,000 in
proceeds from the Regulations S Offering. See "Recent Sales Of Unregistered
Securities." The Company currently has no other internal or external sources of
liquidity, but anticipates that it may raise additional funds by way of equity
or debt financing in the third or fourth quarter of fiscal year 2000. There is
no assurance that the Company will be able to raise any additional funds through
equity or debt financings on terms that are favorable to the Company if at all.
RESEARCH AND DEVELOPMENT
The Company anticipates that it will continue research and development to
enhance the technology of the NuPro Material and existing product applications
and create additional product applications for the NuPro Material over the next
12 months. The Company anticipates that such research and development expenses
will be approximately $676,000. The Company expects that the source of funds for
such expenses will be the proceeds of its Regulation S Offering that closed in
July 1999. See "Recent Sales of Unregistered Securities." Of the $676,000 in
anticipated research and development expenses, (i) approximately $500,000 will
be attributable to product testing and capital expenditures for testing
equipment, which the Company expects to incur by the end of the first quarter of
fiscal year 2000, (ii) approximately $42,000 is expected to be spent on
personnel and labor expenses relating to the Company's research and development
activities, and (iii) approximately $134,000 is expected to be spent on supplies
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and general overhead expenses relating to the Company's research and development
activities. The Company currently anticipates that it will begin production of
pallets and deck boards with the NuPro Material by the fourth quarter of fiscal
year 2000. See "Factors that May Affect Future Operating Results."
PLANT AND EQUIPMENT
The Company is currently in the process of constructing two manufacturing
facilities in Guaymas, Sonora, Mexico, consisting of approximately 186,000
square feet and new administrative and research and development offices in
Tucson, Arizona, consisting of approximately 12,000 square feet. The purpose of
the Company's Tucson offices will be to provide research and development
facilities to enhance the NuPro Material and existing product applications and
to create new product applications. The Company's Tucson offices will also serve
as the Company's corporate headquarters and include, without limitation, the
warehouse and display of finished products made with the NuPro Material and the
training of the Company's employees and future customers. The Company
anticipates that the construction of the first phase of its manufacturing
facilities, which includes approximately 32,000 square feet, and its
administrative and research and development offices will be completed by the end
of the second quarter of fiscal year 2000 and will cost approximately $1,235,600
and $1,200,000, respectively. The Company believes that it has reserved
sufficient funds from the proceeds of its Regulation S Offering that closed in
July 1999 to complete the construction of the first phase of its manufacturing
facilities and its administrative and research and development offices. The
Company considers its current and planned facilities to be sufficient for its
current and anticipated operations.
The Company expects to purchase and install its production equipment during
the second and third quarters of fiscal year 2000. Such production equipment
will be for initial set up of production and testing of product applications for
the NuPro Material. Such testing will focus primarily on the durability,
elasticity and reliability of the NuPro Material in various product applications
under varying conditions. The Company anticipates that it will incur costs of
approximately $1,815,000, in connection with such purchase and installation. The
Company believes that it has reserved sufficient funds from the proceeds of its
Regulation S Offering that closed in July 1999 to complete the purchase and
installation of such production equipment.
EMPLOYEES
The Company anticipates that it will retain approximately 25 additional
employees during fiscal year 2000, which the Company believes will result in
approximately $625,000 of additional employee compensation expense. The Company
believes that such additional employees will primarily perform engineering,
management, production, and administrative functions for the Company.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit calendar year is commonly referred to as the "Year 2000" issue. As a
result of the Year 2000 issue, such systems may be unable to accurately process
some date-based information.
Prior to December 31, 1999, the Company had:
investigated new production equipment to be purchased to determine
which equipment is Year 2000 compliant and would be suitable for the
Company;
assessed the Company's limited number of personal computers and
computer software to determine whether the Company has any Year 2000
compliance issues with respect to its limited internal operating
systems; and
examined the extent to which the Company depends on third parties
whose systems may not be Year 2000 compliant.
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However, there may be a number of unforeseen circumstances or unknown factors
that the Company has not yet identified or anticipated regarding the Year 2000
compliance issue, and such circumstances or factors could have a material
adverse effect on the Company's business, financial condition, and results of
operations. Because the Company is currently at a developmental stage, the most
reasonably likely worst case scenario would involve an interruption in the
Company's telephone services, a malfunction of the limited number of personal
computers used by the Company or disruption or cancellation of services being
provided to the Company by third parties that could delay the Company's
commencement of manufacturing operations. For example, if Year 2000 Compliance
issues cause the builders of the Company's manufacturing facilities in Guaymas,
Sonora, Mexico or the Company's new administrative and research and development
offices in Tucson, Arizona to suspend building activities, the Company's plan of
operations may be delayed and thereby allow competitors and other companies
developing similar industrial materials a greater opportunity to gain market
share prior to the Company's entry into the marketplace. Such a delay could have
a material adverse effect on the Company's business, financial condition, and
results of operations. The Company does not have Year 2000 contingency plans in
place and does not intend to develop such plans.
As of January 1, 2000, after the rollover of time, all of the Company's
internal equipment and personal computers and computer software is functioning
properly. In addition, the Company has yet to be notified by the builders of its
new manufacturing facilities or administrative and research and development
offices or any other third parties upon which the Company depends that such
parties have been materially adversely effected by the Year 2000 date change.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Form 10-KSB contains "forward-looking statements" relating to, without
limitation, future economic performance, plans, and objectives of the Company
for future operations and projections of revenue and other financial items, that
are based on the beliefs or assumptions made by and information currently
available to the Company. The words "expect," "estimate," "anticipate,"
"believe," "intend," "plan," and similar expressions and variations thereof are
intended to identify forward-looking statements. The cautionary statements in
this "Factors that May Affect Future Operating Results" section and elsewhere in
this Form 10-KSB identify important factors with respect to such forward-looking
statements, including risks and uncertainties, that could cause actual results
to differ materially from those expressed in or implied by such forward-looking
statements.
NO SALES
The Company is attempting to commercialize a new technology, an industrial
composite material called NuPro, and has no invoiced sales to date. Although the
Company has received funding from potential customers towards the development
and prototyping of a deck board product application, a shipping pallet product
application, and a golf driver product application and has completed prototyping
of a food processing tray product application, the Company has not executed any
product orders to date. The Company's results of operations may be unpredictable
from quarter to quarter as a result of numerous factors, including fluctuations
in the development and design of the Company's current and future product
applications for the NuPro Material, market acceptance of the Company's current
or future product applications for the NuPro Material, the timing of orders and
shipments of the NuPro Material, or the introduction or the announcement of
competitive composite materials or products. There can be no assurance that the
Company will be able to achieve significant revenue from sales of products in
the future.
LIMITED OPERATING HISTORY
The Company is a development stage company that was incorporated in the
Canadian Province of Ontario on November 27, 1996, as TracTop Distributing Inc.
and domesticated in the state of Delaware in the United States under the name
"NuPro Innovations Inc." on August 7, 1997. As a result, the Company has a short
operating history to review in evaluating the Company's business. The Company
has limited financial and operating data upon which the Company's business and
prospects may be evaluated. The Company has not generated operating revenue to
date.
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LACK OF PRODUCT DIVERSIFICATION
The Company anticipates that all of its sales will be derived from the
NuPro Material. Although the Company has developed multiple product applications
for the NuPro Material, and intends to continue such development, the Company's
product line will be based exclusively on the composite formula for the NuPro
Material. The Company has obtained the exclusive right to use and develop the
technology relating to the NuPro Material and to market and sell the NuPro
Material pursuant to the Krida License. If the Company should experience any
problems, real or perceived, with product quality or acceptance of the NuPro
Material, or loses all or a portion of its exclusive right to use, develop, and
market the NuPro Material under the Krida License, the Company's lack of product
diversification would have a material adverse effect of the Company's business,
financial condition, and results of operations.
DEPENDENCE ON SINGLE MANUFACTURING FACILITY
The Company anticipates that the key proprietary chemicals that comprise
the NuPro Material will be mixed solely at one of the Company's facilities. Any
interruption in the operations or decrease in the capacity of this facility,
whether because of equipment failure, natural disaster, or otherwise, may limit
the Company's ability to meet future customer demand for the NuPro Material and
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
RELIANCE ON SUPPLY OF RAW MATERIALS
The NuPro Material is a polyester/epoxy hybrid that requires a substantial
amount of certain chemical constituents, primarily raw petro-chemical
feedstocks. Although the Company believes that such chemical components are
available from a number of suppliers, the Company anticipates that it will
purchase such chemical constituents from a relatively small number of suppliers
located in Mexico, Venezuela, and Romania. The Company's ability to obtain
adequate supplies of chemical compounds for the NuPro Material depends on its
success in entering into long-term arrangements with suppliers and managing the
collection of supplies from geographically dispersed suppliers. The termination
or interruption of the Company's significant supplier relationships could
subject the Company to the risks that it would be unable to purchase sufficient
quantities of raw materials to meet its production requirements or would have to
pay higher prices for replacement supplies. The termination of significant
sources of raw materials or payment of higher prices for raw materials could
have a material adverse effect on the Company's business, financial condition,
and results of operations. See "Description of Business - Suppliers."
MANAGEMENT OF GROWTH
The Company recently has experienced growth in product application
development and prototyping and expects to begin production of pallets and deck
boards with the NuPro Material by the fourth quarter of fiscal year 2000 and to
commence production on a small initial order of its food processing tray product
application in the near future. This growth in the Company's business has
resulted in an increase in the responsibilities of the Company's management and
is expected to place added pressures on the Company's operating and financial
systems. The Company's ability to assimilate new personnel will be critical to
its performance, and there can be no assurance that the management and systems
currently in place will be adequate if its operations continue to expand or that
the Company will be able to implement additional systems successfully and in a
timely manner as required.
RISKS IN DEVELOPING AND COMMERCIALIZING THE NUPRO MATERIAL TECHNOLOGY AND
PRODUCT APPLICATIONS
The Company has developed a number of product applications for the NuPro
Material. The commercialization and sale of these new product applications are
relatively new ventures with high costs, expenses, difficulties, and delays
associated with commercialization of new products. Such new product application
development necessitates the development of new production processes for cost
effective manufacture in commercial quantities. The Company has developed a
distribution plan for each product application, either through an internal sales
and marketing organization or through establishing relationships with companies
with existing distribution networks. This development process typically spans
over a period of years. Although the Company in the last few years has expended
substantial sums on accomplishing development of new product applications which
has taxed the Company's resources, significant additional funds must be expended
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for the new product and process development and marketing activities to
continue. There is no assurance that the Company will be able to raise such
funds on terms favorable to the Company, if at all.
Although the Company may develop applications for the NuPro Material that
have been previously created with steel, alloys, wood, plastic, fiberglass,
plastic foam, or other materials, the market for products created with the NuPro
Material is in an early stage of development. Because this market is only
beginning to develop, it is difficult to assess the size of this market and the
product features and prices, the optimal distribution and manufacture strategy,
and the competitive environment that will develop in this market.
UNCERTAINTY OF ACCEPTANCE OF THE NUPRO MATERIAL
The NuPro Material and its applications are still being developed and
commercialized. There can be no assurance that the Company will be able to
continue to develop applications for the NuPro Material or that any product
applications for the NuPro Material will achieve market acceptance. The failure
of the product applications of the NuPro Material to achieve market acceptance,
or maintain such acceptance, if achieved, could have a material adverse effect
on the Company's business, financial condition, and results of operations.
DEPENDENCE ON NON-PATENTED PROPRIETARY RIGHTS AND KNOW-HOW
The Company's success depends, in part, upon its intellectual property
rights relating to its production process and other operations. The Company
anticipates that it will rely on a combination of trade secret, nondisclosure,
and other contractual arrangements, confidentiality procedures, and patent,
copyright, and trademark laws, to protect its proprietary rights. The Company
has filed applications for the federal registration of its NuPro(TM) and NuPro
Innovations(TM) marks.
The Company uses non-patented proprietary technology for manufacturing the
NuPro Material. The Company believes that the non-patented proprietary NuPro
Material will be protected under trade secret, contractual, and other
intellectual property rights that do not afford the statutory exclusivity
possible for patented products and processes. To protect its proprietary
technology, the Company mixes the proprietary component of the NuPro Material in
a secure environment at one of its facilities. The production processes to
manufacture products from the NuPro Material are not proprietary; however, there
is a certain amount of "know-how" that the Company has gained which would hinder
a person taking the NuPro Material and introducing it into the conventional
manufacturing environment.
There can be no assurance that the steps taken by the Company with respect
to its proprietary technology and technical know-how will be adequate to deter
misappropriation of its proprietary information or that the Company will be able
to detect unauthorized use and take appropriate steps to enforce its
intellectual property rights. The Company's proprietary information may also
become known to or independently developed by, competitors, or the Company's
non-patented proprietary rights may be challenged. Such events could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
COMPETITION
Competition in the markets for industrial materials, which includes, among
other things, steel, plastics, wood, and fiberglass, is largely based upon
quality and price. Many of the Company's competitors have greater financial
resources than those available to the Company and certain competitors spend
substantially greater amounts for advertising and promotion. In addition, many
of the Company's competitors are more established and have greater name
recognition.
INTRODUCTION OF NEW PRODUCT APPLICATIONS
The Company's success will primarily depend upon its ability to introduce
new product applications that achieve market acceptance. To meet these
challenges, the Company invests and expects to continue to invest in the
development of new product applications and production processes. There can be
no assurance that the Company will be able to respond effectively to the needs
of emerging markets or that markets will develop for any product applications
introduced or under development by the Company.
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ENVIRONMENTAL LIABILITIES
Actions by Federal, state, and local governments concerning environmental
matters could result in environmental laws or regulations that could increase
the cost of producing the NuPro Material and the product applications developed
by the Company, or otherwise adversely affect the demand for the NuPro Material.
At present, during the Company's early stage of development, environmental laws
and regulations do not have a material adverse effect upon the demand for the
NuPro Material. In addition, certain of the Company's operations are subject to
Federal, state, and local environmental laws and regulations that impose
limitations on the discharge of pollutants into the air and water and establish
standards for the treatment, storage, and disposal of solid and hazardous
wastes. While the Company has not had to make significant capital expenditures
for environmental compliance, the Company cannot predict with any certainty its
future capital expenditure requirements relating to environmental compliance
because of continually changing compliance standards and technology. The Company
does not have insurance coverage for environmental liabilities and does not
anticipate obtaining such coverage in the future. See "Business Regulation and
Environmental Considerations."
The Company is also subject to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar state
laws which impose liability without regard to fault or to the legality of the
original action, on certain classes of persons (referred to as potentially
responsible parties or "PRPs") associated with the release or threat of release
of certain hazardous substances into the environment. Generally, liability of
PRPs to the government under CERCLA is joint and several. Financial
responsibility for the remediation of contaminated property or for natural
resources damage can extend to properties owned by third parties. The Company
believes that it is in substantial compliance with all environmental laws
applicable to its business. There can be no assurance that the Company will
respond effectively to changes in CERCLA and similar state laws, if necessary,
relating to the release or threat of release of certain hazardous substances
into the environment.
PRODUCT LIABILITY CLAIMS
The manufacture of the NuPro Material could expose the Company to the risk
of product liability claims. While the Company has had no material liability
with respect to product liability claims to date, the Company is still in its
development stages. After the Company begins production and achieves sales,
product liability claims could have a material adverse effect on the Company's
business, financial condition, and results of operations. While the Company
maintains product liability insurance against the possibility of defective
product claims there can be no assurance that such insurance would be sufficient
to protect the Company against liability from such claims.
DEPENDENCE ON KEY PERSONNEL
The activities of the Company, including exploitation and development of
innovative polymer composite formulations, and, as a result, the Company's
future success, will depend to a significant extent on its senior management and
other key employees. Certain officers of the Company have engaged in related
activities in Germany, Canada, and the United States for approximately 35 years.
The Company's Chief Executive Officer and President, Luba Veselinovic, is not an
employee of the Company but is serving in such capacities pursuant to a
Secondment Agreement between the Company and Krida Overseas, which is controlled
by Mr. Veselinovic and employs Mr. Veselinovic. The terms of the Secondment
Agreement provide for a consulting relationship in which the Company pays Krida
Overseas to receive the services of certain employees of Krida Overseas. The
Secondment Agreement does not create an employment relationship between the
Company and the Krida Overseas employees, including Mr. Veselinovic, but
establishes terms under which such employees of Krida Overseas provide services
for the Company. As the Company's President and Chief Executive Officer, Mr.
Veselinovic will be primarily responsible for the day-to-day operations of the
Company and serve the Company in a policy-making capacity. Any interruption of
or default by the Company under the Secondment Agreement may result in the
Company losing the services of Mr. Veselinovic, which could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Certain Relationships and Related Transactions."
17
<PAGE>
The Company also believes that its future success will depend in a large
part on its ability to attract and retain key employees. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. The Company's inability
to attract and retain additional key employees or the loss of one or more of its
current key employees could have a material adverse effect on the Company's
business, financial condition, and results of operations.
CONFLICTS RELATING TO THE MANAGEMENT OF THE COMPANY
On June 18, 1999, the Company closed the acquisition (the "TrucTech Asset
Acquisition") of substantially all of the assets and liabilities of TrucTech,
Inc., a Georgia corporation ("TrucTech"), pursuant to an Asset Purchase
Agreement between the Company and TrucTech effective as of December 1, 1998 (the
"TrucTech Asset Purchase Agreement"). The TrucTech Asset Acquisition was
approved by the Board of Directors and stockholders of TrucTech and by the Board
of Directors of the Company. The total consideration for the TrucTech Asset
Acquisition was US $5,500,000, which was satisfied by the issuance of 7,333,333
shares of Common Stock (the "Shares"), valued at US $0.75 per share. Certain
directors, officers, employees, and stockholders of the Company were also
directors, officers, employees, and stockholders of TrucTech. As a result,
certain conflicts of interest existed with respect to the TrucTech Asset
Acquisition, and the subsequent distribution of the Shares to the TrucTech
Stockholders pursuant to a proposed Plan of Voluntary Dissolution of TrucTech.
See "Certain Relationships and Related Transactions."
Krida Overseas which is controlled by Luba Veselinovic, President and Chief
Executive Officer of the Company, owns the technology relating to the NuPro
Material and licenses to the Company the right to use and market the NuPro
Material in its operations pursuant to the Krida License. Any interruption of or
default by the Company under the license agreement may result in the Company
losing all or a portion of its exclusive right to use, develop, and market the
NuPro Material, which would have a material adverse effect on the Company's
business, financial condition, and results of operations. As an officer of the
Company, Mr. Veselinovic has fiduciary obligations to the Company's
stockholders, which may conflict with his own interests as an affiliate of the
owner of the NuPro Material. See "Certain Relationships and Related
Transactions."
POLITICAL FACTORS
Certain critical functions and operations of the Company are carried out in
Mexico in accordance with the North American Free Trade Agreement ("NAFTA"). Any
political unrest in Mexico could have a material adverse effect on the Company
and its business activities. Direct foreign investment is often subject to
specific local political risks, including but not limited to, change of laws,
lack of enforcement or discriminatory enforcement of laws, acts of violence, or
other unforeseen events. Occurrence of any one or more of these events could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
ECONOMIC FACTORS
Direct foreign investment in other countries involves potential economic
factors such as currency devaluation, inflation, interest rate fluctuations,
exchange controls, restrictions on currency repatriation, unidentified adverse
changes in internal or international policies, and changes in world economic
conditions. Occurrence of any one or more of these or similar factors may have a
material adverse effect on the Company's business, financial condition, and
results of operations.
CURRENCY FLUCTUATION
The Company has significant operations located in Mexico. Currently, the
Mexican pesos may be readily exchanged for U.S. currency in Mexican banks, and
the exchange rate relating to Mexican pesos has been generally stable for the
past five years in comparison to the exchange rate fluctuations relating to the
currencies of certain other countries. The current exchange rate for Mexican
pesos could change at any time by the direction of the government or economic
developments and such changes could have a material adverse effect on the
Company's business, financial condition, and results of operations.
18
<PAGE>
The Company anticipates that it will acquire a substantial portion of its
chemical supplies from sources in Mexico, Venezuela, and Romania. To the extent
the exchange rate for currencies in any of such countries fluctuates
significantly, such fluctuations could make the Company's chemical supplies more
expensive to acquire and, as a result, could have a material adverse effect on
the Company's business, financial condition, and results of operations.
LABOR MATTERS
The operating activities that the Company is establishing in Mexico require
the engagement and expertise of local labor. Various issues with employees could
be raised, such as wages, working conditions, security, housing, hours of work,
advancement, and medical plans. Any difficulties in relationships with the
employees of the Company could have a material adverse effect on the Company's
business, financial condition, and results of operations.
PROJECTIONS
The Company has prepared internal projections to be used solely by the
Company's management to prepare the Company's business plan and budget. Such
projections are speculative for the following reasons, among others: comparative
historical results do not exist; the Company is at an early stage of development
of its operations and business plans; and the Company has not confirmed the
feasibility of product and technology applications. Projections are only
examples of what could occur if the underlying assumptions actually occur.
Because of the various risks involved in the proposed activities, the Company's
projections could prove to be inaccurate in material respects for any operating
activities, which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS.
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue, without stockholder approval, one or more series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends and distributions and voting rights) as the Board of
Directors may determine. The issuance of this "blank-check" preferred stock
could render more difficult or discourage an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest, or otherwise.
ISSUANCE OF ADDITIONAL SECURITIES; DILUTIVE EFFECT
The Company will have authority to offer shares of preferred stock,
additional shares of Common Stock or other equity or debt securities for cash,
in exchange for property or otherwise. Stockholders will have no preemptive
right to acquire any such securities, and any such issuance of equity securities
could result in dilution of an existing stockholder's investment in the Company.
In addition, the Board of Directors has the authority to issue shares of
preferred stock having preferences and other rights superior to Common Stock.
LIMITED MARKET FOR COMMON STOCK
The Company's Common Stock is covered by Securities and Exchange Commission
rules that impose additional sales practice requirements on broker-dealers who
sell securities priced at under $5.00 (so-called "penny stocks") to persons
other than established customers and accredited investors (generally
institutions with assets in excess of $5 million or individuals with net worth
in excess of $1 million or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by such rules, the broker-dealer
must make a special suitability determination for the purchaser and receive the
purchaser's written agreement to the transaction prior to the sale. Moreover,
such rules also require that brokers engaged in secondary sales of penny stocks
provide customers written disclosure documents, monthly statements of the market
value of penny stocks, disclosure of the bid and ask prices, disclosure of the
compensation to the broker-dealer, and disclosure of the salesperson working for
the broker-dealer. Consequently, the rules may affect the ability of
broker-dealers to sell the Company's Common Stock and also may affect the
ability of persons receiving such Common Stock to sell their Common Stock in the
secondary market. These trading limitations tend to reduce broker-dealer and
investor interest in "penny stocks" and could operate to inhibit the ability of
19
<PAGE>
the Company's Common Stock to reach a $3 per share trading price that would make
it eligible for quotation on NASDAQ, even if the Company otherwise qualifies for
quotation on NASDAQ.
ITEM 7. FINANCIAL STATEMENTS.
Reference is made to the Consolidated Financial Statements, the Notes
thereto and Report of Independent Auditors thereon commencing at Page F-1 of
this Report, which Consolidated Financial Statements, Notes and Report are
included herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company changed its independent auditor from BDO Dunwoody LLP to S.E.
Clark & Company, P.C. on February 8, 1999. S.E. Clark & Company, P.C. has
audited the Company's financial statements for the years ended November 30, 1998
and 1999. This change was by mutual consent due to the Company's domestication
in the State of Delaware from the Canadian Province of Ontario on August 7,
1997. The change was approved by the Company's Board of Directors. None of the
former accountant's reports on the Company's financial statements contain an
adverse opinion or disclaimer of the opinion or was modified as to uncertainty,
audit scope or accounting principles. There were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT.
The information required by this Item with respect to Directors, Executive
Officer, Promoters and Control Persons and Compliance with Section 16(a) of the
Exchange Act is incorporated by reference from the information under the
captions "Information Concerning Directors, Nominees, and Officers" and
"Compliance with Section 16(a) of the Securities and Exchange Act of 1934,"
respectively, contained in the Company's 2000 Annual Meeting of Shareholders to
be held on March 30, 2000 (the "Proxy Statement").
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
20
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
contained in the Proxy Statement.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Domestication of the Company, dated August 7,
1997*
3.2 Certificate of Incorporation of the Company*
3.3 Bylaws of the Company*
4.1 Warrant to Purchase Shares of Common Stock of the Company*
4.2 Form of 10.00% Unsecured Convertible Debenture*
10.1(a) Technology License Agreement by and between Krida Overseas
Investments Trading Limited and the Company effective as of June
1, 1999*
10.1(b) Amendment No. 1 to Technology License Agreement by and between
Krida Overseas Investments Trading Limited and the Company dated
as of February 1, 2000**
10.2 Asset Purchase Agreement by and between TrucTech, Inc., and the
Company effective as of December 1, 1998*
10.3 Form of Indemnification Agreement for Members of the Board of
Directors*
10.4 Form of Indemnification Agreement for Members of the Advisory
Council*
10.5 Secondment Agreement by and between the Company and Krida
Overseas Investments Trading Limited dated as of December 1,
1998*+
10.6 Form of Stock Option Agreement for Members of the Company's
Board of Directors*+
10.7 Form of Stock Option Agreement for Members of the Company's
Advisory Council*+
10.8 Office Building Lease between East Broadway 5151 Limited
Partnership and Luba Veselinovic and Elke Veselinovic, H & W,
DBA NuPro Innovations Inc. dated as of the 17th day of December,
1996*
21
<PAGE>
10.9 First Amendment to Lease made the 17th day of April, 1998, by
and between East Broadway 5151 Limited Partnership and NuPro
Innovations Inc., formerly Luba Veselinovic and Elke
Veselinovic, Husband & Wife, dba, NuPro Innovations Inc.*
10.10 Second Amendment to Lease made the 22nd day of March, 1999, by
and between East Broadway 5151 Limited Partnership and NuPro
Innovations Inc., formerly Luba Veselinovic and Elke
Veselinovic, Husband & Wife, dba, NuPro Innovations Inc.*
10.11 Buy-Sell Agreement dated August 24, 1999 between Ernesto
Zaragoza de Cima and NuPro Innovation Mexico S.A. de C.V.**
10.12(a) Patent Agreement between John W. Martin and Judith Tyler Martin
and TracTop International, Inc. dated as of August 10, 1998**
10.12(b) Letter Agreement between John W. Martin and Judith Tyler Martin
and TracTop International, Inc. dated August 6, 1992**
10.13 Agreement between Luba Veselinovic, the Company and Gary A.
Fitchett dated May 24, 1999**
10.14 Lease between Ernesto Zaragoza de Cima and the Company effective
November 1, 1997**
12.1 Subsidiaries of the Company*
12.2 Letter on Change in Certifying Accountant
12.3 Consent of S.E. Clark & Company, P.C. Independent Auditors
27 Financial Data Schedule
- ----------
* Incorporated by reference from the Company's Form 10-SB Registration
Statement filed with the Commission on December 9, 1999.
** Incorporated by reference to the Company's Amendment No. 1 to Form 10-SB
filed with the Commission on February 16, 2000.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
None.
22
<PAGE>
PART F/S
The following financial statements are included herein:
NuPro Innovations Inc. - Financial Statements
Consolidated for the year ended November 30, 1999
Combined for the periods ended November 30, 1998
Independent Auditor's Report................................................ F-1
Audited Financial Statements - Consolidated for the year ended November 30, 1999
and combined for the periods ended November 30, 1998:
Balance Sheets......................................................... F-2
Statements of Loss and Deficit......................................... F-3
Statements of Shareholders' Equity..................................... F-4
Statements of Cash Flows............................................... F-5
Notes to Financial Statements.......................................... F-6
23
<PAGE>
[LETTERHEAD OF S.E.CLARK & COMPANY, P.C.]
REPORT OF INDEPENDENT AUDITORS
Shareholders and
Board of Directors
NuPro Innovations Inc.
Tucson, Arizona
We have audited the consolidated and combined balance sheets of NuPro
Innovations Inc. (a development stage company) as of November 30, 1999 and 1998,
respectively, and the related consolidated and combined statements of
shareholders' equity, loss and deficit, and cash flows for the periods then
ended. These 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
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.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated and combined
financial position of NuPro Innovations Inc. as of November 30, 1999 and 1998,
respectively, and the consolidated and combined results of its operations and
cash flows from inception and for the periods then ended in conformity with
generally accepted accounting principles.
S.E. Clark & Company, P.C.
Tucson, Arizona
January 14, 2000
F-1
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
AT NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
(CONSOLIDATED) (COMBINED)
1999 1998
---------- ---------
ASSETS (Restated)
CURRENT
Cash (Note 2) $4,387,983 $ 2,458
Accounts Receivable -- 3,902
Inventory 2,246 2,633
Prepaid Expense 11,589 12,892
---------- ---------
Total Current Assets 4,401,818 21,885
PROPERTY AND EQUIPMENT (Note 5 ) 2,023,386 421,117
OTHER
Accounts Receivable - TopTrac, S.A. de C.V. (Note 4) 90,189 100,189
Unutilized Pre-production Plant (Note 5) -- 226,114
Deposits 6,815 --
---------- ---------
97,004 326,303
---------- ---------
$6,522,208 $ 769,305
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT
Notes Payable (Note 6) $ 119,390 $ 81,240
Accounts Payable (Note 6) 542,224 83,551
Accrued Liabilities 41,130 51,785
Accrued Management Fees and Salaries
(Notes 11 and 12) 327,214 107,253
Current portion of long-term liabilities 59,346 46,532
---------- ---------
Total Current Liabilities 1,089,304 370,361
LONG-TERM LIABILITIES (Note 7) 200,724 539,283
CONVERTIBLE DEBENTURES (Note 8) 1,050,000 --
OTHER LIABILITIES
Accrued Management Fees (Note 11) 320,000 320,000
COMMITMENTS AND CONTINGENCIES (Note 11) -- --
SHAREHOLDERS' EQUITY (DEFICIENCY) (Note 8) 3,862,180 (460,339)
---------- ---------
$6,522,208 $ 769,305
========== =========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS AND DEFICIT
YEARS ENDED NOVEMBER 30,1999 AND 1998
- --------------------------------------------------------------------------------
(COMBINED)
DEFICIT
ACCUMULATED
DURING THE
(CONSOLIDATED) (COMBINED) DEVELOPMENT
1999 1998 STAGE
------------ ------------ ------------
(Restated)
Revenue - Interest earned $ 114,891 $ -- $ 114,891
----------- ----------- -----------
Costs and expenses:
Development, pre-production,
and administration 679,980 649,479 3,031,552
Stock issued for protection
of investment -- 3,252,600 3,252,600
Loss on impairment and disposition
of properties -- 71,841 321,794
Financial, primarily interest 65,619 69,046 691,635
Depreciation and amortization 19,809 21,678 138,764
----------- ----------- -----------
765,408 4,064,644 7,436,345
----------- ----------- -----------
Loss before income tax benefits (650,517) (4,064,644) (7,321,454)
Income tax benefits -- -- --
----------- ----------- -----------
Net loss $ (650,517) $(4,064,644) $(7,321,454)
=========== =========== ===========
Net loss per common share
(basic and diluted) $ (0.06) $ (0.40)
=========== ===========
Weighted average shares
outstanding (Note 13) 11,336,670 10,142,218
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING
COMMON SHARE CAPITAL PAID IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
ISSUED DURING FISCAL 1996
Issued for cash (Note 8) 750,002 $ 5,571 $ -- $ 5,571
ISSUED DURING FISCAL 1997
Issued for cash (Note 8) 542,672 200,975 -- 200,975
Issued for services 75,660 27,268 -- 27,268
Issued for settlement of debts
of TrucTech, Inc. 535,806 270,348 -- 270,348
----------- ----------- ------------ -----------
ISSUED PRIOR TO REDOMESTICATION
AUGUST 7, 1997 (NOTE 2(A)) 1,904,140 504,162 -- 504,162
Adjustment to par value -- (502,258) 502,258 --
Issued for cash (Note 8) 200,933 201 119,664 119,865
Issued for services 38,273 38 22,652 22,690
----------- ----------- ------------ -----------
ISSUED TO NOVEMBER 30, 1997 2,143,346 2,143 644,574 646,717
DEVELOPMENT STAGE LOSS
AS PREVIOUSLY REPORTED -- -- -- $ (177,399) (177,399)
Adjustment to restate expenses
associated with TrucTech, Inc. -- -- -- (144,651) (144,651)
----------- ----------- ------------ ----------- -----------
BALANCES, AS RESTATED 2,143,346 2,143 644,574 (322,050) 324,667
Issued for acquisition of
net assets of TrucTech, Inc. 7,333,333 7,333 5,492,667 5,500,000
Adjustment to combine net
assets of TrucTech, Inc. -- -- (476,585) (2,284,243) (2,760,828)
----------- ----------- ------------ ----------- -----------
COMBINED, DECEMBER 1, 1997 9,476,679 9,476 5,660,656 (2,606,293) 3,063,839
Issued for cash (Note 8) 545,389 546 419,770 -- 420,316
Issued for services 5,150 5 5,145 -- 5,150
Issued for settlement of debts
of TrucTech, Inc. 100,000 100 99,900 -- 100,000
Issued for short-term rent 15,000 15 14,985 -- 15,000
Combined net losses as
previously reported -- -- -- (4,137,454) --
Adjustment to restate expenses
associated with TrucTech, Inc. -- -- -- 144,651 --
Loss on impairment of asset -- -- -- (71,841) --
-----------
Net loss, as restated -- -- -- (4,064,644) (4,064,644)
----------- ----------- ------------ ----------- -----------
BALANCE, NOVEMBER 30, 1998 10,142,218 10,142 6,200,456 (6,670,937) (460,339)
----------- ----------- ------------ ----------- -----------
Regulation-S issued 2,475,000 2,475 4,947,525 -- 4,950,000
Costs of raising capital -- -- (53,698) -- (53,698)
Escrowed shares issued
in conversion of debt (Note 8) -- -- 76,734 -- 76,734
Net loss for the period -- -- -- (650,517) (650,517)
----------- ----------- ------------ ----------- -----------
BALANCE, NOVEMBER 30, 1999 12,617,218 $ 12,617 $ 11,171,017 $(7,321,454) $ 3,862,180
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOW
YEARS ENDED NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(COMBINED)
ACCUMULATED
DURING THE
(CONSOLIDATED) (COMBINED) DEVELOPMENT
1999 1998 STAGE
----------- ----------- -----------
(Restated)
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net loss for the period $ (650,517) $(4,064,644) $(7,321,454)
Adjustments to reconcile net loss
to net cash
Depreciation 19,809 21,678 138,764
Loss on disposal of obsolete equipment -- -- 130,141
Stock issued for protection of investment -- 3,252,600 3,252,600
Stock issued for rent and services -- 20,150 70,108
Impairment Loss on unutilized
pre-production plant -- 71,841 71,841
Accounts receivable 13,902 12,283 (90,189)
Inventories 387 -- (2,246)
Prepaid expense 1,303 (2,864) (11,589)
Accounts payable and accrued liabilities 520,167 (76,656) 655,503
Payables and accruals paid with NuPro stock -- 100,000 370,348
Accrued management fees and salaries 219,961 325,500 647,214
----------- ----------- -----------
125,012 (340,112) (2,088,959)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of capital assets (1,622,078) (3,220) (2,507,746)
Deposits (6,815) -- (6,815)
----------- ----------- -----------
(1,628,893) (3,220) (2,514,561)
----------- ----------- -----------
FINANCING ACTIVITIES
Notes payable 38,150 8,519 119,390
Increase in (repayment of) long-term liabilities (9,429) (143,239) 392,442
Advances from (repayments to) shareholders (85,617) 57,258 98,327
Increase in convertible debentures 1,050,000 -- 1,050,000
Common stock subscribed and paid 4,896,302 420,316 7,331,344
----------- ----------- -----------
5,889,406 342,854 8,991,503
----------- ----------- -----------
INCREASE (DECREASE) IN CASH FOR THE PERIOD 4,385,525 (478) 4,387,983
CASH, BEGINNING OF PERIOD 2,458 2,936 --
----------- ----------- -----------
CASH, END OF PERIOD $ 4,387,983 $ 2,458 $ 4,387,983
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
NuPro Innovations Inc. ("NuPro") (A Development Stage Company) was formed
to further develop and commercialize an innovative industrial engineering
hybrid composite material technology, which it acquired through exercise of
the option disclosed in Note 3.
TrucTech, Inc. ("TrucTech") (A Development Stage Company) was formed to
develop and manufacture a unique telescoping pickup truck cover and other
prospective products.
The financial statements of NuPro are for the fiscal years ended November
30, 1999 and 1998 and TrucTech are for the eleven months ended November 30,
1998.
The 1999 financial statements are consolidated presentations including
those of its majority owned subsidiary NuPro Innovation Mexico S.A. de C.V.
All inter-company assets, liabilities and operating transactions have been
eliminated upon consolidation.
The Combined 1998 Balance Sheets and Statements of Shareholders' Equity
reflect the combined assets, liabilities and shareholders' equity, of NuPro
and TrucTech based on the 1999 completion of the acquisition by NuPro of
the net assets of TrucTech, see Note 3.
NuPro and TrucTech were under common control as defined by U.S. GAAP which
requires that their combination be accounted for at historical cost in a
manner similar to pooling of interest accounting. To reflect the continuity
of interest of the principal shareholders in the business, all assets,
liabilities, and shareholders' equity have been recorded in the Combined
Balance Sheet at the book values of the predecessor companies' accounts.
Research and development expenditures are charged to expenses in the period
incurred. Cumulative expenses through the effective date of the combination
represent the development costs of the TracTop telescoping pickup cover and
other products and materials:
TrucTech $2,426,641
NuPro 991,696
----------
Cash and Accrued expenses 3,418,337
TrucTech stock issued for
protection of investment 3,252,600
----------
Total expense $6,670,937
==========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Companies follow the generally accepted accounting principles of the
United States ("U.S. GAAP").
(a) Nature of Business
NuPro was incorporated in Canada on November 27, 1996, and has been in
the development stage since its formation. As of August 7, 1997, the
Company was redomesticated and continued in the State of Delaware,
U.S.A. and its name changed to NuPro Innovations Inc. from TracTop
Distributing Inc.
F-6
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
A 99% owned foreign subsidiary has been incorporated as of November
12, 1998 as NuPro Innovation Mexico S.A. de C.V. At November 30, 1998
its organization was incomplete and it had no assets, liabilities,
revenues or expenses. As of November 30, 1999 its activities include
construction of a production facility in Guaymas, Sonora, Mexico which
is not yet operational.
TrucTech, incorporated on May 31, 1989 in the State of Georgia,
U.S.A., has been in a development stage since its formation and is in
the process of dissolution.
(b) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
(c) Property and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is recorded on a straight-line basis during
commercial production at the following rates:
Building 3%
Production Equipment 10%
Automotive Equipment 20%
Office Equipment 10 and 20%
Management will periodically assess its ability to recover the cost of
its long-lived assets through cash-flows resulting from sales of
related products or the assets. Costs deemed not recoverable will be
considered impaired and the asset cost reduced by the estimated
impairment. Since the company is still in the development stage it is
not yet possible for management to assess whether an impairment, if
any, exists.
(d) Foreign Currency Translation
Assets and liabilities are translated from Canadian or Mexican
currency into U.S. currency by use of the exchange rates in effect at
the balance sheet date. Revenues and expenses are translated using the
exchange rates in effect on the date they are included in income or
using weighted-average exchange rates. Capital accounts are translated
using the exchange rates in effect when the foreign entity's capital
stock was acquired or issued. Gains or losses on translating the
Canadian or Mexican currency into U.S. currency are reported as other
comprehensive income. Foreign currency transaction gains and losses
are included in net income in the period the exchange rate changes.
Translation or transaction gains or losses were not material to the
financial statements as of November 30, 1999.
(e) Cash and Cash Equivalents
The company considers highly liquid investments having a maturity of
three months or less at the date of purchase to be cash equivalents.
As of November 30, 1999 cash included five certificates of deposit
totaling approximately $3,787,000 with maturities ranging from 30 to
90 days, bearing interest at approximately 4 - 5%. One of the CD's, in
the amount of $100,000, is restricted as security for a line of
credit.
F-7
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Cash balances are insured by the F.D.I.C. up to $100,000 per
institution. Balances in excess of $100,000 per institution are at
risk should the financial institution fail. Substantially all of the
company's cash assets are held by one financial institution and are
accordingly subject to that risk.
3. ACQUISITION OF TRUCTECH, INC.
By agreement dated December 5, 1996, as amended, NuPro had an option to
acquire the net assets of TrucTech, including technology rights, at their
fair value, by exchanging NuPro stock for all of the net assets and
liabilities of TrucTech. Since the TrucTech shareholders would retain
control after the combination, the combination is considered a reverse
acquisition. Accounting rules of the U.S. Securities and Exchange
Commission required that the historic cost basis of the control parties be
carried over. Thus, the transaction is required to be recorded at historic
costs which may be substantially less than the current fair value of the
assets exchanged.
The exercise of the option under the agreement was approved by the Board of
Directors of NuPro Innovations Inc. on March 24, 1999.
Both the stockholders and directors of TrucTech have acknowledged that the
technology to the plastic that is a major component of the TracTop product
is an unpatented technology that is owned by Krida Overseas Investments
Trading Limited ("Krida"), controlled by Luba Veselinovic, spouse of the
TrucTech president, Elke Veselinovic.
TrucTech has entered into a licensing and royalty agreement for the patent
rights to certain technologies used in the TracTop product. The agreement
required payment of $150,000 from profits and $5.00 per unit sold.
Additionally, TrucTech has developed other technologies, which are
unpatented, pertaining to the development and production of the TracTop
units.
The technology rights acquired by the NuPro shareholders from TrucTech are
the learned and licensed technologies that apply to the TracTop product and
the license agreement to the plastic technology that is the acknowledged
property of Krida.
In June, 1999 the oral technology license agreement referred to in Note 3
to the audited financial statements for the year ended November 30, 1998
was documented in a written agreement between Krida and NuPro. The
agreement grants NuPro an exclusive world wide license to the NuPro
technology owned by Krida through December 31, 2002. The license fee is
1.5% of the gross revenues up to $5,000,000 and 2% thereafter resulting
from the NuPro technology and products sold by NuPro. The exclusivity after
December 31, 2002 is dependent on the continuing involvement of Luba
Veselinovic or achievement of at least 50% of the forecasted sales in the
business plan and annual sales increase of at least 10%.
As a result of the option agreement to acquire the net assets of TrucTech,
and the anticipated completion thereof, NuPro commenced organizational
activities and prototyping and market development efforts in early 1997.
However, certain related expenses, totaling $144,651, continued to be paid
by TrucTech until November 30, 1997.
F-8
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
In 1998 it was recognized that these 1997 amounts should be born by NuPro.
They were transferred to NuPro by a credit to Advances - TrucTech. The
amount is reflected as a prior period adjustment in the Statement of Loss
and Deficit for NuPro. This restatement increased the net loss per share
computation by approximately $(0.01).
4. ACCOUNTS RECEIVABLE - TOPTRAC , S.A. De C.V.
This amount represents unsecured advances to TopTrac, S.A. de C.V.
("TopTrac"), a Mexican manufacturing company, owned by a director of NuPro,
which manufactures the TracTop product for direct sales in Mexico and for
sales to NuPro. The amount is comprised as follows:
(CONSOLIDATED) (COMBINED)
1999 1998
------- --------
Sales of inventory of TracTop Components $78,051 $ 78,051
Miscellaneous charges paid on behalf of TopTrac 12,138 12,138
Cash advance -- 10,000
------- --------
$90,189 $100,189
======= ========
The balance is to be repaid, without interest, at the rate of $100 per
TracTop unit sold. Since TrucTech is the sole source of TopTrac's cash
flows and there are no TracTop sales, it is unlikely this account will be
repaid in full within the next year.
5. PROPERTY AND EQUIPMENT
(CONSOLIDATED) (COMBINED)
1999 1998
---------- ----------
Land $ 252,822 $ --
Construction in Progress (Note 11) 1,339,970 --
Plant Equipment 398,839 398,640
Automotive Equipment 105,006 83,277
Office Equipment 29,398 22,040
---------- ----------
2,126,035 503,957
Less: Accumulated Depreciation 102,649 82,840
---------- ----------
NET BOOK VALUE $2,023,386 $ 421,117
========== ==========
All of the TrucTech plant equipment is located at the TopTrac, S.A. de C.V.
plant in Guaymas, Mexico. NuPro has entered into a lease for contiguous
space. Under terms of the lease, equipment and inventory is subject to
possession and sale by the landlord to satisfy lease delinquencies, if any.
F-9
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
(CONSOLIDATED) (COMBINED)
1999 1998
-------- ---------
INVESTMENT IN UNUTILIZED PRE-PRODUCTION PLANT
Land $ -- $ 82,500
Building -- 225,795
Less Accumulated Depreciation -- (10,340)
Less Impairment Reserve -- (71,841)
-------- ---------
Net book value $ -- $ 226,114
======== =========
In January 1999 the Company sold the land and building which has a book
value of $297,955 for net proceeds after adjustments and selling expenses
of $225,254. The mortgage payable thereon was discharged from the proceeds.
A loss of $71,841 was realized on the transaction. Since the loss occurred
soon after the fiscal 1998 year end the financial statements have been
restated to recognize the asset impairment as of November 30, 1998.
6. NOTES PAYABLE
Included in NuPro bank indebtedness is a bank line of credit in the amount
of $31,185 (Cdn $45,000) with an outstanding balance at November 30, 1999
of $20,969 (Cdn $30,265). The bank line of credit is due on demand and
bears interest at prime plus 4% and is secured by a general security
agreement over all assets of the Company and the guarantee of a former
director. TrucTech also has a bank note outstanding in the amount of
$31,866, due January 22, 2000 including 10% interest. Also included in
notes payable are loans from affiliates totaling $66,555 further discussed
in Note 12. Prime at November 30, 1999 was 8.25%.
On June 1, 1999 NuPro opened a line of credit with Bank One in the amount
of $100,000. The line was secured by a certificate of deposit in an equal
amount. Interest is payable monthly and accrues at prime which at November
30, 1999 was 8.25%. The maximum amount was borrowed on the line and repaid
during the year. The line will be reviewed for renewal annually.
ACCOUNTS PAYABLE
Included in accounts payable are $125,519 trade accounts payable and
$416,705 construction accounts payable. Included in construction accounts
payable are $26,955 due to DIEZ (E. Zaragoza affiliate) for the balance of
the Guaymas land and $196,883 to Inversiones de Guaymas for construction,
further discussed in Notes 11 and 12.
F-10
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
7. LONG-TERM LIABILITIES
(CONSOLIDATED) (COMBINED)
1999 1998
-------- ---------
Mortgage Payable
Montgomery County Bank - 9% payable in monthly
installments of $2,575, including principal and
interest, due May 1999, secured by Company real
estate. $ -- $230,699
Notes Payable
Montgomery County Bank - prime plus 2.5%,
payable in monthly installments of $4,224,
including principal and interest, due February
2002. Secured by a general security agreement
over all assets, and insured by the Small
Business Administration. 120,196 149,355
Chrysler Corporation
12.5%, payable in monthly installments of $630,
including principal and interest, due July
2000. Secured by a vehicle and the guarantee of
a director. 6,498 12,764
Other Contracts Payable
1999 amount is a capitalized lease payable to
the Veselinovic Children's Trust for lease of a
1999 Suburban, 60 monthly payments of $739,
including imputed interest at 8.5% 35,049 9,053
Related Party Loans
Loans from various shareholders of the
Companies, interest at 10 - 12%, with no
specific terms of repayment or maturity dates.
Unsecured. 98,327 183,944
-------- --------
260,070 585,815
Less: Current portion of principal 59,346 46,532
-------- --------
$200,724 $539,283
======== ========
F-11
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
Future minimum principal payments due on long-term liabilities for the
years ended November 30 are as follows:
2000 $ 59,346
2001 51,032
2002 51,365
Unscheduled shareholder loans 98,327
--------
$260,070
========
8. SHARE CAPITAL
Under the State of Delaware Certificate of Incorporation, NuPro's capital
stock is as follows:
(a) Authorized
20,000,000 shares of common stock, par value of $0.001
1,000,000 shares of preference stock, par value of $0.001, issuable in
series, with powers, preferences and relative, participating, optional
or other special rights, and qualifications, limitations, or
restrictions as fixed by the Board of Directors.
(b) Issued
12,617,218 shares of common stock.
F-12
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE RANGE SHARES AMOUNT VALUATION
------- ----- ------ ------ ---------
<S> <C> <C> <C> <C> <C>
ISSUED DURING FISCAL 1996:
"Escrow" shares issued for cash $0.007 $0.007 750,000 $ 5,569 fair market value
Initial shares issued for cash $1.000 $1.000 2 2 fair market value
---------- ----------
750,002 5,571
---------- ----------
ISSUED DURING FISCAL 1997:
Issued for cash $0.366 $0.365-$0.366 535,855 195,857 fair market value
Issued for cash $0.524 $0.520-$0.540 169,933 89,000 fair market value
Issued for cash $0.731 $0.731 6,817 4,983 fair market value
Issued for cash $1.000 $1.000 31,000 31,000 fair market value
---------- ----------
743,605 320,840
---------- ----------
Issued for services $0.361 $0.360-$0.361 75,660 27,268 fair market value
Issued to pay services and debt $0.506 $0.505-$0.533 569,139 288,098 fair market value
Issued for services $1.000 $1.000 4,940 4,940 fair market value
---------- ----------
649,739 320,306
---------- ----------
ISSUED DURING FISCAL 1998:
Issued for cash $0.533 $0.514-$0.560 215,816 114,954 fair market value
Issued for cash $0.650 $0.650 9,886 6,425 fair market value
Issued for cash $0.750 $0.750 83,000 62,250 fair market value
Issued for cash $1.000 $1.000 236,687 236,687 fair market value
---------- ----------
545,389 420,316
---------- ----------
Issued to pay services, rent
and debt $1.000 $1.000 120,150 120,150 fair market value
---------- ----------
ISSUED DURING FISCAL 1999:
Issued for net assets of TrucTech -
exchange price set during 1998 $0.750 $0.750 7,333,333 5,500,000 fair market value
---------- ----------
Regulation S shares issued
for cash $2.000 $2.000 2,475,000 4,950,000 fair market value
---------- ----------
TOTAL SHARES ISSUED 12,617,218
==========
</TABLE>
In July, 1999 the escrow shares referred to above were returned to treasury
and redistributed to certain shareholders in accordance with the plan
previously authorized by the board of directors. 460,887 shares were
distributed to approximately 60 shareholders to equalize the initial issue
price paid and 289,113 were distributed to 7 shareholders to settle various
NuPro commitments.
F-13
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
(c) Share Purchase Options
Options to purchase 275,000 common shares are outstanding, and may be
exercised on the following basis:
NUMBER OF EXERCISE
SHARES PRICE EXPIRATION DATE
------ ----- ---------------
Directors 125,000 $4.00 December 31, 2002
Advisory Council 90,000 $4.00 December 31, 2000
Consultants 60,000 $1.00 December 31, 2002
During fiscal 1998, each member of the Company's Board of Directors
received options to acquire 25,000 shares of the Company's common stock at
$4.00 per share as director compensation. In addition, each member of the
Advisory Council received options during fiscal 1998 to acquire 15,000
shares of the Company's common stock at $4.00 per share as advisory council
compensation. Since the exercise price substantially exceeds the current
market price of the stock, grant-date fair value has been assigned to the
options granted. No options have been exercised during fiscal 1998 or 1999.
Stock issued to acquire goods or services, other than employee services, is
valued at grant-date fair value.
REGULATION S
In an offering that closed July 7, 1999, the Company raised capital and
issued securities under Regulation S of the Securities Act. The issue,
totaling $6,000,000, consists of 1,500,000 shares of common stock at $2.00
per share, $3,000,000 in debentures convertible into shares of common stock
at a minimum of $2.00 per share, and warrants to purchase 1,500,000
additional shares of common stock at $2.50 per share, exercisable only
after the debentures have been converted. As of November 30, 1999,
$3,500,000 of the units subscribed had been paid with shareholders opting
to receive common shares directly in lieu of convertible debentures. The
remaining $2,500,000 has also been collected which resulted in the issuance
of an additional 725,000 common shares and convertible debentures totaling
$1,050,000. Interest will begin accruing on the debentures at 10% per annum
commencing January 1, 2000 with maturity on December 31, 2004. Warrants for
200,000 shares are subscribed but unpaid at $2.50 per share leaving
remaining unsubscribed or exercised warrants for 1,300,000 shares.
The debenture certificates have not yet been distributed in anticipation of
further conversions to common stock.
Interest has not been accrued on the subscribed and paid but undistributed
certificates. Management sold the debentures with the intent that interest
would not begin accruing until one year after their issue date. The
undistributed debentures, which prescribed interest payment beginning
approximately one year after the issue date of July 7, 1999, have been
revised for an accrual date of January 1, 2000. Accrual of interest through
November 30, 1999 would approximate $50,000 which would have been
capitalized as construction period interest. The debenture subscribers have
subsequently agreed to set the interest accrual date as January 1, 2000.
F-14
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
In the year ended November 30, 1998, 5,150 shares of NuPro, valued at
$5,150, were issued for services, 15,000 shares of NuPro, valued at
$15,000, were issued for rent, and 100,000 shares of NuPro, valued at
$100,000, were issued to settle debts of TrucTech.
The value of the shares issued in settlement of debt and services rendered
was at the fair value of the shares at the date of issuance. No income
taxes were paid and interest paid approximates the amounts disclosed as
expense.
10. INCOME TAXES
NuPro potentially has losses for income tax purposes available to reduce
future taxable income of approximately $1,637,000. The potential benefit
($655,000) of these losses has not been reflected in the financial
statements since there is no assurance that the losses will be utilized.
These losses will begin expiring as of November 30, 2012. Additionally, the
limitations on these losses resulting from the business combination has not
been determined but could be substantial. Accordingly, the valuation
allowance equals the deferred tax asset.
TrucTech potentially has losses for income tax purposes available to reduce
taxable income of approximately $2,074,000. The potential benefit
($830,000) of these losses has not been reflected in the financial
statements since there is no assurance that the losses will be utilized.
The benefit of these losses may only be applied to future income from the
TracTop product. These losses will begin expiring as of December 31, 2004.
Additionally, the limitations on these losses resulting from the business
combination has not been determined but could be substantial. Accordingly,
the valuation allowance equals the deferred tax asset. The deductibility
and carryover benefit of the amount paid to TrucTech shareholders through
issuance of TrucTech stock as "stock issued for protection of investment"
has not been determined and is excluded from the above.
11. COMMITMENTS AND CONTINGENCIES
NuPro has lease commitments outstanding as follows:
MONTHLY ANNUAL MATURITY
------- ------ --------
Office - Tucson, Arizona $1,961 $25,332 March 31, 2000
Factory - Guaymas, Mexico 1,015 12,180 October 31, 2002
Future minimum lease payments due on leases for years ended November 30 are
as follows:
2000 $20,024
2001 12,180
2002 11,165
-------
$43,369
=======
See the above discussion regarding lessors contingent rights to inventory
and equipment of NuPro.
F-14
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
On February 15, 1998 TrucTech and NuPro entered into an agreement with
Tooling Technology, canceling their option to acquire 3% of the issued and
outstanding TrucTech shares and settling in full the approximate $100,000
liability for production tooling in exchange for 100,000 shares of NuPro
stock and warrants to acquire an additional 100,000 shares at $1.25 per
share. Those warrants expired on June 30, 1998 without exercise.
CONTINGENCIES
TrucTech issued common shares to certain stockholders, officers and
directors to protect their investment. The calculated amount was based in
part on the value of services performed by these individuals during the
development stage of TrucTech and other pro-rata amounts. It has not been
determined for tax purposes if these shares will be considered capital
distributions or compensation to the recipients. The tax consequences of
this determination to the recipients could be substantial. The tax
consequences to TrucTech have not been determined, but are believed to be
immaterial. See further comments in Note 10.
YEAR 2000 COMPLIANCE
The year 2000 issue relates to misstatements that may result in computer
systems that use only two digits to record a year. The misstatements, which
may occur before, on, or after January 1, 2000, result when dates are used
in computations and comparisons. Company management believes it is
compliant with the SEC's requirement to evaluate and disclose the cost of
compliance. NuPro utilizes only popular retail software which asserts that
it is Y2K compliant. Additionally, management believes it is not currently
dependent on vendors or suppliers whose systems, if not compliant would
cause any material financial misstatements to NuPro.
MANAGEMENT TRANSITION
In May 1999, Luba Veselinovic entered into an agreement (on behalf of Krida
and the Veselinovic Children's Trust) with Gary Fitchett, personally and on
behalf of the Fitchett Family Trust, Pinecrest Consultants, Inc. and
Management Synergistics to purchase 1,000,000 shares of Fitchett's NuPro
shares for the aggregate price of $500,000. $250,000 of the purchase price
is payable on closing. Closing has not yet occurred because certain
conditions precedent to closing have not yet been satisfied. The remaining
$250,000 balance is payable by a note co-signed by Luba Veselinovic and
NuPro Innovation Inc. and is payable according to the following schedule:
MONTHLY ANNUAL
------- ------
Year one $ 2,500 $ 30,000
Year two 5,000 60,000
Year three 7,500 90,000
Year four 10,000 70,000
--------
$250,000
========
F-15
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
The written agreement specifies a partial return of shares to Mr. Fitchett
if the note is not paid by August 31, 2004.
While NuPro is not the principal signer of the note, it is expected that
the cash flows will come from NuPro as payment of compensation or accrued
management fees to Luba Veselinovic or one of his affiliated entities.
Existing accrued management fees due to Fitchett of approximately $175,000
will be paid upon the earlier of (1) completion of a public offering of
NuPro shares or (2) annual profits earned in excess of required annual
capital expenditures and dividends. $175,000 of the management fees due to
Luba Veselinovic are also "frozen" and payable under the above mentioned
terms. Management fees in excess of $175,000 accruing to Luba Veselinovic
or his affiliates are payable out of available funds. The "frozen" fees may
otherwise be paid to make the note payments or personal obligations of
Veselinovic to Fitchett. An additional 200,000 shares were provided by
Fitchett to Veselinovic to use for special consideration at no charge.
$30,000 of the "frozen" fees are classified as current to allow payment of
the above purchase obligation of Mr. Veselinovic according to the above
schedule. Certain issues related to the written agreement are being
clarified by the parties. Management believes these issues will be resolved
in a manner that is not materially adverse to the Company.
CONSTRUCTION IN PROGRESS
NuPro and its Mexican Subsidiary are both involved with construction
projects as of November 30, 1999. NuPro is constructing an office, research
and storage facility in Tucson of approximately 12,500 square feet for a
total estimated cost of $1,200,000. The company is acting as its own
general contractor and is engaging various subcontractors to construct the
project. Payables to these contractors, included in accounts payable, total
approximately $193,000 as of November 30, 1999. As of November 30,
management estimates that the project is 37% complete, having incurred
costs to date of approximately $445,000 and estimate that $755,000 of
additional costs will be incurred through the completion of the project.
NuPro Innovation Mexico S.A. de C.V. is constructing two production
facilities in Guaymas, Sonora, Mexico, totaling approximately 32,000 square
feet for a total estimated cost of $1,235,600. An affiliate of NuPro
director, Ernesto Zaragoza, is acting as the general contractor and is
engaging various subcontractors to construct the project. Payables to these
contractors, included in accounts payable, total approximately $223,838 as
of November 30, 1999. As of November 30, management estimates that the
project is 75% complete, having incurred costs to date of approximately
$895,000 and further estimate that approximately $341,000 of additional
costs will be incurred through the completion of the project.
In addition to the direct costs of construction, management estimates that
an additional $699,000 will be expended during fiscal 2000 to furnish and
equip the Tucson facility and $1,116,000 will be expended during fiscal
2000 to furnish and equip the Guaymas facilities.
F-16
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS
During the periods, the following financial transactions were completed
with shareholders, directors, managers or employees who are deemed to be
related parties to each Company:
NUPRO
In June 1998, options to purchase 25,000 common shares at $4.00 per share
until December 31, 2002 were issued to each of five directors.
In June 1998, options to purchase 15,000 common shares at $4.00 per share
until December 31, 2000 were issued to each of six members of the advisory
council.
During 1998 rent was paid to a director for factory space in Guaymas,
Mexico of $12,180.
During 1998, management fees were accrued to two members of management
covering the period of April 1997 to November 1998 in the amount of
$270,000.
During 1998, management salaries were accrued to one member of management
covering the period of January 1997 to November 1998 in the amount of
$75,125.
During 1998, various unsecured loans bearing interest at 12% per annum were
made to the Company by shareholders. The balance outstanding at November
30, 1998 totaled $64,098.
During 1998, wages were paid to children of one director in the amount of
$16,436.
During 1998, common shares were issued as follows:
<TABLE>
<CAPTION>
RELATION NUMBER CONSIDERATION VALUATION
-------- ------ ------------- ---------
<S> <C> <C> <C>
Director and officer 60,000 45,000 cash Exercise of warrants
Director and officer 64,000 33,600 cash Exercise of warrants
Director and officer 23,000 17,250 cash Exercise of warrants
Children of a director 5,600 2,938 cash Fair market value
Members of advisory council 3,375 3,375 services Fair market value
Director 15,000 15,000 rent Fair market value
TrucTech creditor 100,000 100,000 debt settlement Fair market value
</TABLE>
TRUCTECH
During 1998 an unsecured loan bearing interest at 10% was made to the
Company by a director. The balance outstanding at November 30, 1998 was
$119,846.
F-17
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
On July 27, 1998, the TrucTech shareholders approved the issuance of the
shares, including shares to related parties to protect their investment.
This issuance resulted in the control group shares prior to merger as
disclosed below:
Estimated
Total NuPro Shares
Shares on Merger
--------- ---------
TrucTech shares held prior to merger:
Affiliated with Luba and Elke Veselinovic:
Krida Overseas Trading and Investments 320,867 2,027,253
Edda Schaecke 20,737 207,375
Veselinovic Children's Trust 161,642 1,104,412
NAFTA Technology, Trading and Consulting 80,327 473,960
Affiliated with Gary Fitchett:
Pinecrest Consultants, Inc. and
Fitchett Family Trust (See note 11) 171,771 1,261,918
Richard Fitchett 2,981 21,815
--------- ---------
758,325 5,096,733
--------- ---------
Percent of TrucTech shares 69.49%
=========
NuPro shares held prior to merger:
Affiliated with Luba and Elke Veselinovic:
Veselinovic Children's Trust 210,000 210,000
Affiliated with Gary Fitchett:
Fitchett family group 500,690 500,690
Gary Fitchett as trustee for
escrow shares (Note 8) 750,000 750,000
--------- ---------
1,460,690 1,460,690
--------- ---------
Control group totals:
Affiliated with Luba and Elke Veselinovic: 210,000 4,023,000
Affiliated with Gary Fitchett: 1,250,690 2,534,423
--------- ---------
1,460,690 6,557,423
========= =========
Percent of NuPro shares 50.39% 64.65%
========= =========
NUPRO CONSOLIDATED
During 1999 rent was paid to a director for factory space and demo line in
Guaymas, Mexico of $40,757.
F-18
<PAGE>
NUPRO INNOVATIONS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
During 1999, management fees were accrued to two members of management in
the amount of $180,000.
During 1999, management salaries were accrued to one member of management
in the amount of $73,290.
During 1999, various unsecured loans bearing interest at 12% per annum were
made to the Company by shareholders. The balance outstanding at November
30, 1999 totaled $66,555. During 1999, wages were paid to children of one
director in the amount of $12,033.
During 1999, NuPro Mexico advanced funds totaling $768,000, to Inversiones
de Guaymas, and other affiliates of Ernesto Zaragoza who is a director of
NuPro, for progress payments for facility construction. See Note 11.
13. NET LOSS PER SHARE
Restricted shares and warrants are not included in the computation of the
weighted average number of shares outstanding during the period as the
effect would be antidilutive. The 1999 net loss per common share is
calculated by dividing the consolidated loss by the 11,336,670 weighted
average number of shares outstanding during the year. The 1998 net loss per
common share is calculated by dividing the combined losses by the
10,142,218 shares outstanding after the business combination.
14. SECONDMENT AGREEMENT
NuPro entered into a "secondment" agreement effective December 1, 1998 with
Krida Overseas Investments Trading Limited, a Cyprus entity affiliated with
Luba Veselinovic, whereby Luba is employed by Krida to provide services to
NuPro at the rate of $12,500 per month. The initial term of the agreement
is five years but may be extended for additional five year periods. The
agreement may not be terminated during the initial term.
F-19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NUPRO INNOVATIONS INC.
Date: February 28, 2000 By: /s/ Luba Veselinovic
------------------------------------
Name: Luba Veselinovic
Title: Chief Executive Officer and
President (Principal
Executive Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: February 28, 2000 By: /s/ Elke Veselinovic
------------------------------------
Elke Veselinovic
Treasurer, Director
(Principal Financial Officer)
Dated: February 28, 2000 By: /s/ Ernesto Zaragoza de Cima
------------------------------------
Ernesto Zaragoza de Cima
Vice President, Director
Dated: February 28, 2000 By: /s/ Lawrence J. McEvoy Jr.
------------------------------------
Lawrence J. McEvoy Jr.
Secretary, Director
Dated: February 28, 2000 By: /s/ Charles H. Green
------------------------------------
Charles H. Green
Director
Dated: February 28, 2000 By: /s/ Reiner Becker
------------------------------------
Reiner Becker
Director
24
LETTER ON CHANGE IN CERTIFYING ACCOUNTANT
February 25, 2000
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: Form 10-KSB Annual Report of NuPro Innovations Inc.
Gentlemen:
We have read the section titled "Ratification of Independent Auditor - Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure"
included in the Form 10-KSB Annual Report of NuPro Innovations Inc. filed with
the Securities and Exchange Commission on February 28, 2000, and are in
agreement with the statements contained therein.
Yours very truly,
/s/ BDO Dunwoody LLP
CHARTERED ACCOUNTANTS
Per: Robert W. Babensee, C.A.
Partner
[S.E.CLARK & COMPANY, P.C. LETTERHEAD]
EXHIBIT 12.3
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the inclusion of our report dated
January 14, 2000, in the Form 10-KSB for NuPro Innovations, Inc. which includes
the consolidated and combined financial statements of NuPro Innovations, Inc.
for the periods ended November 30, 1999 and 1998.
S.E.Clark & Company, P.C.
Tucson, Arizona
February 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
FINANCIAL STATEMENTS OF NUPRO INNOVATIONS INC. FOR THE YEAR ENDED NOVEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 4,387,983
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,246
<CURRENT-ASSETS> 4,401,818
<PP&E> 2,126,035
<DEPRECIATION> (102,649)
<TOTAL-ASSETS> 6,522,208
<CURRENT-LIABILITIES> 1,089,304
<BONDS> 1,250,724
0
0
<COMMON> 12,617
<OTHER-SE> 3,849,563
<TOTAL-LIABILITY-AND-EQUITY> 6,522,208
<SALES> 0
<TOTAL-REVENUES> 114,891
<CGS> 0
<TOTAL-COSTS> 699,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,619
<INCOME-PRETAX> (650,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> (650,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (650,517)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
