As filed with the Securities and Exchange Commission on May 17, 2000
Registration No.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
----------
AMENDMENT NO. 2 TO FORM SB-2 ON FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NOVEX SYSTEMS INTERNATIONAL, INC.
(Name of Registrant in its Charter)
New York 3272 41-1759882
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation) Classification Code Number) Identification No.)
16 Cherry Street
Clifton, New Jersey 07014
(973) 777-2307
(Address and Telephone Number of Registrant's Principal Executive Office)
Daniel W. Dowe, President
Novex Systems International, Inc.
16 Cherry Street
Clifton, New Jersey 07014
(973) 777-2307
(Name, Address and Telephone Number of Agent for Service)
Copy to:
Janet L. Dowe, Esq.
Dowe, Capetanakis & Preite
67 Wall Street, Suite 2001
New York, New York 10005
Telephone: (212) 825-1400
Facsimile: (212) 825-0354
Approximate date of sale to the public: After the registration statement
becomes effective each shareholder may or may not sell its shares, although each
shareholder was entitled to have its shares registered pursuant to agreements
reached with the company.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [x]
If this form is filed to register additional securities for an Offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
----------
The Registrant amends this registration statement on such date or dates as may
be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act, or until the registration statement shall become effective on
such date as the Securities and Exchange Commission (the "Commission"), acting
pursuant to said Section 8(a), may determine.
----------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
Proposed
Amount Maximum Maximum Amount of
Title of Each Class of To be Offering Price Aggregate Registration
Securities to be Registered Registered Per Security(1) Offering Price(1) Fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 11,796,692 $ 560.58(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Class B Warrants 675,365 --(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, underlying the
Class B Warrants(4) 675,365 32.09
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock Options 1,185,924 --(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value, underlying the
Common Stock Options(5) .............................. 1,185,924 56.36
- ---------------------------------------------------------------------------------------------------------------------------------
Total ................................................ -- -- -- $ 649.03
Previously Paid ...................................... -- -- -- $ 649.03
Total Amount Due ..................................... -- -- -- $ 0
=================================================================================================================================
</TABLE>
(1) As of the filing date of this registration statement, no particular offer
of securities is made by or on behalf of a Selling Securityholder. When a
particular offer is made, to the extent required, a Prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the offering.
(2) In accordance with Rule 457(c) and (d), the registration fee is based upon
the average bid and asked price of Novex's common stock on a date within 5
days from the initial filing of this Registration Statement. The
Registration Statement was filed on Tuesday, February 2, 2000. On Friday,
January 28, 2000, the average bid/ask price of the stock was $.18 per
share.
(3) No filing fee is required pursuant to Rule 457(g).
(4) Represents shares of common stock that may either be resold by the selling
securityholders after acquiring the shares upon exercising their Class B
warrants, or alternatively, that may be issued by Novex to those
individuals or entities that purchase Class B warrants from the selling
securityholders.
(5) Represents shares of common stock either that may be resold by the selling
securityholders after acquiring the shares upon exercising their stock
options, or alternatively, that may be issued by Novex to those individuals
or entities that purchase the common stock options from the selling
securityholders.
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
Showing Location in Prospectus of Part I Items of Form S-1
<TABLE>
<CAPTION>
Item Number and Heading
In Form S-1 Registration Statement Location in Prospectus
---------------------------------- ----------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus ........................... Front of Registration Statement; Outside Front Cover of
Prospectus
2. Inside Front and Outside Back Cover Pages
Of Prospectus ............................................ Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information, Risk Factors and Ratio Earnings
To Fixed Charges ......................................... Prospectus Summary; Risk Factors
4. Use of Proceeds ............................................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price ............................. Not Applicable
6. Dilution .................................................... Dilution
7. Selling Securityholders ..................................... Selling Securityholders
8. Plan of Distribution ........................................ Outside Front Cover Page of Prospectus
9. Description of Securities ................................... Description of Securities
10. Interest of Named Experts and Counsel ....................... Legal Matters; Experts
11 Information with Respect to Registrant
Description of Business ..................................... Prospectus Summary; Risk Factors; Business
Description of Property ..................................... Business
Legal Proceedings ........................................... Business
Market for Common Equity, Dividends and
Related Stockholders Matters ............................. Outside Front Cover Page of Prospectus; Prospectus
Summary; Dividend Policy; Description of Securities;
Shares Eligible for Future Sale
Financial Statements ........................................ Selected Financial Data; Financial Statements
Selected Financial Data ..................................... Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operation ....................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
Directors, Executive Officers, Promoters and
Control Persons .......................................... Management
Executive Compensation ...................................... Management
Security Ownership of Certain Beneficial Owners
and Management ........................................... Principal Shareholders
Certain Relationships and Related Transactions .............. Certain Transactions; Management
12 Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities .......................................... Risk Factors; Management
</TABLE>
<PAGE>
Dated May 15, 2000
NOVEX SYSTEMS INTERNATIONAL, INC.
----------
11,796,692 Shares of Common Stock
675,365 Class B Warrants
1,185,924 Common Stock Options
----------
Trading Symbol
NASDAQ Bulletin Board
"HARD"
----------
The registration statement of which this Prospectus forms a part relates
to:
- -- the offer and sale by the selling securityholders of up to 11,796,692
shares of common stock of Novex Systems International, Inc.
- -- the offer and sale by certain holders of up to 675,365 Class B warrants and
the 675,365 shares of common stock which Novex would issue to them if they
were to exercise the warrants;
- -- the possible issuance by Novex of up to 675,365 shares of common stock if
individuals or entities that purchase Class B warrants from the selling
securityholders were to exercise the warrants;
- -- the offer and sale by the selling securityholders of up to 1,185,924 shares
of common stock options and 1,185,924 shares of common stock which Novex
would issue to them if they were to exercise the options; and
- -- the possible issuance by Novex of up to 1,185,924 shares of common stock if
individuals or entities that purchase common stock options from the selling
securityholders were to exercise the options.
This investment involves a high degree of risk. You should purchase shares only
if you can afford a complete loss. See "Risk Factors" beginning on page 7.
----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>
ADDITIONAL INFORMATION
With respect to the securities offered in this registration statement,
Novex has filed with the Washington, D.C. office of the Securities and Exchange
Commission, a registration statement on Form S-1 under the Securities Act of
1933, as amended. Whenever the term "registration statement" is used in this
document, we mean the original registration statement and any and all amendments
to the registration statement. The registration statement contains additional
and more detailed information and includes exhibits to which this Prospectus may
only make reference. In all cases, you should rely on the information contained
in the registration statement. You may inspect the registration statement and
its exhibits without charge, or obtain a copy of all or any portion of it, at
prescribed rates, at the public reference facilities of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, NW, Room 1024,
Washington, D.C. 20549. The registration statement and exhibits may also be
inspected at the Commission's regional offices at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7
World Trade Center, Suite 1300, New York, New York 10048.
In addition, Novex files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
Our SEC filings are publicly available through the SEC's website on the Internet
at http://www.sec.gov.
2
<PAGE>
PROSPECTUS SUMMARY
The Prospectus describes in detail numerous aspects of Novex and its
business which are material to investors. This summary highlights only some of
the information in the Prospectus. Because it is only a summary, it may not
contain all the information which may be important to you in making your
investment decision. You should read and understand the entire Prospectus,
including the financial statements, prior to investing in our Company. Unless
otherwise indicated, the information in this Prospectus does not give effect to
the exercise of any outstanding Class B warrants or outstanding common stock
options.
THE COMPANY
Novex manufactures and markets a diversified line of premium building
products for the construction industry. We operate facilities in Clifton, New
Jersey where our line of Por-Rok pre-packaged concrete repair, grouting and
patching products is manufactured and in Mississauga, Ontario where we
manufacture our Fiberforce line of polypropylene fibers and cement admixture
products.
The Company initially began manufacturing and marketing a proprietary
admixture for the enhancement of cementitious products now known as "Adment."
Adment is a blend of various materials which, when mixed with portland cement
and water, results in a product having higher compressive, bonding, flexural and
tensile strengths, reduced shrinkage, increased workability and, most
importantly, because of its dense pore structure, a higher resistance to
penetration of water and chloride ions from de-icing salts.
We began marketing our Adment products in Canada and the East Coast of the
United States in April 1998. Since then, we have used an acquisition strategy
for our growth. Through our acquisition of all of the issued and outstanding
common stock of ARM PRO Inc. ("ARM PRO"), located in Teeswater, Ontario, in
September 1998, we manufacture and market a line of polypropylene fibers.
Polypropylene fibers are blended into cementitious products to provide secondary
reinforcement and reduce cracking. Through our acquisition of the Allied
Composition/Por-Rok business unit from The Sherwin-Williams Company in August
1999, we manufacture and market a line of pre- packaged concrete repair,
grouting and patching products.
We now market in the United States and Canada a line of polypropylene
fibers under the Fiberforce name and an array of grouting, patching and flooring
products under the tradename Por-Rok. We distribute products that we believe are
well-known in the industry, reliable and priced competitively. The Por-Rok brand
name is well-regarded in the industry. Indeed some of the Por-Rok products have
been on the market for over 25 years. Similarly, our Fiberforce line of
polypropylene fibers has been marketed in Canada for nearly 10 years. We pride
ourselves on our ability to provide our customers with high quality construction
materials and exceptional service and technical support.
Because the transportation of heavy building materials involves substantial
shipping costs, there are hundreds of small manufacturers each of which have
been able to sustain market share in local markets thus resulting in a
fragmented industry. Our strategy is to focus on developing our business by:
1. expanding our product line through acquisitions and product
development;
2. increasing sales of our existing product line;
3. gaining market share and industry recognition; and
4. reducing excess overhead by consolidating like operating facilities.
Our marketing strategy revolves around a "systems approach" to marketing
building materials. Specifically, end-users prefer to purchase complete repair
"kits" from one manufacturer than isolated products from various manufacturers.
For this reason, Novex's foremost goal is to expand its product line to
representatives who earn commissions on sales generated in their territory.
3
<PAGE>
Novex Systems International, Inc., is a New York corporation having its
principal place of business and executive offices located at 16 Cherry Street,
Clifton, New Jersey 07014. Its telephone number is (973) 777-2307. We also have
a wholly-owned operating subsidiary, Novex Systems International, Ltd. (formerly
known as Novacrete Technology (Canada) Inc.), which is a company registered
pursuant to the laws of the Province of Ontario, Canada and is located at 2525
Tedlo Street, Unit B, Mississauga, Ontario L5A 4A8, telephone 905-566- 0716
("Novex Canada"). Until May 11, 1999, Novex was known as Stratford Acquisition
Corp. and had been a corporation organized under the laws of Minnesota.
Effective May 11, 1999, Stratford Acquisition Corp. merged into its wholly-owned
subsidiary, Novex Systems International, Inc., a newly-formed New York
corporation, which was the surviving corporation.
THE OFFERING
Securities Being Offered
by Selling Securityholders ....................... 11,796,692 shares of
Common Stock
675,365 Class B
Warrants
675,365 shares of
Common Stock
underlying the Class
B Warrants
1,185,924 Common
Stock Options
1,185,924 shares of
Common Stock
underlying the
Common Stock Options
Offering Price(1): .................................... N/A
Common Stock Outstanding Before and
After this Registration(2) ....................... 21,987,738 shares
Class B Warrants outstanding Before and
After this Registration(2) ........................ 738,365 warrants
Common Stock Options Outstanding Before
and After this Registration(2) .................... 1,373,424 options
NASDAQ Bulletin Board Trading Symbol:
Common Stock .......................................... HARD
- ----------
(1) As of the filing date of this registration statement, no particular offer
of securities is made by or on behalf of a selling securityholder. When a
particular offer is made, and if required, a Prospectus will be distributed
setting forth the number of shares being offered and the terms of the
offering. Sales of these securities and/or the potential of sales at any
time may have an adverse effect on the market prices of the securities
offered in this registration statement.
(2) Novex is registering these securities pursuant to its obligations under
agreements with certain selling securityholders providing for registration
rights, and pursuant to the request of certain Novex officers and directors
who collectively own 674,971 shares of common stock.
4
<PAGE>
Proceeds from the Offering
Novex will receive no proceeds from the sale of the securities by the
selling securityholders, but it will bear substantially all expenses of
registering these securities under federal and state securities laws. Novex will
receive proceeds when it issues common stock to selling securityholders who
exercise their Class B warrants or common stock options or to individuals that
exercise Class B warrants or common stock options that they purchased from
selling securityholders. The proceeds will be equal to the number of common
shares purchased upon exercise of the Class B warrants and common stock options
multiplied by the applicable exercise price. If any or all of the common stock
options and Class B warrants are exercised, Novex will likely use the proceeds
for working capital or to retire outstanding debt.
Securities Offered by Selling Securityholders
This prospectus covers the offer and sale by the selling securityholders
of:
-- 11,796,692 shares of common stock, including 674,971 outstanding
shares of common stock held by officers of Novex ;
-- 675,365 shares of common stock issuable upon exercise of 675,365 Class
B warrants held by the selling securityholders; and
-- 1,185,924 shares of common stock issuable upon exercise of 1,185,924
common stock options held by the selling securityholders.
In addition, the prospectus covers:
-- up to 675,365 shares of common stock underlying the Class B warrants
held by the selling securityholders which may be issued and sold by
Novex if persons who acquire Class B warrants directly or indirectly
from the selling securityholders were to exercise the warrants; and
-- up to 1,185,924 shares of common stock underlying the common stock
options held by the selling securityholders may be issued and sold by
Novex if persons who acquire common stock options directly or
indirectly from the selling securityholders were to exercise the
options.
See "Selling Securityholders".
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information as of May 31, 1999 and 1998 and the years
ended May 31, 1999 and 1998 has been abstracted from Novex's consolidated
financial statements included elsewhere in this Prospectus. The summary
financial information as of February 29, 2000 and February 28, 1999 and for the
nine months ended February 29, 2000 and February 28, 1999 have been derived from
Novex's unaudited consolidated financial statements. In the opinion of
management, these interim financial statements have been prepared on the same
basis as Novex's audited consolidated financial statements and include all
adjustments necessary for the fair presentation of its financial position and
results of operations. These interim results are not necessarily indicative of
results that can be expected for the year ended May 31, 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and
"Consolidated Financial Statements."
<TABLE>
<CAPTION>
Historical Historical Pro-Forma
----------------------------- ------------------------- -----------------------
Nine months ended Year ended Nine months
----------------------------- -------------------------- ended Year ended
Feb. 29 Feb. 28, May 31, May 31, Feb. 29, May 31,
2000 1999 1999 1998 2000(1) 1999(2)
------------ ------------ ---------- ----------- -------- --------
Statement of (unaudited) (unaudited) (unaudited) (unaudited)
Operations Data:
<S> <C> <C> <C> <C> <C> <C>
Net Sales .............................. 1,390,412 220,842 321,311 9,073 1,656,387 2,060,382
Cost of Sales .......................... 959,353 80,829 113,305 5,444 1,201,345 1,598,392
Loss from
Continuing Operations ............... (596,364) (870,050) (1,181,253) (995,653) (637,251) (1,216,380)
Net Loss ............................... (863,641) (998,469) (1,392,340) (1,112,594) (941,387) (1,651,782)
Net Loss
Per Share .......................... (.04) (.08) (.10) (.10) (.04) (.11)
Number of
Shares ............................... 20,818,206 13,194,542 13,720,171 11,472,508 20,818,206 14,720,171
Balance Sheet Data:
Current Assets ......................... 1,098,236 440,942 252,785 200,660 n/a n/a
Goodwill, net .......................... 842,758 284,162 316,300 -0- n/a n/a
Total Assets ........................... 3,402,120 819,173 656,058 318,540 n/a n/a
Current Liabilities .................... 3,060,635 1,483,062 806,862 719,585 n/a n/a
Long-Term Debt ......................... 799,613 -0- 772,582 -0- n/a n/a
Stockholders' Deficit .................. (458,128) (663,889) (923,386) (401,045) n/a n/a
</TABLE>
(1) Includes historical financial information of Novex Systems International,
Inc. and the Allied/Por-Rok division as if the acquisition on August 13,
1999 of Allied/Por-Rok had occurred at the beginning of the nine months
ended February 29, 2000.
(2) Includes historical financial information of Novex Systems International,
Inc., ARM PRO, Inc. and the Allied/Por- Rok division as if the acquisitions
on August 13, 1999 of Allied/Por-Rok and on September 16, 1998 of ARM PRO,
Inc. had occurred at the beginning of the year ended May 31, 1999.
6
<PAGE>
RISK FACTORS
The securities offered in this registration statement are highly
speculative in nature and involve a high degree of risk. They should be
purchased only by persons who can afford to lose their entire investment.
Therefore, before purchasing these securities, each prospective investor should
consider very carefully the following risk factors, as well as all other
information set forth in this Prospectus.
Our limited operating history makes it difficult for investors to evaluate our
business based on past performance - Novex has only had manufacturing operations
and related revenues since April 1998 and we have only owned the Por-Rok
business for less than six months. As a result, it may be difficult for
investors to evaluate our business and its prospects based on prior performance.
Novex has had losses and may not be able to achieve profitability. Novex has
recorded net losses for each year of operation (1994-1999) and anticipates
recording a net loss in the fiscal year ending May 31, 2000. In addition, a
significant portion of our assets are attributable to goodwill. In September
1998, Novex purchased Arm Pro, Inc., which resulted in goodwill of $347,095. As
of May 31, 1999, goodwill amounted to $316,300, net of accumulated amortization
of $30,795, and is being amortized on the straight-line method over 10 years. In
August 1999, Novex purchased all the assets of Por-Rok, which resulted in
goodwill of $584,867 and is being amortized on a straight-line method over 10
years. As of February 29, 2000, goodwill amounted to $842,758, net of
accumulated amortization of $89,204. Amortization expense charged to operations
for the nine months ended February 29, 2000 was $58,400 and for fiscal year 1999
was $30,795. Management will periodically review the recoverability of goodwill
to determine if it has been impaired. Events that may cause an impairment would
be the inability to successfully integrate the operations of Arm Pro and/or
Por-Rok with Novex, Novex's future intentions with regard to the operations, and
the operations forecasted undiscounted cash flows. Any reduction in the value of
goodwill would be to the extent that the present value of the expected future
cash flows are less than the carrying amount of goodwill. This analysis may
result in a complete or partial write-off or acceleration of the amortization
period. A write-down of part or all of this would hurt our results of operations
and make it even more difficult to achieve profitability in the future. Going
forward, we anticipate incurring significant expenses, including product and
service development expenses, sales and marketing costs and administrative
expenses, as well as other problems, expenses, delays and other uncertainties
inherent in a business with a relatively short history of operations which is
seeking to expand its operations. Accordingly, these factors will also make it
more difficult to achieve profitability in the near future. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
"Consolidated Financial Statements and Notes."
If Novex Cannot expand its limited product line, its ability to increase
revenues and become profitable will be hampered. In the construction products
industry, end-users would prefer to use one manufacturer's products in any given
construction project and distributors generally prefer to stock an expanded
rather than a limited product line. We currently market only a limited number of
products and need to acquire companies with complementary products and/or
develop new products. Because of the uncertainties associated with obtaining
acquisition financing and with closing these transactions, we may not achieve
our objective to expand our product line this year. Furthermore, we do not
currently know when new products under development will be ready for
manufacturing, generate revenues, or whether they can be successfully marketed.
If we are unable to acquire new products or develop new products, our ability to
achieve profitability through increased sales from an expanded product line
would be delayed. See "Business-The Company's Future Operations"
and"-Description of Products."
If Novex cannot acquire other companies, its ability to increase revenues and
become profitable will be hampered. Much of Novex' success depends upon its
ability to acquire companies having products which complement Novex' existing
product line. As of the date of this registration statement, Novex has reached
no agreement with any potential target. If Novex cannot expand its product lines
and revenues by acquiring companies and must rely instead upon its own
development of complementary products, it will take even longer for Novex to
achieve increased sales and profitability. See "Business-The Company's Future
Operations".
7
<PAGE>
If Novex cannot obtain additional financing, it could default on its debt
obligations, lose the Por-Rok facility and suffer a decrease in revenues. Novex
is required to make monthly payments on the $890,000 Secured Term Loan
Promissory Note in favor of Dime Commercial Corp. and periodic payments on the
$1.3 million Promissory Note in favor of The Sherwin-Williams Company. Our
ability to pay off the debt owed to Dime Commercial Corp. and The
Sherwin-Williams Company will be dependent to a large extent upon the success of
our new marketing strategy, our acquisition of additional brand products, the
successful implementation of our distribution strategy and our marketing and
sales efforts. If the revenues generated by our sales and marketing efforts are
not sufficient to pay off the debt owed to Dime Commercial Corp. and The
Sherwin-Williams Company, we will need to obtain financing from an outside
source. [If Novex shall need additional financing for working capital it does
not have any assets to pledge, therefore any future financing would have to be
in the form of unsecured debt financing that would be subordinated to current
secured loans, or equity financing such as the sale of preferred or common
stock. If Novex had to raise capital through unsecured debt the interest rate
would be much higher than secured financing and could be as high as 15%-20%. It
may also require the issuance of common stock or a warrant to purchase common
stock at favorable prices. On the other hand, if Novex had to raise financing
through the sale of preferred stock the dividend rate on the stock would likely
be in the 10%-15% range. A potential investor could also require that the
preferred stock be convertible into common stock at a future date on terms that
are not favorable to current common shareholders. Lastly, Novex could offer to
sell common stock to a prospective investor, however since the company has yet
to become profitable it is likely that this form of financing would be very
dilutive to current shareholders.] If Novex is unable to obtain additional
financing, it could default on the loans made by Dime and The Sherwin- Williams
Company. Failure to make any of the payments to Dime Commercial Corp. or The
Sherwin Williams Company could result in a re-transfer of the Por-Rok facility
to Dime Commercial Corp. and/or The Sherwin- Williams Company. Any such
re-transfer would reduce Novex's operations substantially, adversely effect its
financial condition and results of operation and make it even more difficult to
achieve profitability in the future. See "Business", "Management's Discussion
and Analysis of Condition and Results of Operations" and "Financial Statements
and Notes."
If Novex defaults on its loans it could lose its Por-Rok manufacturing
operations. Novex is required to make monthly payments on the $890,000 Secured
Term Loan Promissory Note in favor of Dime Commercial Corp. and periodic
payments on the $1.3 million Promissory Note in favor of The Sherwin-Williams
Company. Novex currently has a working capital deficit. If the company's
revenues are not sufficient to generate the cash flow needed to make the monthly
payments to Dime and The Sherwin-Williams Company, Novex's failure to make any
of the payments could result in a re-transfer of the Por-Rok facility to Dime
Commercial Corp. and/or The Sherwin- Williams Company. See "Business".
Because Novex has no patent protection for its product formulae, its competitors
could copy its products and market them under another name which could decrease
Novex's revenues and hamper its ability to achieve profitability. Since the
formulae would become public knowledge if Novex were to obtain patent
protection, Novex has chosen not to obtain patents on any of its proprietary
technology. Therefore, the absence of patent protection represents a risk in
that Novex will not be able to prevent other persons from developing competitive
products. If Novex's competitors were to learn of the secret formulae for making
its products, they could easily duplicate the products and offer them to Novex's
customers without any suggestion of patent infringement. As a result, Novex's
revenues would decline and its ability to achieve profitability would be
hampered.
Some of Novex's products are seasonal and may cause fluctuations in our
quarterly operating results. Novex's Fiberforce product line is subject to
substantial seasonal fluctuations. Historically, a significant portion of
Novex's net sales and net earnings have been realized from sales of the
Fiberforce line during the months of March through November while net sales and
net earnings have generally been significantly lower during the period December
through February. Accordingly Novex's operating results may vary significantly
from quarter to quarter. If for any reason Novex's sales were to be
substantially below seasonal norms during November through February, Novex's
annual revenues and earnings would be adversely affected. Additionally,
fluctuations caused by variations in quarterly operating results may have a
corresponding effect on the market price of our common stock. See "Financial
Statements and Notes", "Management Discussion and Analysis of Financial
Condition and Results of Operations", and "Business".
8
<PAGE>
If Novex were to lose the services of its chief executive officer, its ability
to continue its operations would be hampered. Novex relies considerably on the
services of Mr. Daniel W. Dowe, its President and Chief Executive Officer. To
the extent that the services of Mr. Dowe become unavailable,it would be very
difficult to attract or retain personnel who would be able to adequately perform
the functions previously performed by Mr. Dowe and the company's ability to
continue its operations until a replacement is hired would be substantially
hampered. See "Management".
Holders of the Class B warrants may be forced by Novex to purchase them. Certain
of the Class B warrants are subject to redemption. Redemption of the Class B
warrants by Novex could force the holder to exercise the Class B warrants and
pay the exercise price at a time when it may be disadvantageous for the holder
to do so or to sell the warrants at their then current market price when the
holder might otherwise wish to hold the warrants for possible appreciation.
Alternatively, the holders may accept the redemption price when it is likely to
be substantially less than the market value of the Class B warrants at the time
of redemption. Any holder who does not exercise Class B warrants before they
expire or are redeemed, as the case may be, will forfeit the right to purchase
shares of common stock of Novex underlying the warrants. See "Description of
Securities-Class B Warrants."
Purchasers of these securities who reside in or move to a state in which these
securities are not registered or otherwise qualified for sale, will not be able
to resell these securities. On the Effective Date, the securities offered in
this registration statement shall be tradable. It is possible, however, that
purchasers who buy these securities in the aftermarket may reside in or may move
to jurisdiction in which these securities are not registered or otherwise
qualified for sale. In this event, Novex would only be able to issue shares of
common stock to the holder desiring to exercise a Class B warrant or common
stock option if the shares could be registered or otherwise qualified for sale
in the state in which the purchaser resides, or an exemption from registration
or qualification exists in that state. See "Description of Securities".
Because our stock is presently considered to be a "penny stock", the
applicability of "Penny Stock Rules" could make it difficult for investors to
sell their shares in the future in the secondary trading market.. Federal
regulations under the Exchange Act regulate the trading of so-called "penny
stocks" (the "Penny Stock Rules"), which are generally defined as any security
not listed on a national securities exchange or NASDAQ, priced at less than
$5.00 per share, and offered by an issuer with limited net tangible assets and
revenues. In addition, equity securities listed on NASDAQ that are priced at
less than $5.00 per share are deemed penny stocks for the limited purpose of
Section 15(b)(6) of the Exchange Act. Therefore, during the time which the
common stock is quoted on the NASDAQ OTC Bulletin Board at a price below $5.00
per share, trading of the common stock will be subject to the full range of the
Penny Stock Rules. Under these rules, broker dealers must take certain steps
prior to selling a "penny stock," which steps include: (i) obtaining financial
and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor; and
(iii) providing the investor a written identification of the shares being
offered and in what quantity. If the Penny Stock Rules are not followed by the
broker-dealer, the investor has no obligation to purchase the shares.
Accordingly, the application of the comprehensive Penny Stock Rules may be more
difficult for broker-dealers to sell the common stock, and purchasers of the
shares of common stock offered hereby may have difficulty in selling their
shares in the future in the secondary trading market.
If a trading market is not maintained, holders of the common stock may
experience difficulty in reselling such Common Shares or may be unable to resell
them at all. . The Common Shares of the Company are presently quoted on the
NASDAQ Over-The-Counter (OTC) Bulletin Board, a regulated quotation service that
captures and displays real-time quotes and indications of interest in securities
not listed on The NASDAQ Stock Market, or any U.S. securities exchange. The
current trading ticker symbol for the Common Shares is "HARD". The Company may,
but has not, entered into any agreements with market makers to make a market in
the Company's Common Stock. In addition, any such market making activity would
be subject to the limits imposed by the Securities Act, and the Securities
Exchange Act of 1934, as amended, ("Exchange Act") and it is possible that the
market in the common stock can be discontinued at any time. Accordingly, if
there is no active market available for the common shares, no liquidity or if
the market is discontinued, holders of the common stock may have difficulty or
may be unable to sell the shares which he or she may hold.
9
<PAGE>
The Private Litigation Reform Act of 1995 provides a "safe harbor" for
forward-looking statements. Certain information included in this registration
statement contain statements that are forward-looking, such as statements
relating to future anticipated direction of Novex, plans for expansion,
corporate acquisitions, anticipated sales growth and capital funding sources.
Such forward-looking information involves risks and uncertainties that could
significantly affect anticipated results in the future, and accordingly, such
results may even materially differ from those expressed in any forward-looking
statements made by or on behalf of Novex.
USE OF PROCEEDS
Novex will receive no proceeds from the sale of the securities by the
selling securityholders, but Novex has agreed to bear substantially all expenses
of registering these securities under Federal and state securities laws. Novex
will receive proceeds when it issues common stock to selling securityholders who
exercise their Class B warrants or common stock options or to individuals that
exercise Class B warrants or common stock options that they purchased from
selling securityholders. The proceeds will be equal to the number of common
shares purchased upon exercise of the Class B warrants and common stock options
multiplied by the applicable exercise price. If any or all of the common stock
options and Class B warrants are exercised, Novex will likely use the proceeds
for working capital, or to retire outstanding debt. Because of the uncertainty
of the exercise of the securities and the amount of the proceeds that Novex will
receive, management has no specific plan on the use of the proceeds.
DIVIDEND POLICY
Novex has never paid any dividends and currently intends to retain all of
its earnings, if any, to develop and expand its business. For this reason,
investors who anticipate the need for dividends from their investment should
take into consideration this factor, among others, in deciding whether they
should not purchase the securities offered in this registration statement and,
if they purchase Class B warrants or common stock options, whether they should
exercise such Class B the warrants or common stock options to purchase shares of
Novex's common stock.
10
<PAGE>
NOVEX'S CURRENT CAPITAL STRUCTURE
The following table sets forth as of May 31, 1999 and February 29, 2000 the
capital structure of Novex. The table should be read in conjunction with the
consolidated financial statements and notes to the financial statements included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
February 29, May 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
Total Debt: (1) $ 3,009,849 $ 1,222,830
----------- -----------
Stockholder's Equity:
Common Stock, $.001 par value, 50,000,000
Shares authorized, 21,987,738 and 15,250,771
issued and outstanding, respectively 21,987 15,251
Additional paid-in capital 5,730,916 4,408,753
Accumulated Deficit (6,211,031) (5,347,390)
----------- -----------
Total Stockholders' deficiency (458,128) (923,386)
----------- -----------
Total capitalization $ 2,551,721 $ 299,444
=========== ===========
</TABLE>
(1) As of February 29, 2000, Total Debt includes:
Current portion of long-term debt of $217,670;
Due to factor of $78,118;
Note payable to The Sherwin Williams Company of $1,281,351;
Bank line of credit of $601,172;
and Long-term debt of $799,613; and
Loan payable-shareholder of $31,925
As of May 31, 1999, total debt includes:
Current portion of long-term debt of $393,548;
Due to factor of $56,700; and
and Long-term debt of $772,582
NO BOOK VALUE DILUTION
Since Novex is a reporting issuer and is not selling the common stock, the
Class B warrants, or the common stock options or any common stock issuable and
resalable upon exercise of the Class B warrants and the common stock options,
the sale of the securities will have no net tangible book value dilution.
11
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical consolidated statement of operations for
the three years ended May 31, 1999, 1998 and 1997 and as of May 31, 1999 and
1998, have been derived from the consolidated financial statements of Novex that
are included elsewhere in this Prospectus and that have been audited by Feldman
Sherb Horowitz & Co., P.C. whose reports with respect to the consolidated
financial statements are also included elsewhere in this Prospectus. The
selected historical consolidated statements of operations for the nine months
ended February 29, 2000 and February 28, 1999, and as of February 29, 2000 and
February 28, 1999, are unaudited, but have been prepared on the same basis as
the audited financial statements and, in the opinion of management, contain all
adjustments, consisting only of normal recurring accruals necessary for a fair
presentation. This information should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Years Ended May 31
-----------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales ......................... $ -0- $ 140,741 $ -0- $ 9,073 $ 321,311
Gross Profit ...................... -0- -0- -0- 5,444 208,006
Loss from Continuing Operations ... (40,503) (375,361) (2,326,144) (1,112,594) (1,392,340)
Net Loss from Continuing Operations
Per Common Share ............. $ (.03) $ (.07) $ (.24) $ (.10) $ (.10)
BALANCE SHEET DATA:
Working Capital (Deficit) ......... $ 221,769 $ 288,836 $ 94,022 $ (518,925) $ (554,077)
Goodwill, net ..................... -0- -0- -0- -0- 316,300
Total Assets ...................... 236,666 479,615 219,533 318,540 656,058
Long Term Debt .................... -0- -0- 315,000 -0- 772,582
Stockholders' Equity (Deficit) .... 224,019 466,984 (208,685) (401,045) (923,386)
<CAPTION>
Nine Months Ended
--------------------------
Feb. 29, Feb. 28,
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales ......................... $ 1,390,412 $ 220,842
Gross Profit ...................... 431,059 139,913
Loss from Continuing Operations ... (596,364) (870,050)
Net Loss from Continuing Operations
Per Common Share ............. $ (.04) $ (.08)
BALANCE SHEET DATA:
Working Deficit ................... $(1,962,399) $(1,042,120)
Goodwill, net ..................... 842,758 284,162
Total Assets ...................... 3,402,120 819,173
Long Term Debt .................... 799,613 -0-
Stockholders' Deficit ............. (458,128) (663,889)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the information contained in the Financial Statements and the Notes to the
financial statements appearing elsewhere in this Prospectus. The Financial
Statements for the six month period ended November 30, 1999, included in this
registration statement and elsewhere in this Prospectus are unaudited; however,
this information reflects all adjustments (consists solely of normal recurring
adjustments), which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period. Forward looking statements
made in this section are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
Results of Operations
For Novex Systems International, Inc. (including its subsidiary, Novex Systems
International, Ltd., and the operations of the Allied Composition/Por-Rok
business unit from August 13, 1999 to February 29, 2000)
Nine months ended February 29, 2000 v. February 29, 1999
While net sales for the nine month period ending February 29, 2000 was
$1,390,412, net sales for the same period ended February 28, 1999, were
$220,842. The increase in sales was attributable principally to the Company's
acquisition of the Allied Composition/Por-Rok business unit from The
Sherwin-Williams Company ("Por-Rok Unit") on August 13, 1999.
12
<PAGE>
The Company only achieved a gross margin of 31% in the nine months ending
February 29, 2000, which resulted principally from the historically low sales in
this period from it Canadian-subsidiary, Novex Systems International, Ltd.
("Novex, Ltd."). Novex, Ltd. manufactures and markets the Company's Fiberforce
line of concrete-reinforcing synthetic fibers and experiences a significant
slowdown during the months of December through February due to the decline in
the construction business in Eastern Canada and the northeastern region of the
United States.
For the nine month period ending February 29, 2000, the Company generated a loss
from operations of $596,364. The Company also incurred approximately $52,300 in
freight expenses which, going forward, the Company will pass on to its customers
through a new pricing and shipping policy that will become effective on June 1,
2000. Although the new pricing and shipping policy was mailed to all Por-Rok
customers in March, its implementation was delayed until June to accommodate
major customers who wanted 90 days to implement the new policy within their own
organizations. Also, in this period, the Company incurred non-cash charges for
depreciation and amortization (including amortization of debt discount) of
$116,815, and incurred non-recurring charges of approximately $20,000 relating
to the service agreement it entered into with Sherwin-Williams which terminated
on February 29, 2000 . The net effect of the non-cash accounting charges,
non-recurring costs and the freight expenses, would have resulted in the Company
posting a net operating loss of $407,249 before expenses for interest which in
the nine month period totaled $192,803 and foreign currency loss of $41,921
which reflects the difference in currency exchanges between the United States
and Canada for funds transferred by the Company to Novex, Ltd. for operating
expenses.
For the nine month period ending February 29, 2000, the Company's overall
operating results do not reflect a normalized operation on a consolidated basis
due to the seasonal slowdown at Novex, Ltd. in this period. In addition, these
results reflect only six and one-half months ofthe Por-Rok operation which was
acquired on August 13, 1999.
As of February 29, 2000, the Company had $1,098,236 in current assets, which
consisted principally of accounts receivable of $585,929 and inventory of
$450,751. The Company's net property, plant and equipment totaled $1,461,126 and
goodwill of $842,758 which is attributable to the two acquisitions that the
Company completed in 1998 and 1999. All of the Company's asset categories
increased substantially when compared to its year ending balance sheet dated May
31, 1999 due to the integration of the assets it acquired in August 1999 as part
of the Por- Rok transaction.
Liquidity and Financial Resources at February 29, 2000
As of February 29, 2000, the Company had $3,060,635 in current liabilities,
which includes a seller's note for $1,281,351 that was issued to The
Sherwin-Williams Company upon the acquisition of the Por-Rok Unit ("Sherwin-
Williams Note"). The Company also had $601,172 outstanding on its secured
revolving line of credit with Dime Commercial Corp. which is used to fund the
Company's operations. It had accounts payable of $605,957 and accrued expenses
of $244,442. The officer's loan of $31,925 was made to Novex by its current
President, Daniel W. Dowe, in June and July, 1999 to assist Novex with its
operating cash flow needs before we acquired the Por-Rok Unit and opened the
line of credit with Dime Commercial Corp. Mr. Dowe has entered into an agreement
with Novex's board of directors to have the loan repaid without interest. There
is no agreement between Novex's board of directors and Mr. Dowe to repay the
loan on a specified date. However, if Novex has adequate cash on hand after it
finances another acquisition, or if it becomes profitable Novex and Mr. Dowe
will agree to a mutually acceptable payment plan. At the present time, Mr. Dowe
has agreed to allow Novex time to repay the loan with no set conditions for
repayment.
Long-term debt of $779,613 consists of the long-term portion of a three
year $890,000 term loan that was made by Dime Commercial Corp. to enable the
Company to acquire the Por-Rok Unit. The remaining portion of the purchase price
for the Por-Rok Unit was paid with the Sherwin-Williams Note. The $78,118
obligation listed as "Due to Factor" is the value of an equipment loan made to
Novex, Ltd. denominated in United States dollars.
13
<PAGE>
The Dime Note is secured by all the assets that are located at the Por-Rok
operation at 16 Cherry Street, Clifton, New Jersey. These assets include the
land (1.58 acres), the main manufacturing building and the two warehouses,
including all the equipment in these buildings and all trademarks owned by
Novex. In addition, the revolving line of credit that Novex has with Dime is
secured by the accounts receivable generated at the Por-Rok unit and all
inventory. The Sherwin Williams Note is also secured by the same assets as, and
is subordinated to, the Dime Note. If the value of all the Por-Rok assets would
exceed the balances on the Dime Note and the Revolving Line of credit then the
Sherwin-Williams Note would be partially secured by the value of the assets that
are in excess of the obligations owing to Dime. Since all the assets at the
Por-Rok operation are secured by the Dime Note and then by the Sherwin-Williams
Note, there are no other assets that can be used to secure new financing if it
were needed.
Novex has already begun the early stage process of refinancing the
Sherwin-Williams Note which matures on August 12, 2000, with an equity or a
partial equity and debt security offering which may be completed as part of
another acquisition, although no acquisition agreement exists as of the filing
of this registration statement. The net effect of this refinancing, assuming a
portion, if not all, of the refinancing is completed through an equity offering,
would enable Novex to increase its shareholders equity which was a negative
$458,128 on February 29, 2000. Although plans to refinance the Sherwin-Williams
Note are being undertaken, no assurance can be made that the refinancing will be
completed, or that it will be on terms that are favorable to Novex.
In September, 1998 Novex sold a 9% $800,000 Debenture to the same entity
that had purchased $500,000 of the debenture that was sold by Novex in February
1998. Of the $800,000 note, $610,000 was used to purchase ARM PRO, Inc. The
balance of the proceeds was used for working capital, transaction expenses and
primarily to move the ARM PRO operations to Novex's Mississauga, Ontario
facility. The debenture holder agreed to convert the principal amount of the
February debenture which was due to mature on October 31, 1998 into Novex's
common stock at a rate equal to the average of the eleven lowest closing trading
prices during the month of October, 1998, which was $.17 per share and resulted
in the issuance of 2,730,737 shares of Novex's common stock.
In addition, Montcap Financial Corporation, loaned Novex Canada $70,000
that is secured by equipment at the Mississauga location, and Mr. Friedenberg
loaned Novex a total of $145,000 in notes to assist with cashflow shortfalls
during the summer of 1998 before Novex acquired ARM PRO and received a bridge
loan of $250,000 during February 1999. (See Notes 7 and 11(d) to Consolidated
Financial Statements)
Based on its past sales history since 1993 the Por-Rok product line is sold
to a fairly consistent group of customers and each month it generally sells its
finished goods inventory. However, a few products like Por-Rok Anchoring Cement,
Super Por-Rok and Dash Patch are very popular and inventory of these products
can be converted into cash up to three to four times a month. On the other hand,
other products sell at lower volumes and are converted into cash more on a 45 to
60 day basis. Novex's current management has adopted a new policy to minimize
the amount of inventory on hand so that no excess cash is tied up in slow moving
inventory. If the entire inventory at February 29, 2000, of $450,751 was sold at
current prices it would have a value of approximately $901,502. If this
inventory were sold and if the entire accounts receivable balance of $585,929
were paid at one time, the proceeds would pay off all accounts payable, accrued
expenses, the bank line of credit and the loan payable to shareholder.
For the fiscal year ended May 31, 1999 (prior to purchasing the assets of
Por-Rok) Novex sold $321,311 of finished goods inventory. This inventory
consisted primarily of the finished goods inventory of the company's fiber
operations (Novex, Ltd.) which, as of that date, had only been owned and
operated by Novex for eight months. This figure further reflects a three-month
slow-down which Novex Ltd. experiences during the winter season. Based on
historical information provided by The Sherwin-Williams Company, sales of the
finished goods inventory of Por-Rok products amounted to approximately $1.8
million for the calendar year ended December 1998. Assuming Novex were to
achieve similar sales, this amount would be sufficient to cover the company's
current liabilities of $1,779,284.
14
<PAGE>
Inflation and Changing Prices
Novex does not foresee any risks associated with inflation or substantial
price increase in the near future. In addition, the raw materials that are used
by Novex in the manufacturing of its materials are available locally through
many sources and are for the most part commodity products. The one raw material
that Novex uses in all its products that cannot be classified as a pure
commodity is currently in sufficient supply. In addition, Novex presently owns
approximately 600,000 lbs. of this product. For these reasons, while Novex will
always have exposure to inflationary risks, it does not believe that inflation
will have any materially significant impact on its operations in the near
future.
Statement of Revenues and Costs of Goods Sold
On August 13, 1999 Novex acquired all the assets applicable to the Allied
Composition/Por-Rok Business unit from The Sherwin-Williams Company. Since this
unit was not a wholly-owned subsidiary, or a defined division of The
Sherwin-Williams Company, the accounting of its operations was part of a much
larger product line and therefore, expenses other than for those directly
attributable to the manufacturing of the products purchased by Novex were not
stated in the unit's financial statements. Any allocation of other expenses,
except for the direct costs, would not be applicable in these financial
statements.
For the twelve month periods ending December 31, 1998 and December 31,
1997, net sales were $1,725,853 and $1,262,008, respectively. The gross profit
derived from the net sales in 1998 was $325,631, versus a loss of $21,761 in
1997. The increase in gross profit in 1998 was derived principally from the
increase in net sales in this period. At a net sales level of $1,262,008, which
the business unit produced in 1997, expenses incurred to manufacture the goods
sold were at a break-even level since the unit had a fixed factory overhead cost
structure that could support a much higher level of sales without being
increased. For this reason, as the business unit generates net sales in excess
of $1,262,008, it would begin to generate gross profits which was the case in
1998. In 1998 the gross profit margin was 19%. With additional sales, this
margin could increase until the additional sales caused an expansion of Novex's
factory overhead. Although the business unit had once experienced net sales at
much higher levels, the current management of Novex was not directly involved in
the management of this unit, thus it would have no historical basis to forecast
future profitability of this unit, if and when net sales increased to higher
levels.
Statement of Assets
On August 13, 1999, the assets that were purchased by Novex from The
Sherwin-Williams Company totaled $1,919,004. Of this amount, there were current
assets of $537,644, consisting of $311,983 of accounts receivable and $225,661
of raw materials and finished goods inventory. The unit had fixed assets of
$566,360 and land and buildings valued at $815,000. Since the transaction
consisted solely of an asset purchase no liabilities were assumed by Novex.
Unaudited Pro Forma Consolidated Statements of Operations - Year Ended May 31,
1999
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended May 31, 1999 reflect the consolidated operations of Novex, the Allied
Composition/Por-Rok Business unit and ARM PRO, Inc. on a twelve month fiscal
period ending May 31, 1999. The presentation of the financial operations on a
pro forma basis are to illustrate the performance of the two business units as
if they had been combined on June 1, 1998 and operated together for one full
fiscal year ending May 31, 1999. In this period, the combined entity would have
generated net sales of $2,060,382 and a gross profit of $461,990, which would
have resulted in a gross margin of 24%. After deducting operating expenses Novex
would have had a loss from operations of $1,216,138. Of this loss, $1,181,253
would have been derived from the operations of Novex Systems International,
Inc., which had $122,315 of expenses attributable to non-cash imputed stock
compensation. In this period Novex had just emerged from the development stage
and had generated only $321,311 in net sales, which were principally derived
from sales of a new product line that Novex acquired in September, 1998 from ARM
PRO, Inc. Upon acquiring ARM PRO, Inc., Novex began manufacturing and marketing
the Fiberforce line of concrete reinforcing fibers which it markets to ready-mix
concrete producers. Before acquiring ARM PRO, Novex had generated approximately
$75,000 of sales of its
15
<PAGE>
Novacrete product line which it starting selling in April, 1998. In addition,
since ARM PRO's sales were principally in Canada and the northeastern portion of
the United States, sales in the winter season beginning in November through
February, 1999 were low as they had been historically during the winter season.
The combination of the early stage of Novex and its seasonal nature of ARM PRO's
sales was the major reason for the loss. Offsetting this loss would have been
ARM PRO's loss from operations of $7,828 and income from operations of $252,744
from the Allied/Por-Rok unit, thus resulting in a loss from operations of
$1,216,380. However, included in this loss was an additional $280,043 in general
and administrative costs that would have been incurred had the two units been
combined on June 1, 1998. In addition, the combined unit would have had $339,164
in interest expenses relating to the financing of the Allied/Por-Rok acquisition
and other non-operating expenses of $96,455 that were attributable to a previous
financing that Novex undertook to finance its development stage expenses and to
acquire ARM PRO. Including all adjustments for operating and financial expenses,
Novex on a pro forma basis would have generated a loss before income taxes of
$1,651,782.
As the operating analysis indicates Novex had formally emerged from the
development stage but was still required to rely on funds from external sources
to cover its cash shortfall from operations. When Novex acquired ARM PRO, it
acquired its bank accounts which had a collective balance of $158,000 at
closing. This cash, along with the $190,000 balance from the $800,000 note that
was sold by Novex to purchase ARM PRO, Inc. was used to fund Novex's operations.
To cut costs, four administrative and sales positions were eliminated. The
increase in general and administrative costs of approximately $400,000 for the
year ended May 31, 1999 is primarily due to the ARM PRO acquisition.
Unaudited Pro Forma Consolidated Statements of Operations - Nine Months Ended
February 29, 2000
The Unaudited Pro Forma Consolidated Statements of Operations for the nine
month period ended February 29, 2000 reflects the consolidated operations of
Novex and the Allied Composition/Por-Rok Business Unit on a nine month fiscal
period beginning on June 1, 1999 and ending on February 29, 2000. The historical
presentation of the financial statements consists of the full nine months of
operations for Novex Systems International Inc. and the operations of the
Allied/Por-Rok business unit from August 13, 1999 to February 29, 2000. In the
historical column Allied/Por-Rok is the operation of this unit from June 1, 1999
to August 12, 1999. The presentation of the financial operations on a pro forma
basis are to illustrate the performance of the two business units as if they had
been combined on June 1, 1999 and operated together for the nine month period
ending February 29, 2000. In this period, the combined entity would have net
sales of $1,656,390 and a gross profit of $455,045, which would have produced a
gross margin of 27%. After deducting operating expenses of $1,092,296 which
includes an additional $64,873 in general and administrative expenses, the
combined business unit would have generated a loss from operations of $637,251.
Of this loss $596,364 would have been derived from the operations of Novex
Systems International, Inc., its Subsidiary and the Allied/Por-Rok unit would
have had income from operations of $23,986. After including in interest expenses
and another $74,474 of other expenses that were attributable to expenses
generated from previous financing that Novex undertook to finance its
development stage expenses and the ARM PRO acquisition, the net loss was
$941,387.
Year ended May 31, 1999 (Fiscal 1999) as compared to May 31, 1998 (Fiscal 1998)
The fiscal year ending May 31, 1999 was the first year in which Novex was
not in the development stage for the entire year. In this period, Novex made its
first acquisition by purchasing, ARM PRO, Inc. on September 16, 1998, and it
signed another contract to purchase Por-Rok. That transaction closed on August
13, 1999, after Novex's fiscal year ending May 31, 1999. In fiscal 1999, Novex
generated $321,311 in net sales, which excludes sales of Novex's line of
Fiberforce concrete reinforcing fibers that it acquired from ARM PRO, for the
period from June 1, 1998 to September 16, 1998, which is the strongest period
for fiber sales. Novex generated a loss from operations of $1,181,253 of which
$122,315 was attributable to non-cash imputed stock compensation.
As the operating analysis indicates Novex has formally emerged from the
development stage, but was still required to rely on funds from external sources
to cover a cash shortfall from its operations. When we acquired
16
<PAGE>
ARM PRO, we acquired its bank accounts which had a collective balance of
$158,000 at closing. This cash, along with the $190,000 balance from the
$800,000 note that was sold by Novex to purchase ARM PRO, Inc. was used to fund
Novex's operations. To cut costs four administrative and sales positions were
eliminated and Novex relocated ARM PRO's operations by merging it into its
facility in Mississauga, Ontario. The increase in general and administrative
costs of approximately $400,000 is primarily due to the ARM PRO acquisition.
In the 1999 fiscal period, other than for approximately $75,000 derived
from sales of Novacrete products, sales were generated from Novex's Fiberforce
line of products.
On May 31, 1999 Novex had $252,785 in current assets and $80,914 of net
property and equipment and goodwill of $316,300. The increase in goodwill was
attributable to the excess of the purchase price for ARM PRO, Inc. over the net
assets acquired in the transaction.
As of May 31, 1999, Novex had $221,707 in inventory. Of this amount,
$113,288 consisted of raw materials, $3,217 consisted of work in progress and
$105,202 consisted of finished goods. A substantial amount of the raw material
inventory consists of the 600,000 lbs. of one raw material that is used in the
Adment product. The finished goods inventory consists of 55lb. bags of Novacrete
Repair Products that are stacked on wood pallets with each pallet containing 56
bags and bags of Fiberforce products that are packed in cardboard boxes. The
increase in inventory was primarily attributable to new inventory of Fiberforce
products and a build up of Novacrete products.
Novex had $1,579,444 in total liabilities at the end of the fiscal year
which was an increase of 119% over the prior year. The majority of the increase
in liabilities resulted from Novex's sale of an $800,000 note to acquire ARM
PRO, Inc. and a note for $250,000 that was sold to the holders of the $800,000
note to provide additional working capital to Novex.
As part of the Por-Rok transaction, the holder of the $800,000 note agreed
to convert the principal amount of the note into common stock at $.17 per share.
The $250,000 working capital note was to be satisfied in full from the proceeds
of the $750,000 line of credit that Novex secured on August 13, 1999.
The increase in accounts payable and accrued expenses was directly
attributable to Novex's expansion of its operations in the current fiscal year.
As part of the Por-Rok transaction, the current portion of long-term debt
of $393,548 net of the $250,000 working capital note will be converted into
common stock. (See Note 18, Subsequent Event).
Year ended May 31, 1998 (Fiscal 1998) as compared to May 31, 1997 (Fiscal 1997)
After the senior management change in November, 1997, Novex significantly
advanced its plans to move from the development stage to the operating stage. On
March 15, 1997 Novex officially began commercially producing its Novacrete
products and, in April 1998, recorded its first truckload shipment of product
which was to a construction products distributor in Canada. In addition in May,
1998, Novex sold its first truckload of product to a distributor in the United
States. As a result of this activity, which began just two and one-half months
before the close of this fiscal year Novex recorded $9,073 in gross revenues for
the one truckload sales that took place in April. The truckload that was ordered
in May was not shipped until early June and appears as revenue in the first
quarter of the 1999 fiscal year. Although this increase in gross revenues
represents a 100% increase over the operating results in 1997, the percentage
increase should be qualified since Novex recorded $0 in gross revenue in the
previous fiscal year and had very little capability in the previous year to sell
its products, although it did have inventory for sale.
In 1998, Novex had $122,134 in inventory. Of this amount, $76,276 consisted
of raw materials, $440 consisted of work in process and $45,418 consisted of
finished goods. A substantial amount of the raw material inventory consists of
the 600,000 lbs. of one raw material that is used in the Adment product. The
finished goods inventory consists of 55lb. bags of Novacrete Repair Products
that are stacked on wood pallets with each pallet containing 56 bags.
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From June 1, 1997 to January, 1998 Novex's operations were funded through
sales of its common stock to affiliated and non-affiliated parties. In December,
1997, Novex announced a 60 Day Plan to advance Novex from the development stage.
In February, 1998, Novex sold a 10% $550,000 Convertible Debenture that matured
on October 31, 1998, to three non-affiliated persons who also received warrants
to purchase 1,100,000 share of common stock at the exercise price of $.30 per
share for a three year period. The proceeds of this debenture were used
principally to purchase the industrial blending and bagging equipment that was
installed in Novex's operating subsidiary in March 1998, to renovate Novex's
offices and for working capital to fund Novex's operations until sales of its
product could materialize.
General and administrative cost (excluding stock compensation, depreciation
and amortization expense) decreased from $927,451 in 1997 to $824,321 in 1998 or
11% from the previous year. The decrease in General and Administrative costs was
attributable primarily to fewer employees from November, 1997 to February, 1998,
when Novex began to increase its payroll with new personnel and with better
management of Novex's resources. In addition non-cash costs attributable to the
issuance of stock compensation decreased substantially in 1998 to $180,405 when
compared to the $1,360,580 incurred in 1997. Novex's new management terminated
the stock option plan that was initiated in 1996 and which resulted in the
excessive issuance of common stock to insiders at below market prices. In 1998,
Novex incurred $17,548 of interest expenses versus $12,917 in the previous year
and $15,267 of foreign currency losses versus $3,144 in the previous year. In
addition Novex amortized debt discount of $84,535 in 1998 which resulted from
the issuance of warrants to holders of the debenture that was sold in February,
1998. The net result of the increase in General and Administrative expenses over
revenues resulted in a net loss of $1,112,594.
DISCUSSION ABOUT NOVEX'S BUSINESS
a. General Business Development
Novex Systems International, Inc. ("Novex") is a corporation formed under
the laws of New York and has its principal place of business and executive
offices located at 16 Cherry Street, Clifton, New Jersey 07014, telephone
973-777-2307. Until May 11, 1999, Novex was known as Stratford Acquisition Corp.
and had been a corporation organized under the laws of Minnesota. Effective May
11, 1999, Stratford merged into its wholly- owned subsidiary, Novex Systems
International, Inc., a newly-formed New York corporation, which was the
surviving corporation. The purpose of the merger was to "redomesticate" the
company from the state of Minnesota where it had virtually no business activity,
to the State of New York where the company had its corporate headquarters.
Furthermore, it was management's belief that New York has a more developed body
of laws governing public companies than does Minnesota. For this reason, the new
entity, Novex, was incorporated in the State of New York, and the Minnesota
company, Stratford, was merged into Novex. As a result, the Minnesota company
essentially dissolved into and became a part of the surviving entity, Novex.
Novex also has a wholly-owned operating subsidiary, Novex Systems
International, Ltd. (formerly known as Novacrete Technology (Canada) Inc.),
which is a company registered under the laws of the Province of Ontario, Canada
and is located at 2525 Tedlo Street, Unit B, Mississauga, Ontario L5A 4A8,
telephone 905-566-0716 ("Novex Canada").
Before August 15, 1995, Stratford was a dormant corporation. On August 15,
1995, it acquired from the inventor, the exclusive right to manufacture and
market a proprietary admixture for the enhancement of cementitious products now
known as "Adment". Novex granted the inventor 500,000 shares of common stock and
a royalty of 2% of the gross sales of Adment up to a maximum royalty amount of
$500,000. The inventor is deceased and is now represented by his wife and
daughter who are not affiliated with Novex, other than through the royalty
agreement.
Adment is a blend of various materials which when mixed with portland
cement and water causes a chemical reaction that creates a calcium silicate
hydrate (CSH) paste binder that has a very dense microscopic pore structure.
This change in the molecular matrix of the cementitious product increases the
bonding between the CSH paste and the aggregates that are mixed into the formula
to create a mortar or concrete product. By having a denser
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pore structure, the end product becomes more durable and resistant to chemicals
and water penetration. For this reason, Adment causes cement to chemically react
in a manner that ultimately:
o produces higher compressive, bonding, flexural and tensile strengths,
o reduces shrinkage,
o increases workability and, most importantly,
o increases resistance to penetration of water and chloride ions from
de-icing salts.
Upon acquiring the technology in 1995, Novex's initial plan was to conduct
further research and development of Adment with the intention of marketing
Adment and a line of pre-packaged concrete repair products using Adment. In the
two and one-half year period from August 15, 1995 through November, 1997 Novex
underwent a series of management changes, generated no revenues, incurred an
accumulated deficit of approximately $3,000,000 and was still in the early
development stage.
On November 17, 1997, Novex made a major change in its business plan which
has resulted in significant advancements in all aspects of Novex's operations.
With the implementation of a 60 Day Business Development Plan that was announced
in December, 1997, Novex's new management increased the number and caliber of
its board of directors and senior management by appointing as chairman of the
board Mr. William K. Lavin who has substantial senior level management
experience with the Woolworth Corporation and Mr. Edward J. Malloy who, as
President of Building and Construction Labor Union in the Greater New York area
brings substantial experience in construction practices and contacts to Novex.
Novex then installed industrial level manufacturing and packaging equipment and
warehousing equipment for raw materials and finished goods. It refurbished its
executive offices at its Canadian operating plant and constructed an internal
testing laboratory. It also opened its first U.S. sales office in New Jersey and
closed on a working capital financing of $550,000. As a result of the 60-day
plan, Novex began to manufacture and package its Novacrete products, and to
execute a sales and marketing program in Canada and the East Coast of the United
States which lead Novex to book in April 1998 its first sale of pre-packaged
Novacrete repair products. Since that time, Novex has developed and marketed a
line of eight concrete repair products that it markets under the Novacrete name.
In September 1998, Novex's wholly-owned subsidiary, Novex Canada purchased
all of the issued and outstanding common stock of ARM PRO Inc. ("ARM PRO"),
located in Ontario, Canada. The funds used to purchase ARM PRO were derived from
Novex's sale of a 9% $800,000 (U.S.) debenture due to mature on September 4,
2000 and which included a warrant to purchase 1,500,000 shares of Novex's common
stock at an exercise price of $.45 per share. The warrant expires on September
4, 2000. Since 1986, ARM PRO has manufactured and marketed the trademarked
FIBERFORCE line of polypropylene fibers. Polypropylene fibers are blended into
cementitious products to provide secondary reinforcement and reduce cracking.
Novex's overall plan was to consolidate the operations of the acquired company
with its existing operations, to realize greater operating efficiencies, and to
achieve its targeted gross margin of 50% of net sales. Accordingly, in December
1998 Novex closed ARM PRO's Teeswater, Ontario plant and merged the ARM PRO
operations into Novex's Mississauga, Ontario operating facility.
On August 13, 1999, Novex acquired the Allied Composition/Por-Rok business
unit from The Sherwin- Williams Company ("Por-Rok"). Por-Rok manufactures a
well-known line of grouting and concrete patching products that are distributed
nationally. The purchase price for the Por-Rok acquisition was $2.1 million and
was paid for in part from the funds derived from a secured term loan from Dime
Commercial Corp. in the amount of $890,000. In exchange for the line of credit
from Dime, Novex was required to issue to Dime a warrant to purchase 233,365
shares of Novex's common stock. The warrants have an exercise price of $.25 per
share and an exercise period commencing upon issuance and terminating on August
13, 2002. The balance of the purchase price was provided by The Sherwin-Williams
Company in exchange for which Novex issued a 10% secured promissory note in the
amount of $1.3 million and 1 million shares of Novex's common stock .
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Novex believes that the Por-Rok product line is a natural extension of
Novex's line of concrete repair and flooring products that it markets under the
Novacrete name. It is management's opinion, based on an emerging trend in the
industry, that end-users would prefer to use one manufacturer's products in any
given construction project. Quite often, one project requires the use of various
products. Under these circumstances, the customer prefers to use products that
are compatible and are backed by the warranty of one manufacturer. By offering
several products as a complete repair system under one warranty, Novex believes
it will increase sales of all products to the end-user.
Additionally, Novex believes that distributors would rather stock one
manufacturer's product line to reduce the number of vendors with which they have
to do business, meaning less shipments to their warehouses and less accounting
for only a few large vendors versus multiple smaller ones. Furthermore, with
larger orders, distributors are able to demand better pricing on all products.
Accordingly, Novex believes that by diversifying the array of products that
Novex can offer to distributors of building materials, it will become more
favorable to distributors as well.
While having a smaller product line does not mean that Novex would be
unable to market its products, the company believes that as its product line
grows, it will become more favorable to end-users and distributor, resulting in
increased sales to both of these types of customers. For this reason, Novex is
proactively pursuing opportunities to acquire entire companies or selected
product lines from companies to further expand its line of speciality building
materials. Although there are no agreements or letters of intent to acquire any
companies as of the filing of this Prospectus, Novex has engaged in discussions
with several targets with the goal of closing at least two more transactions in
the next twelve months to expand the array of products that Novex offers and to
increase its market share in the United States and in Canada. To date, there
have been no discussions on price. In fact, the decision as to which companies
would be suitable acquisition candidates does not rest solely on price but also
upon other factors such as the breadth of its product line, its management, its
distribution channels and how easily its operations could be integrated with
Novex's existing facilities in Clifton, New Jersey or Mississauga, Ontario.
Although we have identified acquisition targets, there can be no assurances that
Novex will be able to reach agreements with any of the targets or that it can
close these transactions. Management anticipates that it will finance future
acquisitions in part with debt and equity. All assets acquired in an acquisition
will be used to raise secured debt financing which will be paid to the selling
entity. Management anticipates that it will continue to increase its debt
financing through Dime Commercial Corp. Therefore, any loans currently
outstanding with Dime should not be an impediment to future financings. If
additional financing is required to purchase a business this financing will need
to be in the form of unsecured loans or equity. In addition, management has
planned that as part of any future financing, it would seek to raise sufficient
capital to pay off the $1.3 million note owed to The Sherwin-Williams Company.
Assuming this type of financing arrangement could be achieved, Novex would not
be hindered from financing future acquisitions on account of its current
financial obligations.
Increasing Novex's product line and hiring additional staff to help
management the business will be very challenging, but not impossible. To expand
the product line apart from acquisitions, Novex would be required to undertake
internal research and development by using the resources of its staff cement
chemist. The cost to develop new products is minimal given the cost of the
materials required for the desired products and the fact that we have an
in-house chemist. Although Novex currently has the financial capability to
develop these new products, the real "cost" in developing these products is the
time needed to ensure that a new product will perform satisfactorily under field
conditions and whether the product will gain market acceptance once it is
completed. One advantage Novex has is that the brand name "Por-Rok" is well
known and any new products that are marketed under the brand name Por-Rok should
be easier to market than a "no-name" product. Nevertheless, until the new
product is offered for sale, no one can actually gauge how successfully the
product will sell. For this reason, management prefers to purchase products that
are already accepted and have a loyal customer base rather than rely upon the
development of new products. If Novex acquires a company having just a few
products, it can then offer its own Por-Rok products to customers that purchase
products offered by the newly acquired company. This is called "cross-marketing"
which management believes is the most suitable approach to growing its product
line.
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At present, the company has sufficient cash flow to hire one to two
additional plant workers (although there is no present need to do so) and one
salesman which the company is in the process of recruiting. Even if we were to
acquire additional products, whether through acquisition or internal
development, our existing manufacturing staff plus one or two more plant workers
would be capable of manufacturing the new products until additional shifts were
needed to meet increased demand. Furthermore, since the new products would be
sold primarily to our existing customers, we would continue to use the
manufacturers' representatives who presently market our products.
A benefit of making acquisitions is that quality personnel that have
considerable experience often can be attracted to stay with the acquiring
company. For example, when Novex acquired ARM PRO and Por-Rok it retained all
the key employees that now contribute greatly to Novex's daily operations.
However, if Novex does not make any acquisitions this year, which is possible,
it will have to compete with other companies for talented management personnel.
When this happens, especially in a "tight" job market which we are currently
experiencing, key personnel can be very costly to attract and Novex may not have
the resources to compete with large companies that can offer more attractive
compensation packages. On the other hand, one benefit we can offer individuals
with an entrepreneurial bent is the opportunity to become key personnel and part
of senior-level management group which is building a company. Nonetheless,
finding high-quality people that can get the job done and help grow a small
company like ours is always difficult. Since the future success of Novex will be
dependent, in part, upon its ability to attract and retain qualified personnel,
our inability to do so could have a material adverse effect upon our business.
In addition, Novex's success depends, to a large extent, on certain
economic factors that are beyond its control. Unfavorable changes in factors
such as general economic conditions, levels of unemployment, interest rates, tax
rates at all levels of government, competition and other factors beyond Novex's
control may have an adverse effect on its ability to sell its products and to
collect its receivables.
b. Financial Information About Industry Segments
All assets, revenues and operating expenses are dedicated to one business
segment -- the manufacturing and marketing of construction products.
Accordingly, Novex accounts for its business operations within one industry,
i.e. the building materials industry. The company has two operating segments
within the building materials industry, namely the fiber business and the Allied
Por-Rok business. For information relating to these two operating segments, see
Note 15 to Novex's Consolidated Financial Statements.
c. Novex's Current Business Operation
Novex is engaged in the business of manufacturing and marketing two lines
of premium building product materials. The first is a line of polypropylene
concrete reinforcing fibers that are marketed under the Fiberforce trade name
and a proprietary cement-enhancing admixture that Novex will be marketing under
the trade name Por- Rok. These products are promoted directly to ready-mix and
pre-cast concrete manufacturers. The second is a line of pre-packaged concrete
repair products that are marketed to contractors directly and also to
distributors of building material products. (See Description of Products) .
Novex currently has its executive offices at 16 Cherry Street, Clifton, New
Jersey 07014. Novex's manufacturing operations are conducted at its 25,000
square foot facility in Clifton, New Jersey and through its wholly-owned
subsidiary, Novex Canada, in a leased 12,500 square foot facility located at
Mississauga, Ontario (20 minutes west of Toronto).
The Clifton operating facility is a fully-integrated manufacturing plant
with the capacity to manufacture approximately 2 million lbs. of product per
month on a single shift, which translates into roughly $8 million per annum in
sales. Although Novex has the capacity to produce this quantity of product, it
does not currently sell all that the company can produce. This operating plant
currently runs at approximately 25% of its capacity on a two shift level. At
present, the Clifton facility manufacturers 5.5 million lbs. of product, or $1.8
million in revenues per annum.
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Novex plans to expand its product line significantly over the next five
years by acquiring companies that manufacture and market compatible premium
building material products that have already gained an acceptable level of
market penetration. The building material industry is large and encompasses a
wide variety of products, services and equipment. In particular, it is
interested in acquiring manufacturers of premium flooring and concrete repair
products and related accessory products as well as cement enhancing admixtures
for concrete. These types of products usually achieve higher margins since they
are not commodity products and are principally sold based on the product's added
value. Because these products are usually made and packaged in either a
fully-integrated or, in some instances, a semi-integrated manufacturing
facility, large volumes of product can be produced in short time periods with
minimal labor.
Our consolidation strategy is aimed at reaping the cost reductions afforded
by eliminating excess facilities and overhead while building a full service
specialty product line thereby offering one-stop shopping to professional
contractors who prefer to choose from one line of products for convenience,
product compatibility and warranty and liability reasons.
d. How Novex Manufactures and Distributes Its Products
Novex manufactures and distributes all of its products from its New Jersey
and Canadian operating facilities. The Clifton facility is a fully-integrated
blending and packaging facility having the capacity to produce over 24,000,000
lbs. on a single shift basis, although the company's current level of sales does
not match its production abilities. The facility consists of three buildings
located on a 1.6 acre tract of commercially-zoned land. The majority of raw
materials used at this facility are stored in silos affixed to the roof of one
of the buildings. Through an automated raw material batching system that is
controlled by a plant supervisor, the raw materials are fed through the silo
system and into mixing blenders. When the raw materials have been blended into a
finished product, the finished batch is forced from the blender by compressed
air into an automated packaging system that packages the products into 50lb.
bags. The bags are then manually stacked onto wood pallets and are prepared for
shipping. In addition, certain quantities of the blended finished product are
transported in large metal bins by a forklift to another packaging system that
packages the blended product into 1lb., 5lb., 7lb. and 50lb. pails. Most of the
smaller quantity pails are then repacked into cardboard boxes in quantities of
4-8 pails per carton for distribution to hardware and retail outlets.
This facility currently packages products for distribution through building
supply yards and retail outlets in packages ranging from 1 and 5lb. plastic
containers to 50lb. bags and pails. To eliminate excessive shipping costs
associated with delivering small quantities of product, Novex sells larger
quantities of products (full truckload orders) to distributors that ultimately
resell the product into local markets. Before the acquisition of Por-Rok, Novex
used a public warehouse in New Jersey to warehouse and ship product on its
behalf for a per diem handling charge. The Clifton facility now serves as
Novex's distribution center for eastern United States. Novex will continue to
use public warehouses in areas where the sales volume justifies the need to have
product readily available in a local market, but where there is not an
established distributor that stocks Novex's products.
The Canadian facility has the annual capacity on a single shift basis to
produce approximately 750,000 lbs. of Fiberforce product, although the company's
current sales does not meet the level of its production. All Fiberforce products
are made from polypropylene strands that are cut into various lengths and
shapes. Novex currently manufacturers three types of fibers which are
categorized as multifilament, fibrillated and Fiberforce #1. All fiber products
are packaged in 1.0, 1.5 and 2.0 lb. bags and are promoted to the ready-mix
concrete industry.
e. How Novex Markets Its Products
Novex currently has one full-time salesperson located in Mississauga,
Ontario, and 25 manufacturers' representatives, giving Novex coverage from the
eastern United States to as far west as North Dakota. These individuals are
presently covering the following areas of the United States and Canada:
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New England Region
Maine Massachusetts
New Hampshire Connecticut
Vermont Rhode Island
New York/Philadelphia Region
New York Delaware
New Jersey Maryland
Pennsylvania Washington, D.C.
Midwest Region
Iowa North Dakota
Indiana South Dakota
Michigan Iowa
Illinois Nebraska
Wisconsin Kansas
Minnesota
Southeast Region
Missouri North Carolina
Arkansas South Carolina
Mississippi Tennessee
Louisiana Alabama
West Virginia Georgia
Virginia Florida
Kentucky
Canada Distribution
Western Canada Eastern Canada
Manitoba Ontario
Saskatchewan Quebec
Alberta
British Columbia
Novex is in the process of hiring another full-time salesperson in Canada
to specialize in sales of the Novacrete and Por-Rok products, since the other
salesperson is principally focused on sales of Fiberforce fibers.
f. How Novex's Products Are Graded By Industry Standards
Building material products are classified in accordance with standardized
performance criteria established by the American Society of Testing Materials
(ASTM). The basic performance characteristics that are considered when
classifying the types of building products that Novex sells are:
o Compressive strength
o Flexural strength (flexibility)
o Tensile strength (splitting)
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o Bonding strength (adherence)
o Shrinkage
o Resistance to water penetration
o Durability in freeze/thaw cycles
Novex has a research laboratory located in its Novex Canada facility, and a
full-time cement chemist that oversees the development of new products and
performs the technical analysis on products that Novex acquires.
Novex follows a standard format for developing new building material
products. The initial step in the development of a building product entails an
analysis of the market for a product and the cost to manufacture the product. If
the market for a product and the cost to manufacture it are acceptable, Novex's
laboratory personnel develop a trial formulation for the product. Once a trial
formulation has been developed, a sample of the product is given to a qualified
independent testing laboratory, and the above 7 properties, among others, are
tested pursuant to established ASTM guidelines.
Standard testing generally requires the recording of the above properties
at 1,3,7, and 28 day intervals from the beginning of the test. Early test
results are monitored to determine certain performance criteria, such as a
product's compressive strength within 24 to 72 hours after it has been
installed. This result is particularly important to end-users that need products
that will be used to repair areas with little down time, such as hospitals, gas
stations, parking garages and other 24 hour operations. Higher strengths over
time are important where load bearing floor areas are involved, or in areas that
are exposed to aggressive industrial environments, like waste hauling stations.
If the 1-3-7-28 day results are acceptable, a full batch of the product is
made and samples of the product are generally given to contractors to use on
small job sites to observe the product's performance under non-laboratory
conditions. If the 1-3-7-28 day results are unacceptable or the field trials
fail, the trial formulation is reworked and resubmitted for further laboratory
testing. In instances where only a slight modification to the product's
formulation is required, the need for additional laboratory testing may be
unnecessary. If the field trials are acceptable, technical data sheets, package
design and marketing materials are finalized and the product is then ready for
market.
The ASTM laboratory test results are an important validation of a product's
performance capabilities. However, until a product has performed satisfactorily
in a number of projects, end-users are reluctant to use a product. The cost to
correct a project if a product were to fail and the resultant damage to the
reputation of the professional contractor or the specifying architect or
engineer are the underlying reasons for this resistance. While our Novacrete
products have successfully passed these laboratory tests and marketing of the
products has commenced, we believe that selling these new products in
conjunction with Por Rok's well-established product lines will help us to
overcome this resistance.
For this reason, Novex intends to market the Novacrete products in the
future under the name of either Por- Rok or one of the other trade names
acquired in the Por-Rok transaction.
g. A Brief History On Novex's Admixture Product
The admixture and concrete repair product businesses are well-established
throughout the world. There are various types of admixture products that are
used in construction products and the applications for these admixtures are
extensive. The Novacrete Admixture is a non-metallic, powder-based admixture
that consists of various raw materials that when combined together and mixed
with cement and water provides a chemical reaction which gives the final product
increased compressive and flexural strength, reduced shrinkage, greater density
and therefore better resistance to water and deicing salt penetration, greater
flow and workability and improves the bonding characteristics and setting time
for the product to fully-cure.
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Adment has the physical characteristics of a greyish-white powder.
Admixtures can be in powder form or liquid and can be used for multiple or
limited purposes such as slowing or increasing the setting time for a product.
Because of the reactive effect of the raw materials in Adment, it should only be
incorporated into cement-based products where the other materials in the product
are known and generally, only after a sample test has been conducted to
determine the appropriate level (dosage rate) of Adment that should be used in
the final product. This approach substantially reduces the risk of improperly
mixing the Adment with chemically adverse substances that could cause product
failure.
Novex's Novacrete products resulted from its search for a way to strengthen
cement-based products without the addition of polymers. The cement chemist that
invented Novex's admixture formula intended to develop a purely cementitious
product that would equal the performance characteristics of polymer-based
products, but which would be significantly less expensive to manufacture.
Over the past four years, Novex has expended considerable resources to
develop its proprietary cement- enhancing admixture into a commercially viable
product. During this period, Novex employed the services of two of Canada's
largest independent testing laboratories and has worked with a well-known New
Jersey-based laboratory to conduct field trials using the admixture in concrete.
To date, Novex has successfully developed a version of its admixture
technology that can be used in formulations for concrete repair products to
enhance the compressive, bond and flexural strengths of the product and increase
the density of the product so that it resists penetration by erosive elements
like water and deicing salts. It is manufactured at Novex's wholly-owned
operating subsidiary, Novacrete Canada, and is directly marketed by Novex's
sales personnel in 22lb. bags or in bulk quantities to end-users, which range
from manufacturers of cementitious products such as ready-mix concrete, pre-cast
concrete, brick, paver, cinder block and other manufacturers of cement-based
pre-packaged products.
Novex is still developing a final formulation of its admixture technology
that can be used in new concrete. It intends to manufacture and distribute its
final admixture product for concrete in various sizes ranging from 25lb. bags to
bulk packages weighing 2,000 lbs. Novex has conducted extensive field trials
with a large ready-mix concrete producer and has achieved very promising results
in the admixture's ability to increase the strength of concrete. Additional
laboratory work and field trials will be required to make the admixture product
acceptable to the industry and cost effective for ready-mix producers.
We estimate the cost to complete the final admixture's development to be
$10,000-$20,000 in laboratory work to monitor field trials. The real "cost"
involved in finalizing its development is the time required to work with
end-users to convince them of the benefits of using the admixture. Since
concrete is structural in nature, concrete producers generally approach new
products with a great degree of caution before they accept the liability of
selling concrete that contains the new product. If a foundation to a home fails,
the cost to correct the problem could be exorbitant. For this reason, the
end-user of the admixture exercises considerable caution to ensure that the
product performs as proclaimed. For this reason, we are working with local
ready-mix concrete producers that are familiar with our company and our testing
laboratory and that are slightly less reluctant to try our new product. As the
product is used locally and performs well it will likely gain market acceptance
and we can then branch out to a wider region until the products have achieved a
general level of credibility in the industry. At this time, we cannot gauge the
amount of time that will be required before we gain customer acceptance and the
demand for the product increases.
h. Market Trends for Performance Enhancing Admixtures and Building
Materials
The demand for high performance concrete and concrete repair products is
growing at a dramatic pace. The catalyst for the increased use of admixtures and
the need for higher performance products stems from the increasingly rigorous
specifications for new construction and concrete rehabilitation work. Federal
and state
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departments of transportation are increasing the performance standards that need
to be met in new construction and for the repair and rehabilitation of roads and
bridges to expand the life of the structures and to reduce future maintenance.
Infrastructure in both developed and developing countries is aging, and
governments with stringent fiscal constraints are looking for effective and
durable alternatives to costly demolition and rebuilding. Repairs relating to
natural disasters are also adding to this demand. Other special applications,
including the storage of nuclear and hazardous waste, the shielding of workers
in nuclear medicine and radiology, and the disposal of chemical and other
hazardous wastes, are creating demand for high performance products.
The growth will be based in part on expected increases in infrastructure
and major construction spending. But it will also be driven by the increased use
of admixtures in all types of cement, and concrete and "the growing popularity
of value-added proprietary admixture products in place of lower-cost
generics."(1)
Markets for new concrete reflect a similar trend toward high performance
concerns. High performance is also required in various specialty niches, such as
fast-setting products for road repairs and other commercial applications where
the cost of shutdown can be very high, and impermeable products for hazardous
waste disposal and radiation shielding for nuclear applications, to name a
couple of examples. With increasing environmental awareness, communities are now
demanding products that are safe to use and non-toxic.
The market for concrete and masonry products has been increasing
substantially in the United States. With the federally-funded Transportation
Equity Act of the 21st Century (TEA 21) having been signed into law in 1997 an
estimated $216 billion will be spent over the six year period 1998-2003 where up
to $173 billion has been provided for highways and an additional $41 billion for
transit projects. This bill increased the level of highway funding by over 30%
when compared to the previous Federal highway bill, the Intermodal Surface
Transportation Efficiency Act (ISTEA). Approximately $19.5 billion was
programmed for federal highway spending under ISTEA. ISTEA was augmented by the
1995 National Highway System Act that provided for an additional $5.2 billion in
funding. In addition, TEA 21 provides that the revenues generated from the 4.3
cents per gallon gas tax now be deposited into the Highway Trust Fund to be
spent for the construction and rehabilitation of highways and bridges.
The United States and Canada are not the only geographic areas engaged in
significant infrastructure spending. Concrete structures -- buildings, bridges,
highways, dams -- all over the world are in need of repair. Stringent government
capital budgets inhibit replacement of all structures. Municipalities are
continually searching for ways to extend the useful life of these structures
through patching, refinishing, and protecting the existing work. The world-wide
market for cement-based products to repair concrete structures is projected to
be as high as $100 billion per year. The additive component of this market is
conservatively estimated at more than 2% or $2 billion.(2)
In the Spring 2000, Novex will seek to implement a marketing strategy to
penetrate the market for high- performance concrete (HPC). HPC can be defined as
concrete that has high compressive and flexural strengths and high resistance to
chloride and water penetration. Use of HPC is increasing as federal and state
agencies demand greater product life and ultimate product strength for high-end
uses such as roads, bridges, dams, ports and other concrete applications that
have exceptionally high load bearing requirements like building foundations,
parking garages and bridge decks.
- --------
(1) Freedonia Group Study reported in Construction Marketing Today, April,
1997.
(2) Based on Statistics Canada Report.
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i. A Description of Novex's Products
As of the filing of this registration statement, the following is a list of
the Por-Rok and Fiberforce products marketed by Novex:
POR-ROK PRODUCTS (A Line of Grouts and Patching Products)
POR-ROK Anchoring Cement - non-shrink expansion cement that requires only water
at the job site to create a pourable, yet durable, anchoring, patching or
grouting compound.
SUPER POR-ROK Exterior Anchoring Cement - non-shrink expansion cement for
exterior applications that requires only water at the jobsite to create
exceptionally high early strengths in the first three days from installation.
POR-ROK Halco Grout - contains expansive agents and flow enhancers to provide
high strengths yet exceptional flowability for ease of application.
POR-ROK Aqua Plug - durable water resistant hydraulic cement which sets in 3-5
minutes. Designed to stop leaks or running water, patch cracks and fill holes in
masonry surfaces. Can be used in interior and exterior surfaces and sets under
water.
POR-ROK Concrete Patch - requires only mixing of water at jobsite, will level or
smooth most concrete or masonry surfaces and can be used to repair and patch
spalled concrete, cracks in masonry, broken steps and porches. Sets in 40-80
minutes and is stronger than ordinary concrete. Can be used in interior and
exterior surfaces.
POR-ROK Dash Patch - powder-based product that when mixed with water bonds well
to concrete, wood or plaster that is used to smooth surfaces before the
placement of tile, carpeting or wood. Fills cracks, ruts and score lines, strong
bond adhesion and no shrinkage.
POR-ROK Lev-L-Astic - used as an underlayment over concrete, wood, quarry tile,
terrazzo, before installing asphalt or vinyl asbestos, tile, linoleum, and other
types of floor surfaces. Eliminates the need for felt paper over wood surfaces,
eliminates high spots on floor, improves bonding base to new tile and linoleum.
POR-ROK All Purpose Underlayment - used as an underlayment over concrete, wood,
quarry tile, terrazzo, before installing asphalt or vinyl asbestos, tile,
linoleum, and other types of floor surfaces. Eliminates the need for felt paper
over wood surfaces, eliminates high spots on floor, improves bonding base to new
tile and linoleum.
POR-ROK Adment - a proprietary, powder-based admixture that enhances the
physical characteristics of cement- based products.
POR-ROK Levelon - single component, fast-cure, non-shrink, high bond repair
mortar capable of achieving 3,480 psi in four hours. FC can be walked upon in a
little less than one hour from installation and driven over within two hours of
installation.
FIBERFORCE PRODUCTS - All Fiberforce products are made from polypropylene and
are cut into various lengths and shapes. Novex currently manufacturers three
types of fibers which are categorized as monofilament, fibrillated and
Fiberforce #1 each designed to reduce cracking and provide secondary
reinforcement. The fiber products are packaged in 1.0, 1.5 and 2.0 lb. bags.
j. Novex's Competitors
The principal methods of competition in our industry are price, service and
the reliability of the product as demonstrated by performance. Except for the
admixture product, each of the products which Novex currently offers
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has been on the market for at least 10 years and in some cases over 25 years.
Because the products have been used for so long, they have achieved a level of
market acceptance. It is very unlikely that someone would claim that our Por-Rok
or Fiberforce products don't work inasmuch as customers have been using them for
years. Our prices are competitive with other like products. We do not aim to be
the lowest nor the highest price on the market, but to be competitive. When it
comes to competing with major manufacturers, we cannot offer the full range of
products that they can. Consequently we cannot offer volume price discounts to
the extent our larger competitors can. Until we expand our product line, we
cannot offer the complete repair kits which some of our larger competitors can.
To remain competitive in the interim, we aim to provide customers with
exceptional service and very favorable pricing and payment terms with respect to
the product currently in our line.
The industry for building material products is highly fragmented and has
various classes of competitors. Competition ranges from large multi-national
companies to local manufacturers. Because the transportation of heavy products
like building materials involves sizeable shipping costs, hundreds of
manufacturers of building products have been able to sustain market share in
local markets, thus resulting in a fragmented industry. Novex would like to
capitalize on this situation by acquiring selected companies in various regions
of North America for the purpose of:
o acquiring additional premium building products,
o increasing market share, and
o improving operating margins by consolidating operating facilities to
eliminate excess overhead which is prevalent in the industry.
As of the filing of this registration statement, Novex competes with
several other companies nationwide that manufacture and distribute construction
products that are substantially similar to those manufactured and distributed by
Novex. Until Novex can effect its business strategy, which will eliminate some
competition, at least in certain markets, Novex believes the following companies
will be its primary competitors.
Brand Major Competitors
- ----- -----------------
Por-Rok Conspec
Anchoring Cement Tamms
Master Builders
Quikcrete
Sonneborn
Sternson
W.R. Meadows
ChemMasters
Rockite
Super Por-Rok (Same as above)
Exterior Anchoring
Cement
Por-Rok (Same as above)
Aqua Plug Bondex
Thoro
Por-Rok (Same as above)
Concrete Patch
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Por-Rok Mapei
Halco Grout Tamms
Por-Rok Mascrete
Lev-L-Astic Tamms
Dependable
Mapei
Dap
Por-Rok Dependable
Dash Patch Mascrete
Tamms
CGM Underlayment
Taylor Vitrex
Umasco
Por-Rok Floorcap Masterbuilders
Mapei
Dayton-Richmond
All Fiberforce Products PRO Mesh
Fibermesh
Forta
Dura-Fiber
Euclid
W. R. Grace
Adment W. R. Grace
Masterbuilders
Norchem
Some of Novex's competitors may be better capitalized, better financed,
more established and more experienced than Novex and may offer products at lower
prices or with greater concessions than Novex. Should Novex be unable to compete
effectively, Novex's results of operations and financial position would be
materially and adversely affected.
k. Seasonality
As part of the construction business, Novex is currently subject to
seasonal cycles which historically results in a significant slow down in its
operations during the months of December through February. March begins the
increase in business activity which continues through November, with the peak
sales months being April through September. This seasonal cycle is attributable
to the slowdown in outdoor construction activity in Canada and the northeastern
portion of the United States during the winter months. With the addition of the
Por-Rok line of products, Novex anticipates that the substantial majority of its
sales will be derived from products used for residential, commercial and
industrial repair of deteriorating concrete structures and floors and sold into
commercial and building product outlets like home centers and independent
hardware stores. Although Novex may still be subject to the seasonal effects of
the winter months, it has already begun to recruit agents to sell its products
in the southeastern portion of the U.S. and will engage in a very active
recruiting program to enroll agents in this territory in addition to the other
25 representatives currently employed throughout the United States.
l. Customer Dependence
Novex is not dependent upon any one customer nor does it anticipate
becoming dependent upon one customer in the future. Its marketing strategy is to
diversify its sales through major distributors that are located in
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various geographical areas and to a large number of construction professionals,
such as engineers, architects, contractors, construction managers and end-users
all of whom are involved in separate construction projects. In addition the
Fiberforce and Por-Rok products are sold to various distributors and retailers
none of which account for more than 5% of the respective line of product sales.
Novex does not anticipate that any one customer will account for ten percent or
more of its annual sales in the coming fiscal year.
m. Raw Materials
An important aspect of Novex's business is having an adequate supply of raw
materials. The raw materials used in manufacturing the Por-Rok products are
readily available in the United States and Canada. Novex currently purchases
most of its raw materials from ten principal suppliers located in Canada and the
United States and has access to numerous suppliers in the United States. The raw
materials are purchased on an as needed basis and at market prices at the time
of purchase. Novex does not anticipate that the prices and supplies of the raw
materials will fluctuate substantially since the majority of the raw materials
are commodity items such as sands and cement. Nor does Novex anticipate
difficulty in obtaining these products if its relationship with one or more of
its suppliers were to end. Novex further believes that the loss of any one
supplier will not adversely affect Novex's business. Novex currently owns a
substantial supply of the main component of its Adment product that it
warehouses in its Mississauga facility and in a public commercial warehouse.
n. Intellectual Property Rights
Novex received a certificate of registration for the use of the trademark
"Novacrete" from the Canadian Intellectual Property Office on June 15, 1997. The
Certificate remains in effect until June 5, 2012 and can be renewed by Novex. On
March 3, 1998, Novex received a Certificate of Trademark Registration No.
2,140,062 to use the trademark "Novacrete" in the United States. The term of the
U.S. trademark registration is for ten years. With Novex's acquisition of
Por-Rok in August 1999, Novex acquired the registered trade names for all
Por-Rok products currently being produced.
Novex has not filed an application for a patent on its proprietary
technology. The core technology that is used in each of Novex's products is not
easily replicated. However, if patented the technology would ultimately become
public information. Novex has developed internal controls to protect the
confidentiality of its technology and does not believe that the lack of legal
patent protection will impair its ability to effectively compete with other
manufacturers of like products or cause Novex to incur unnecessary risk of loss
of the technology. Even if Novex had patent protection over its technology, it
still assumes the risk that a competitor may misappropriate the technology and
then its only recourse would be to commence costly and time consuming
litigation. The existence or absence of a patent poses no commercial
disadvantage to marketing Novex's products.
On an internal basis, any proprietary technology is maintained by the
manager of research and development and Novex's senior management on a
"need-to-know" basis in order to perform their jobs. By keeping all laboratory
developments in close confidence Novex seeks to limit misappropriation of
company secrets by employees or third parties. Previously, Novex had required
that employees at the Mississauga facility dealing with the Novacrete Admixture
sign confidentiality agreements. Although Novex had initially thought to require
its Por-Rok employees to sign similar agreements relating to the Por-Rok
products, upon reconsideration, the company has determined it will not require
them to sign confidentiality agreements since these products have been
manufactured for up to 40 years under previous management without
confidentiality agreements in place.
Novex has learned that other companies have been issued a trademark for the
name "Novex". We do not believe that our company will be injured by these uses
of the name Novex nor do we consider our use of the name Novex to be an
infringement upon any of these trademarks since these trademarks relate to
companies, goods and services which are entirely distinguishable and unrelated
to the construction products industry. Even if Novex were required to change its
corporate name, this would not diminish our sales since our products are
marketed under the brand names "Por-Rok" and "Fiberforce". These product names
are protected by registered trademarks in the United States, Canada and the
United Kingdom.
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o. Novex's Working Capital Requirements To Operate Its Business
Novex has historically experienced cash flow fluctuations that track the
seasonal fluctuations in its business due to the construction slowdown in the
winter months. In the fiscal years 1998 and 1999 Novex experienced negative cash
flow and required financing from outside sources to sustain its business
operation. From March to October Novex will experience its highest level of
working capital requirements to sustain higher levels of inventory to meet the
anticipated demand for finished products during these months. With the slowdown
of construction in the winter months Novex anticipates it will generally require
less than two-thirds of the amount of working capital, since sales will likely
decrease to this level of average monthly sales in the peak months. For the
period ending May 31, 1999 Novex experienced a fluctuation in its working
capital requirements since it was just emerging from the development stage and
only owned the Fiberforce product line for two months before the winter slowdown
period. However, for the fiscal year ending May 31, 2000, Novex expects to
experience less fluctuations in its working capital requirements to finance its
operations due to the less seasonal nature of the Por-Rok products as well as
the $750,000 revolving line of credit that Novex now has with Dime Commercial
Corp.
To cover its working capital requirements in 1999, Novex sold a 10%
Debenture in February 1998 of $550,000. Had Novex been unable to sell the
debenture and notes to generate working capital, it would have had a substantial
negative cash flow and would likely have had to formally reorganize or cease its
operations. In the fiscal year 1999 the net cash used in Novex's operations
including investing activities was approximately $1.4 million. This amount was
needed to fund Novex's expansion of its operating facility and for operating
expenses for such as rent, payroll, new operating equipment, raw materials,
research and development, professional fees and trade debts.
On September 4, 1998 Novex sold a 9% $800,000 Debenture that matures on
September 4, 2000 and a warrant to purchase 1,500,000 shares of common stock at
$.45 per share for a period expiring on September 4, 2000. From these proceeds
Novex used $610,000 to purchase ARM PRO and reserved the remaining $190,000 for
working capital and transaction expenses. Upon closing the ARM PRO transaction,
pursuant to the definitive purchase agreement, ARM PRO was required to have
approximately $175,000 of cash, $100,000 in account receivable, $100,000 in
inventory and total liabilities not to exceed $50,000.
To further offset its working capital demands in 1999, Novex also secured a
$250,000 bridge loan from a shareholder to cover the cash shortfall and entered
into a factoring agreement with Montcap Financial Corporation which also
provided Novex with $70,000 note that is secured by equipment located at its
Mississauga facility.
Although Novex's general credit policy is to invoice customers on a thirty
day payment basis, to encourage customers to take larger volume orders Novex
may, in limited circumstances, allow for payment of an invoice in sixty days. In
addition, although invoices are stated as being due in thirty days, it is fairly
common practice in the construction products industry for contractor customers
to pay over a 45-day period. This delay results from the contractor having to
submit invoices for work completed which includes the cost of materials used on
the project. Although Novex will be very aggressive in allowing extending
payment terms to customers where it will result in additional sales of Novex's
products, extended payment terms will generally be discouraged.
p. No Backlog Orders
Novex does not have any backlog orders.
q. Government Contracts
Novex does not have any material contracts with the Government or any
government agency and therefore does not have any exposure to these types of
agreements.
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r. Financial Information About Foreign and Domestic Operations and Export
Sales.
Although Novex manufactures some of its products through a wholly-owned
operating subsidiary located in Canada it does not believe that it will be
subject to any material risks attendant with it being a foreign operation. The
Canadian government is stable and democratic and Novex does not foresee any
changing conditions that would adversely impact Novex. (See Financial
Information about Industry Segments). To the contrary, with the recent reduction
of the Canadian dollar to the U.S. dollar, Novex has benefitted by preferential
exchange rates and lower cost of operations.
s. Novex's Research and Development Activities
In each of the past three fiscal years Novex has incurred expenses relating
to the research and development of its Adment product and Concrete Repair
Products that were formerly marketed as Novacrete and which are now being
marketed under the Por-Rok tradename. In fiscal year 1999, Novex spent
approximately $30,000 on fees payable to outside independent testing
laboratories that were engaged to conduct various testing procedures to improve
the Novacrete products. We further incurred approximately $60,000 in expenses
for personnel and laboratory equipment. In fiscal year 1998 Novex spent
approximately $40,000 on fees payable to outside testing laboratories to advance
testing of its Novacrete products. Other than for a brief period in 1997 in
which Novex employed the services of a cement technology consultant for
approximately three months, Novex did not have any technical personnel on staff
from January, 1997 through February, 1998 to conduct research and development on
new products. In 1996, Novex spent less than $20,000 on fees payable to outside
testing laboratories to advance testing of its Novacrete products and an old
formulation for a Novacrete Fast-Set product that Novex has since abandoned and
replaced with a new formulation to be marketed under the name Por-Rok.
t. Environmental Compliance
Novex does not manufacture products or use raw materials in its products
that are deemed to be subject to rules or regulations relating to the discharge
of certain materials into the environment. Although Novex has installed a
compressed-air dust control system in its facilities to maintain a higher
quality of air in its operating plant this system is not mandatory. The system
installed in Novex Canada cost Novex approximately $20,000 and operates during
the processing of certain products that contain raw materials having a very low
density and have the physical characteristics of dust-like particles.
As part of the Por-Rok acquisition, a Phase I Environmental Compliance
Review was conducted at the Clifton, New Jersey plant. No material findings were
reported. The Clifton plant also has a dust collection system.
With each shipment of product, Novex issues a material safety and data
sheet (MSDS) which describes the product and its components and precautionary
measures when using the product. Since Novex's products are environmentally
safe, unless new regulations are adopted by the governments of Canada or the
United States, we expect to expend a nominal percentage of its operating budget
on environmental compliance for the next fiscal year and for the foreseeable
future.
u. Novex's Future Operations
Although an integral component of Novex's business plan and future growth
will be the acquisition of targeted companies and product lines in the building
materials industry, Novex's operating strategy will also include the following
initiatives:
o Consolidation of Manufacturing Operations
With the closing of the Por-Rok transaction, Novex transferred the
manufacturing of its Novacrete products from its Novex Canada operating
facility to Por-Rok's 25,000 square foot facility located in
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Clifton, New Jersey. Por-Rok's fully-integrated manufacturing plant has the
capacity to manufacture approximately 2 million lbs. of product per month
on a single shift, which translates into roughly $8 million per annum in
sales. The Mississauga facility is capable of producing 750,000 lbs. of
Fiberforce products. Although, Novex has the capacity to produce this
quantity of product, this does not mean that it will sell all that the
company can produce. It only means that Novex would not have to make a
major capital investment until it achieves approximately $16 million in
sales of its Por-Rok products and about $1.5 million is sales of its
Fiberforce product. Currently Por-Rok manufacturers 5.5 million lbs. of
product annually, or $1.8 million in revenues per annum and Fiberforce
manufactures approximately 325,000 lbs. of product annually, or
approximately $485,000 in revenues per annum.
By shifting the Novacrete product manufacturing to the Por-Rok
facility, Novex will have adequate space in its Novex Canada facility to
inventory Por-Rok and Fiberforce products for distribution throughout
eastern Canada. The Por-Rok facility will also be used to warehouse
Fiberforce fiber inventory that will be distributed in the United States.
This arrangement will enable both facilities to serve as distribution
centers for all Novex products and will allow for each facility and its
personnel to specialize in the manufacturing of select products.
o Novex's Plan to Increase Sales
Novex will seek to expand its sales and its customer base through a
number of initiatives each of which is discussed in detail in this section.
Systems Approach to Selling Building Materials
In 1998, Novex conducted extensive "hands-on" market research
which has become the underlying basis for Novex's "systems approach"
to marketing building materials. This research revealed that the usual
concrete repair project, such as the repair of a worn floor of a large
industrial plant, could require the use of several products including
a surface bonding agent, a durable concrete repair product, a floor
hardener or smoother topping product, and possibly a cure or sealing
product to further protect the installation from damage from water and
chemicals. Through its research, Novex learned that end-users prefer
to use products that are compatible with one another and that are
backed by the warranty of one manufacturer. As a result, they look to
purchase complete repair "kits" from one manufacturer rather than to
purchase isolated products from various manufacturers. To accommodate
end-users who desire to purchase products in this manner, distributors
of building materials prefer to stock the products of manufacturers
that produce a full line of products that can be used together.
Several of our competitors already offer complete "kits" to
repair damaged concrete, a floor or a wall. Therefore, responding to
market preferences and competitive forces, Novex's foremost goal this
year will be to grow and diversify its product line. By offering all
the products as a complete repair system under one warranty, Novex
believes it will increase sales to end-users of all products as well
as attract stocking distributors that prefer to handle complete
product lines. Growing through acquisitions (versus solely by research
and development) will shorten the time period needed to achieve this
goal, and will provide Novex with the advantage of marketing
compatible products together with those that have already gained
commercial acceptance.
One Label, One Store
"One Label, One Store" essentially means that Novex will be
offering a diversified line of products that can be used together
under one warranty and all of Novex's products will be available in
most locations. The program will be offered to the 300+ outlets that
currently distribute Por-Rok products and to new distributors and
retail outlets that Novex will be pursuing.
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One stop shopping will benefit the customer and the distributor alike
by eliminating the customer's need to source products at various
locations. By purchasing a wider array of products from one
manufacturer, distributors will satisfy their customers' demands,
eliminate the logistics of stocking multiple vendors and obtain volume
discounts.
Novex first introduced the One Label, One Store program to The
Home Depot and has received approval to begin marketing its Fiberforce
line of products in five Home Depot stores in Ontario, Canada as soon
as Novex can complete a packaging design for retail distribution.
Novex currently packages its Fiberforce products in bags of 1lb. or
larger for distribution to ready-mix producers.
To encourage early participation in the One Label, One Store
program Novex will:
o offer early entry price discounts for distributors that
purchase additional products from Novex;
o arrange pre-scheduled store visits to demonstrate to the
distributors' customers and employees the benefits of the
new products;
o provide point-of-purchase (POP) displays and other marketing
materials to assist the distributors' sale of the new
products; and
o coordinate mailings of marketing pieces on the One Label,
One Store program to the distributors's customers.
The existing line of Por-Rok products is sufficient to implement
the One Label, One Store program since most retail customers, i.e. the
"do-it-yourself" customers, do not typically have the need, experience
or skill to work with the more sophisticated construction products
required by professional contractors. The Por-Rok product line
currently consists of six products, including a relatively new product
called Levelon, that can be used for most home repairs and maintenance
including indoor floor and wall repair as well as for outside uses
such as repair of concrete sidewalks, driveways, patios and to install
poles and railings.
Before the One Store, One Label program can be offered to
distributors of building materials, however, the product line will
need to include a line of curing and sealing products, epoxy-based
products, cement-based and latex waterproofing products and some
additional flooring products. It is Novex's intention to add these
products to its line by way of acquisition. Assuming an acquisition
could be completed before the end of its fiscal year, this program
could be implemented on the distribution side by the end of this
calendar year. If we are unable to add the desired products to our
line by way of acquisition, our ability to implement the one store,
one label program could be delayed for a period of up to two years.
Both retail and distributor programs will require additional
marketing material such as direct mailers and promotional materials
that can be delivered with the products or by sales representatives.
The costs associated with producing these materials is estimated to be
$25,000- $30,000. We are unable to quantify the cost of acquiring
companies with complementary products since this would depend upon a
multitude of factors including the types of products they offer, their
revenues, market share and distribution channels, and the size of
their facilities, to name a few. For the immediate future, we would
expect to finance any such transaction through outside financing
rather than working capital. At present we do not have any financing
in place nor would we seek any financing until an agreement had been
reached with a potential target.
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Improve Por-Rok's Sales Organization
Por-Rok currently markets its products by using the services of
25 manufacturing representatives. There are no full-time sales
personnel to coordinate the sales and marketing function. Novex plans
to dedicate one full-time salesperson to work with the 25
manufacturer's representatives to adequately train them on the
Fiberforce and Por-Rok product lines, along with other products that
Novex plans to acquire and develop internally. This salesperson will
also make personal calls to each Por-Rok customer to promote the One
Label, One Store program. In addition, the local manufacturer's
representative will be responsible for obtaining new accounts in his
territory, increasing sales of products to existing accounts in his
territory and monitoring the sales activity of the Por-Rok and
Fiberforce distribution outlets in his territory.
In addition, Novex plans to hire a full-time salesperson in
Canada and engage the services of one or two more manufacturing
representatives to cover Eastern Canada. Novex currently uses a
manufacturers' representative located in the Province of Alberta to
cover principally the Alberta area as well as other locations in the
western provinces of Canada.
Performance Based Compensation
Novex has increased the performance-based compensation of the 25
manufacturers' representative organizations that it acquired with
Por-Rok. By increasing the actual percentage of sales that will be
paid to sales personnel as commissions and by offering them the
opportunity to participate in other performance-based compensation,
Novex believes it will be offering the incentives needed to motivate
its sales force and reduce attrition by developing long-term
relationships with these individuals.
Architect and Engineering Representative
Novex plans to hire a technical salesperson to coordinate the
introduction of Novex's products to architects, engineers and
contractors that write specifications for construction projects.
Having its products "specified" into a job will create product demand
in that the contractor that is awarded the project is required to use
the specified product. In addition, as Novex's products begin to
appear in construction project specifications, distributors will
become more interested in stocking Novex's products as the demand for
the products increases.
New Retail Channels
As part of Novex's efforts to expand sales of products in all
possible distribution channels, Novex will work aggressively to expand
Por-Rok's existing retail base by offering promotional discounts to
other regional hardware outlets and purchasing cooperatives along with
"big-box" stores like The Home Depot and Lowe's.
Advertising
Novex intends to present to the construction industry and the
consumer an ongoing marketing campaign. To achieve this, Novex will
establish and maintain an advertising and marketing budget. The budget
will be used primarily to participate in trade shows and trade journal
advertising. Where possible, Novex will participate in cooperative
advertising. Novex is also creating promotional materials and has
formulated marketing plans to increase sales by Novex and other
representatives throughout the U.S. and Canada.
35
<PAGE>
Future Acquisitions
Novex is currently considering the acquisition of companies that
would expand its product line into specialized flooring and concrete
repair products, cures and seals, moisture protection products,
specialized industrial grouts, bonding agents, and other accessory
products.
v. Properties.
In November 1999 Novex's principal executive offices were moved from 67
Wall Street, Suite 2001, New York, New York 10005, 212-825-9292 to 16 Cherry
Street, Clifton, New Jersey 07014 973-777-2307, which is the location of the
offices and manufacturing operation that Novex acquired from The
Sherwin-Williams Company in August 1999. Upon closing that transaction, Novex
became the owner of all the real property, buildings and personal property
located at 16 Cherry Street, Clifton, New Jersey. The real property consists of
a 1.58 acre tract of commercially-zoned land with three separate buildings. The
main building is 15,000 square feet, of which 3,000 square feet is dedicated to
office space and a reception area and the remaining 12,000 square feet is
allocated to the manufacturing of Por-Rok products and the warehousing of
certain raw materials. The other two buildings at the Por-Rok facility are
approximately 5,000 square feet each and are used for warehousing supplies, raw
materials and finished goods. In addition, there is another 10,000 square feet
of undeveloped land that could be used to expand the manufacturing and
warehousing capacity of this facility. This operating plant currently runs at
approximately 25% of its capacity on a two shift level.
The subletting agreement that Novex had entered into with Dowe, Capetanakis
& Preite which is the primary tenant of Novex's former office on Wall Street,
will end in February, 2000. Janet L. Dowe, the spouse of Daniel W. Dowe is a
partner of the law firm Dowe, Capetanakis & Preite. Mr. Dowe has no affiliation
with the firm. Total monthly payments under the lease agreement are
approximately $3,500 subject to adjustment for office supplies and services.
Management of Novex believes that the rent paid by it under this lease agreement
is less than the fair market value of similar office space in the surrounding
area.
Novex's subsidiary, Novex Canada operates from a facility housing its
executive offices and a 12,500 square foot manufacturing facility located at
2525 Tedlo Street, Unit B, Mississauga, Ontario, Canada L5A 4A8, 905-566-0716.
This facility is divided into the three areas: 2,500 square feet is allocated to
offices and a research laboratory; 4,000 square feet is dedicated to the
manufacturing of Novex's Novacrete line of cementitious concrete repair products
and the remaining 6,000 square feet is used to manufacture the Fiberforce line
of polypropylene fibers and for inventorying finished goods. The Canadian
facility is subject to a five year lease commencing on May 1, 1997 and expiring
on April 30, 2002. There is no option to renew the lease. The annual lease
payments are $62,500 (CAN). Management of Novex believes that the rent paid by
it under this lease agreement is less than the fair market value of similar
space in the surrounding area. This operating plant currently runs at
approximately 30% of its capacity on a two shift level.
Management believes that the facilities used by it in the operation of its
business are adequately covered by insurance and are suitable and adequate for
their respective purposes.
w. Number of Employees
As of January 2000, Novex, on a consolidated basis, employed thirteen (13)
full-time employees. Of the 13 employees, eight are located in Novex's principal
executive offices and manufacturing facility in Clifton, New Jersey, and five
are located at Novex's operating subsidiary, Novex Canada. Of the 13 employees,
six persons are in management positions, six persons are in plant operations and
one person occupies an administrative assistant position. With the Por-Rok
acquisition, Novex now has a collective bargaining agreement with the plant
personnel in Clifton. Novex has not experienced any work stoppages as a result
of labor disputes and considers its employee relations to be good.
36
<PAGE>
x. Legal Proceedings
On August 12, 1997, a shareholder who was once a director and officer of
Novex ("the Plaintiff") commenced an action against Novex and its former
president, Mr. A. Roy Macmillan, to enjoin Novex from taking any action that
would restrict the sale of up to 300,000 shares of common stock that he
allegedly owns and for the costs he will incur to conduct the lawsuit. He has
not asked for, nor does Novex expect him to ask for, damages. The Plaintiff has
since named Novex's current president, Mr. Dowe, in the lawsuit. The Plaintiff
has no other affiliation with Novex other than for being a shareholder. The
plaintiff submitted a motion for summary judgment which the court denied. Novex
has raised several defenses to this action and believes that plaintiff's claims
are without merit. Novex has also asserted multiple counterclaims against the
plaintiff and, in December, 1999, it asserted multiple claims against two
third-party defendants, Herbert Adams, a former consultant to the company, and
Colin Raynor, a former director and former outside counsel to the company Novex
has alleged that the plaintiff and the two third-party defendants (none of whom
are presently affiliated with Novex) had caused the company to issue them stock
for work that was never done and at a time when current management believes that
fraudulent activities were being undertaken which caused the company's stock
price to be overinflated. All three individuals are claiming that they received
stock as compensation for services rendered. When Novex investigated the matter
it found virtually no records of any tangible service. Their actions and
omissions caused the U.S. Securities and Exchange Commission in or about 1997 to
commence an investigation of the company, then known as Stratford Acquisition
Corp. It is Novex's understanding that the investigation is still pending and
the Company has no information as to what action, if any, the SEC may take
pursuant to the investigation. Mel Greenspoon vs. Stratford Acquisition
Corporation, et. al., Ontario Court (General Division), Index No. 97-CV-126814.
37
<PAGE>
MANAGEMENT
The following provides certain information concerning the directors and
executive officers of Novex and its subsidiaries as of the filing of this
registration statement.
Name Age Position(s) Held*
- ---- --- ----------------
William K. Lavin 56 Chairman, Secretary
Daniel W. Dowe 38 Director, President
and Chief Executive Officer
Douglas Friedenberg 48 Director, Treasurer
Edward J. Malloy 64 Director
* At the annual shareholders meeting held on April 29, 1999, Messrs. Friedenberg
and Dowe were elected to serve as directors for a period of three years; Mr.
Lavin for a period of two years and Mr. Malloy for one year.
William K. Lavin. Mr. Lavin became a director in October, 1997 and currently
operates his own consulting business that he formed in 1994. Before forming his
firm, he was Chief Executive Officer of Woolworth Corporation (renamed
"Venator") from 1993 to 1994 and immediately before that position he served as
Woolworth's Chief Administrative and Financial Officer. Mr. Lavin also serves on
the board of directors of the Allegheny Corporation (NYSE:Y) and Chicago Title
Corporation (NYSE:CTZ).
Daniel W. Dowe. Mr. Dowe became a director in March, 1997, Acting President on
November 17, 1997 and President and Chief Executive Officer on April 1, 1998.
Mr. Dowe has agreed to serve in this capacity for a three year period pursuant
to a written employment agreement and will have an option to serve for an
additional three year period. He was the founder of Dowe & Dowe, a New York
City-based law firm that provided legal services to Novex. From 1993 to November
17, 1997, Mr. Dowe practiced corporate and securities law at his firm. From 1990
to 1993, Mr. Dowe was an associate with Donohue & Donohue, a New York City-based
law firm concentrating on international trade matters. Before practicing law, he
was employed by Alliance Capital Management Company, Salomon Brothers (Salomon
Smith Barney, a division of Citigroup, Inc. ) and J.P. Morgan Bank.
Douglas S. Friedenberg. Mr. Friedenberg has been a director of Novex since
November, 1996 and is currently employed as a financial advisor with American
High Growth Co. He has been the President of Firebird Capital Management, a
financial advisory firm, since March, 1993. In 1991, he co-founded and became
President of Unicorn Capital Management, an investment management firm. From
1983 to 1991, he managed private investment portfolios for Morgan Stanley, Inc.,
a large New York City-based investment banking firm. Mr. Friedenberg also serves
as a Director of Datametrics Corporation (AMEX:DC).
Edward J. Malloy. Mr. Malloy became a director of Novex in January, 1998. Since
1993 he has been President of the Building and Construction Council of Greater
New York. Mr. Malloy represents the interests of over 200,000 laborers involved
in the building trades in the Greater New York City area. He is responsible for
developing building projects in both the public and private sectors to ensure an
adequate level of work for his union members. Mr. Malloy brings to Novex an
extensive level of contacts and industry experience.
Committees of the Board of Directors
The Board of Directors does not have a standing audit or nominating
committee or any other committees performing similar functions. Novex does have
a compensation committee consisting of Messrs. Lavin, Friedenberg
38
<PAGE>
and Malloy (the "Compensation Committee") which had one meeting in each of the
fiscal years ending May 31, 1998 and 1999. The Compensation Committee is
responsible for assuring that the officers and key management of Novex are
effectively compensated in terms of salaries, incentive compensation and
benefits which are internally equitable and externally competitive. The
Compensation Committee is responsible for setting the compensation of the
executive officers.
Executive Compensation
The following table shows all remuneration in excess of $100,000 paid by
Novex and its subsidiaries through May 31, 1999, to all directors and officers:
Table 1
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term Compensation
Annual compensation Awards Payouts
------------------- ------ -------
Securi-
ties
Name Other Underly- All
and Annual Restrict- ing Other
Princi- Compen- ed Stock Options LTIP Compen-
pal Fisc. Salary Bonus sation Awards SARs Payout sation
Position Year ($) ($) ($) (#) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Daniel
Dowe
President 1999 $180,000
(1)(2)(3)(4) 1998 $ 89,850 432,357 575,924
1997 n/a
</TABLE>
(1) From November 17, 1997 through March 31, 1998, during which time Mr. Dowe
served as interim president of Novex, he earned $52,500 in cash
compensation. Commencing April 1, 1998, Mr. Dowe became an employee of
Novex at an annual salary of $180,000. In the fiscal year ending May 31,
1999, Mr. Dowe received $150,000 in cash compensation and deferred the
remaining $30,000 until Novex closed the Por-Rok transaction. As of the
filing of this registration statement, Novex has paid to Mr. Dowe the
balance of the deferred compensation. In addition, Mr. Dowe made an
interest-free loan to Novex of $30,378 in the fiscal year 1999 to cover
working capital shortfalls. None of the loan has been repaid as of the date
of this registration statement. Mr. Dowe does not receive any additional
remuneration for serving as a director.
(2) Before becoming an employee of Novex, Mr. Dowe received 64,857 shares of
common stock in payment for $22,700 of legal services rendered to Novex
through November 17, 1997. From November 17, 1997 through March 31, 1998,
during which time Mr. Dowe served as interim president of Novex, he earned
97,500 shares of common stock. When Mr. Dowe became an employee of Novex,
he received 270,000 shares of common stock representing 30,000 shares per
month for the remainder of the calendar year.
(3) On June 25, 1997, Novex issued an aggregate of 1,727,772 stock options to
its directors as an incentive for future performance. Of these options, Mr.
Dowe received 575,924 options. The stock options were exercisable when
issued at the then current market price of $.35 per share and will expire
on June 25, 2002.
(4) On April 1, 1998, Novex entered a three-year employment agreement with Mr.
Dowe providing for an additional three years at his option and a minimum
annual salary of $180,000 which the Compensation Committee reviews
annually. As of the date of this registration statement, the Agreement has
been amended to include a payment from Novex to Mr. Dowe in the amount of
39
<PAGE>
$800,000 if a Change of Control were to occur on or before November 10,
2000. The term "Change of Control" is defined in the Agreement as:
(i) termination of Mr. Dowe's employment by Novex for reasons other than
for cause;
(ii) a significant reduction by Novex of his position, duties or
responsibilities;
(iii) the removal and/or replacement or any increase in the number of
directors of Novex which removal, replacement or increase shall result
in a change of 50% or more of the current board of directors, or
(iv) the accumulation or acquisition by any one shareholder or group of
shareholders acting in concert resulting in that shareholder(s)'
control over or beneficial ownership of 40% or more of Novex
outstanding capital stock.
Director Compensation
Except for Mr. Dowe, the three remaining directors receive $2,500 per
quarter for services rendered as directors of Novex which is paid in restricted
common stock based on the average bid and closing price of Novex's common stock
on the last trading day for the months ending March, June, September and
December. In addition, each non-employee director receives an additional $10,000
per annum, payable in equal quarterly installments if the director is a member
of a committee of the board of directors that actually meets during the
quarterly period. During the fiscal year 1999, there were no committee meetings.
Limitations of Liability and Indemnification of Directors and Officers
Novex's Certificate of Incorporation and By-Laws require Novex to indemnify
its officers and directors to the fullest extent permitted by New York law.
New York law provides that directors of a corporation will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, including gross negligence, except liability for (i) breach of the
directors' duty of loyalty; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law; (iii) the
unlawful payment of a dividend or unlawful stock purchase redemption; and (iv)
any transaction from which the director derives an improper personal benefit.
New York law does not permit a corporation to eliminate a director's duty of
care, and this provision of Novex's Certificate of Incorporation has no effect
on the availability of equitable remedies, such as injunction or rescission,
based upon a director's breach of duty of care. Accordingly, an officer or
director will be indemnified in any proceeding if he acted in good faith and in
a manner in which he reasonably believed to be in, or not opposed to, the best
interests of Novex. Indemnification would cover expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement.
Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of Novex
pursuant to the foregoing provisions, Novex has been advised, however, that in
the opinion of the Commission, the indemnification described above is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. If a claim for indemnification against these liabilities (other
than the payment by Novex of expenses incurred or paid by a director, officer,
or controlling person of Novex in the successful defense of any action, suit, or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered and offered under this
Prospectus, Novex will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether indemnification by it is against public policy and will be
governed by the final adjudication of the court.
Novex has and will enter into indemnification agreements with each of its
current and future directors and officers which provide for indemnification of,
and advancing of expenses to, such persons to the greatest extent permitted by
New York law, including by reason of action or inaction occurring in the past
and circumstances in which indemnification and the advancing of expenses are
discretionary under New York law. Novex believes that the limitation of
liability provisions in its Certificate of Incorporation and its By-Laws and the
indemnification
40
<PAGE>
agreements will facilitate Novex's ability to continue to attract and retain
qualified individuals to serve as directors of Novex.
Novex's Certificate of Incorporation authorizes Novex to purchase and
maintain insurance for the purposes of indemnification. Novex has obtained the
insurance on reasonable terms, although there can be no assurance that Novex
will be able to maintain the insurance on reasonable terms in the future. Except
as set forth elsewhere in this Prospectus (See "Description of Business--Legal
Proceedings"), there is no pending litigation or proceedings involving any
director, officer, employee or agent for which indemnification will be required
or permitted under Novex's Certificate of Incorporation, By-Laws or
indemnification agreements. Novex is unaware of any threatened litigation or
proceeding which may result in a claim for indemnification.
PRINCIPAL SHAREHOLDERS - COMMON STOCK
The following table shows the amount of common stock owned as of January
10, 2000 by each director and officer and affiliate and by all directors and
officers as a group. Each individual has beneficial ownership of the shares some
of which are subject to unexercised stock options and stock warrants held by
him, and each individual has sole voting power and sole investment power with
respect to the number of shares beneficially owned:
Table 1
Security Ownership of Certain Beneficial Owners
(Management)
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial owner (1) Ownership(2) Class(2)
- ------------------------- --------- -----
Douglas Friedenberg, 2,858,077 11.87%
Director, Treasurer(3)
Daniel W. Dowe 3,445,658 14.31%
Director, President,
Chief Executive Officer(4)
William K. Lavin 295,316 1.23%
Chairman, Secretary(5)
Edward J. Malloy 255,316 1.06%
Director(6)
--------- -----
All Directors and Officers
as a group 6,859,367 28.47%
--------- -----
(1) The address for Messrs. Friedenberg, Dowe, Lavin, and Malloy is 16 Cherry
Street, Clifton, New Jersey 07014.
(2) The class includes stock options and stock warrants granted to the
directors and officers before January 10, 2000 which are deemed by Novex to
be acquirable by the beneficial owner within 60 days of the date of this
offering memorandum by exercise of the option or warrant. As of January 10,
2000 there were 21,987,738 shares issued and outstanding, 24,084,527 on a
fully diluted basis. Percentages are stated on a fully diluted basis.
41
<PAGE>
(3) Mr Friedenberg and various entities for which Mr. Friedenberg exercises
sole voting and investment power as investment advisor presently hold an
aggregate of 2,553,077 shares of common stock. Certain of the entities have
the right to acquire beneficial ownership of an aggregate of 305,000
additional shares upon the exercise of 305,000 Class B warrants held by the
entities.
(4) Mr. Dowe presently owns 2,869,734 shares of common stock (of which Mr. Dowe
purchased 2,437,377 shares of common stock from Little Wing, L.P. for
$500,000 which is payable by a 10% promissory noted maturing on November 4,
2000) and has the right to acquire beneficial ownership of 575,924
additional shares upon exercise of an equal number of common stock options.
(5) Mr. Lavin presently owns 95,316 shares of common stock and has the right to
acquire beneficial ownership of 200,000 additional shares upon exercise of
an equal number of common stock options.
(6) Mr. Malloy presently owns 55,316 shares of common stock and has the right
to acquire beneficial ownership of 200,000 additional shares upon exercise
of an equal number of common stock options.
Set forth below is certain information about the only shareholder known by
Novex (other than Mr. Friedenberg and his affiliated companies) to be a
beneficial owner of more than 5% of the outstanding Common stock of Novex as of
the January 10, 2000:
Table 2
Security Ownership of Certain Beneficial Owners
(Non-Management)
Name and Address Amount and Nature Percent
of Beneficial Owner Beneficial Ownership of Class(1)
- -------------------- -------------------- --------
Parker Quillen 5,041,569 20.93%
c/o Quilcap Corporation
375 Park Avenue
Suite 1404
New York, New York
(1) As of January 10, 2000 there were 21,987,738 shares issued and outstanding,
24,084,527 on a fully diluted basis. Percentage is stated on a fully
diluted basis.
CERTAIN TRANSACTIONS
On June 25, 1997, Novex issued an aggregate of 1,727,772 common stock
options to its directors as an incentive for future performance. Of these
options, Mr. Roy MacMillan (the former president of Novex), Mr. Dowe and Mr.
Friedenberg each received 575,924 common stock options. The options were
exercisable when issued at then current market price of $.35 per share and will
expire on June 25, 2002. As part of his severance from Novex, Mr. MacMillan
agreed to waive his option to purchase 575,924 shares of common stock. In August
1999, to facilitate the raising of the acquisition financing, Mr. Friedenberg
voluntarily agreed to the cancellation of his 575,924 common stock options.
Before becoming an employee of Novex, Mr. Dowe received 64,857 shares of
common stock in payment for $22,700 of legal services rendered to Novex through
November, 1997. From November 17, 1997 through March 31, 1998, during which time
Mr. Dowe served as interim president of Novex, he earned $52,500 in cash
compensation and received 97,500 shares of common stock. When Mr. Dowe became an
employee of Novex, he received 270,000 shares of common stock representing
30,000 shares per month for the remainder of the calendar year.
42
<PAGE>
As directors of Novex, Messrs. Friedenberg, Lavin and Malloy receive $2500
per quarter for services rendered as directors of Novex which is paid in
restricted common stock based on the average bid and closing price of Novex's
common stock on the last trading day for the months ending March, June,
September and December.
Mr. Friedenberg does not receive a salary, but from time to time is
compensated by Novex for services rendered on various financial projects. In
addition to serving as an unpaid director of Novex, Mr. Lavin, or his consulting
firm WKL, Inc. receive compensation for services rendered to Novex for various
acquisition projects.
In December 1998, Novex entered into a subletting agreement with Dowe,
Capetanakis & Preite for the use of approximately 1,600 square feet of office
space located at 67 Wall Street, Suite 2001, New York, New York. Mr. Dowe's
spouse, Janet L. Dowe is a partner in the law firm Dowe, Capetanakis & Preite.
The subletting agreement will end in February 2000. During the period December
1998 through January 2000, the monthly rent under the lease agreement was
approximately $3,500, after adjustment for office equipment, supplies and
services. Management believes that the rent paid by Novex under this lease
agreement is less than what it would have been required to pay for similar
premises within the area in which Novex's executive offices were located.
In addition, the law firm of Dowe Capetanakis & Preite occasionally
provides legal services to Novex. Any payments to Dowe, Capetanakis and Preite
for services rendered to Novex must be approved by the Board of Directors,
except for Mr. Dowe who is not entitled to vote on these matters.
In May 1999, Mr. Daniel Dowe made an interest free loan to Novex in the
amount of $30,378 to provide it with cash flow during the operating deficit that
occurred during the last quarter of fiscal 1999. Novex expects to repay Mr. Dowe
during the third and fourth quarters of fiscal 2000.
With respect to the foregoing transactions, Novex believes that the terms
of these transactions were as fair to Novex as could be obtained from an
unrelated third party. Future transactions with affiliates including loans will
be on terms no less favorable than could be obtained from unaffiliated parties
and will be approved by a majority of the independent disinterested members of
the board of directors.
DESCRIPTION OF SECURITIES
Common Stock
The authorized capital stock of Novex consists of 50,000,000 shares of
common stock, par value $.001 per share, and 10,000,000 shares of Preferred
Stock, par value $.001 per share. The number of shares of common stock issued
and outstanding as of May 31, 1999 and May 31, 1998 were 15,250,771 and
11,965,646, respectively. On a fully diluted basis, the number of shares of
common stock issued and outstanding on May 31, 1999 and on May 31, 1998 was
20,918,047 and 15,695,422, respectively.
Immediately before this registration statement, there were 21,987,738
shares of common stock issued and outstanding. Of the 21,987,738 shares:
o 10,146,721 were issued to 12 accredited investors in Novex's private
placement of shares of common stock which occurred between March 1997
and September 1999;
o 585,114 were issued to officers, directors and employees of Novex
between November 1997 and September 1999;
o 64,857 were issued as compensation for services rendered by Mr. Dowe
before he became interim president in November 1997; and
43
<PAGE>
o 1,000,000 were issued to The Sherwin-Williams Company in August 1999
in partial exchange for providing Novex with acquisition financing.
The balance of 10,191,046 shares are held by approximately 1200 shareholders
holding stock in record and nominee name.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferential rights with respect to any outstanding Preferred Stock (of which
there is none issued as of the filing of this registration statement), holders
of common stock are entitled to receive ratably whatever dividends the Board of
Directors may declare to be payable out of funds specified for that purpose. If
Novex were to be liquidated, dissolved or wound up, holders of common stock
would be entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preferential rights. They would have no right to
convert their common stock into any other securities. All shares of common stock
have equal, non-cumulative voting rights, and have no preference, conversion,
exchange, preemptive or redemption rights. The outstanding shares of Common are
fully paid and nonassessable.
Novex's common stock, $.001 par value, is traded on the Over-the-Counter
("OTC") Bulletin Board operated by the National Association of Securities
Dealers under the ticker symbol "HARD". The table below presents the high and
low closing bid prices for each of the first two quarters of the fiscal year
ending May 31, 2000 the four quarters in the fiscal year ending May 31, 1999 and
May 31, 1998, respectively. The quotations reflect interdealer prices without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions. Novex's common stock became actively traded in July, 1995.
On January 28, 2000, the closing bid price was $.18. Novex has paid no cash
dividends in the fiscal year ended May 31, 1999 and does not expect to change
its dividend policy in the foreseeable future.
Quarterly Common Stock Bid Price Ranges
Quarter High Low Last Day of Quarter
------- ---- --- -------------------
1st $.32 $.31 August 31, 1999
2nd $.19 $.17 November 30, 1999
Quarter High Low Last Day of Quarter
------- ---- --- -------------------
1st $.50 $.27 August 31, 1998
2nd $.36 $.19 November 30, 1998
3rd $.20 $.13 February 28, 1999
4th $.38 $.13 May 31, 1999
Quarter High Low Last Day of Quarter
------- ---- --- -------------------
1st $.43 $.24 August 31, 1997
2nd $.52 $.25 November 30, 1997
3rd $.28 $.19 February 28, 1998
4th $.77 $.20 May 31, 1998
Novex may, but has not, entered into any agreements with market makers to
make a market in Novex's common stock. In addition, any market making activity
would be subject to the limits imposed by the Securities Act, and the Securities
Exchange Act of 1934, as amended. For example, federal regulations under the
Exchange Act regulate the trading of so-called "penny stocks" (the "Penny Stock
Rules"), which are generally defined as any security not listed on a national
securities exchange or NASDAQ, priced at less than $5.00 per share, and offered
by an issuer with limited net tangible assets and revenues. In addition, equity
securities listed on NASDAQ that are priced at less than $5.00 per share are
deemed penny stocks for the limited purpose of Section 15(b)(6) of the Exchange
Act. Therefore, during the time which the common stock is quoted on the NASDAQ
OTC Bulletin Board
44
<PAGE>
at a price below $5.00 per share, trading of the common stock will be subject to
the full range of the Penny Stock Rules. Under these rules, broker dealers must
take certain steps before selling a "penny stock," which steps include: (i)
obtaining financial and investment information from the investor; (ii) obtaining
a written suitability questionnaire and purchase agreement signed by the
investor; and (iii) providing the investor a written identification of the
shares being offered and in what quantity. If the Penny Stock Rules are not
followed by the broker-dealer, the investor has no obligation to purchase the
shares. Given the application of the comprehensive Penny Stock Rules it may be
more difficult for broker-dealers to sell the common stock.
Accordingly, no assurance can be given that an active market will always be
available for the Common stock, or as to the liquidity of the trading market for
the Common stock. If a trading market is not maintained, holders of the Common
stock may experience difficulty in reselling them or may be unable to resell
them at all. In addition, there is no assurance that the price of the Common
stock in the market will be equal to or greater than the offering price when a
particular offer of securities is made by or on behalf of a Selling
Securityholder, whether or not Novex employs market makers to make a market in
Novex's stock.
Class B Warrants
At the time of this registration statement, there were issued and
outstanding 675,365 Class B warrants of which:
o 410,000 were issued to six (6) accredited investors in Novex's private
placement of Class B warrants which occurred between June 1997 and
July 1999;
o 32,000 were issued to a financial consultant in October 1999 for
services rendered; and
o 233,365 were issued in August 1999 to Dime Commecial Corp. in partial
exchange for providing Novex with acquisition financing.
The Class B warrants registered in this registration statement and the
other outstanding Class B warrants of Novex are governed by the terms of warrant
agreements between Novex and each warrant holder. The following statements are
brief summaries of certain provisions of the warrant agreements relating to the
Class B warrants offered in this registration statement. Copies of a form of
warrant agreement may be obtained from Novex and have been filed with the
Commission as an exhibit to the registration statement of which this Prospectus
is a part.
o 305,000 Class B warrants are exercisable until February 1, 2000 into
one (1) share of common stock per share at an exercise price of $.50
per share;
o 5,000 Class B warrants are exercisable until January 25, 2001 into one
(1) share of common stock per share at an exercise price of $. 20 per
share;
o 100,000 Class B warrants are exercisable until February 1, 2001 into
one (1) share of common stock per share at an exercise price of $.30
per share;
o 233,365 Class B warrants are exercisable until September 1, 2002 into
one (1) share of common stock per share at an exercise price of $.25
per share; and
o 32,000 Class B warrants are exercisable until October 20, 2002 into
one (1) share of common stock per share at an exercise price of $.25
per share.
The holder of each Class B warrant is entitled, upon payment of the
exercise price as specified in the respective agreements, to purchase one share
of Novex's common stock. Certain of the Class B warrants are subject
45
<PAGE>
to redemption upon 30 days written notice to the warrant holder at various
prices, respectively. Unless previously redeemed, the Class B warrants are
exercisable at any time until the close of business on the date before the date
specified above. Additionally, one holder of certain Class B warrants has "put"
rights with respect to its warrants and may demand that Novex purchase the
warrants pursuant to the terms and conditions of the corresponding warrant
agreement.
Common Stock Options
At the time of this registration statement, there were issued and
outstanding 1,185,924 common stock options of which:
o 1,085,924 were issued to five (5) board members, officers, and
employees of Novex during the period commencing June 1997 and ending
September 1999; and
o 100,000 to accredited investors in Novex's private placement of common
stock options which occurred in September 1998.
The common stock options registered in this registration statement and the
other outstanding common stock options of Novex are governed by and subject to
the terms of common stock option agreements between Novex and the option holder.
The following statements are brief summaries of certain provisions of the option
agreements relating to the common stock options offered in this registration
statement. Copies of a form of option agreement may be obtained from Novex and
has been filed with the Commission as an exhibit to the registration statement
of which this Prospectus is a part.
o 100,000 common stock options are exercisable until September 4, 2000
into one (1) share of common stock per option at an exercise price of
$.45 per share;
o 27,500 common stock options are exercisable until August 24, 2001 into
one (1) share of common stock per option at an exercise price of $.50
per share;
o 12,500 common stock options are exercisable until November 16, 2001
into one (1) share of common stock per option at an exercise price of
$.30 per share;
o 575,924 common stock options are exercisable until February 1, 2002
into one (1) share of common stock per option at an exercise price of
$.37 per share;
o 30,000 common stock options are exercisable until March 10, 2002 into
one (1) share of common stock per option at an exercise price of $.38
per share;
o 27,500 common stock options are exercisable until August 31, 2002 into
one (1) share of common stock per option at an exercise price of $.30
per share;
o 12,500 common stock options are exercisable until September 15, 2002
into one (1) share of common stock per option at an exercise price of
$.30 per share;
o 200,000 common stock options are exercisable until October 17, 2002
into one (1) share of common stock per option at an exercise price of
$.40 per share; and
o 200,000 common stock options are exercisable until January 15, 2003
into one (1) share of common stock per option at an exercise price of
$.40 per share.
The holder of each common stock option is entitled, upon payment of the
exercise price as specified in the
46
<PAGE>
respective agreements, to purchase one share of Novex's common stock. Unless
previously redeemed, the common stock options are exercisable at any time until
the close of business on the date before the date specified above.
Transfer Agent
The Transfer Agent, Conversion Agent and Registrar for the common stock and
Warrant Agent is Signature Stock Transfer, Inc.
Registration Rights
Novex has agreed to register the securities which are the subject of this
registration statement pursuant to Novex's obligations under certain
registration rights agreements and certain "piggyback" rights under the Class B
warrant and common stock option agreements.
SECURITIES ELIGIBLE FOR FUTURE SALE
If all of the outstanding Class B warrants and common stock options were
exercised and the corresponding stock issued, Novex would have outstanding
24,084,527 shares of common stock. Not all of Novex's outstanding securities are
being registered in this registration statement. Of the 24,084,527 shares of
common stock which would be outstanding (assuming the exercise of all
outstanding Class B warrants and common stock options), 13,657,981 are being
registered in this registration statement. and will be freely tradeable without
registration under the Securities Act following their offer and sale except for
securities purchased by an affiliate of Novex.
Upon the Effective Date of this registration statement, 2,121,401 shares
shall remain restricted consisting of 1,870,901 outstanding shares of common
stock, 63,000 outstanding Class B warrants (and the 63,000 shares of common
stock into which the Class B warrants may be exercised), and 187,500 outstanding
common stock options (and the 187,500 shares of common stock into which the
options may be exercised). The unregistered securities may, however, under
certain circumstances, be available for public sale by means of ordinary
brokerage transactions in the open market pursuant to Rule 144, promulgated
under the Securities Act, subject to certain limitations.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the securities during the four calendar
weeks prior to the date on which notice of the sale is filed with the SEC under
Rule 144. Certain other requirements of Rule 144 concerning availability of
public information, manner of sale and notice of sale must also be satisfied.
Rule 144 also permits, under certain circumstances, the sale of securities,
without any limitation, by a person who is not an affiliate of Novex and who has
satisfied a two-year holding period.
No prediction can be made as to the effect, if any, that sale or
availability for sale of shares of common stock, Class B warrants or common
stock options will have on the prevailing market price of the common stock.
Prospective investors should be aware that the possibility of sales of
substantial amounts of these securities in the public market could have a
depressive effect on the prevailing market price of Novex's common stock.
47
<PAGE>
SELLING SECURITYHOLDERS
The registration statement of which this Prospectus forms a part relates
to:
-- the offer and sale by the selling securityholders of up to 11,796,692
shares of common stock of Novex Systems International, Inc.
-- the offer and sale by certain holders of up to 675,365 Class B
warrants and the 675,365 shares of common stock which Novex would
issue to them if they were to exercise the warrants;
-- the possible issuance by Novex of up to 675,365 shares of common stock
if individuals or entities that purchase Class B warrants from the
selling securityholders were to exercise the warrants;
-- the offer and sale by the selling securityholders of up to 1,185,924
shares of common stock options and 1,185,924 shares of common stock
which Novex would issue to them if they were to exercise the options;
and
-- the possible issuance by Novex of up to 1,185,924 shares of common
stock if individuals or entities that purchase common stock options
from the selling securityholders were to exercise the options.
The shares of common stock underlying the Class B warrants and common stock
options are offered by Novex for purchase only if a selling securityholder or a
person who has purchased warrants and/or options from a selling securityholder
exercises the warrants and/or common stock options in accordance with their
terms.
Common Stock
As of the filing of this registration statement, there were 21,987,738
shares of common stock outstanding. On a fully diluted basis, assuming all
outstanding stock options and warrants to purchase common stock are exercised,
Novex would have 24,084,527 shares of common stock issued and outstanding. The
following table sets forth:
o the names and addresses of the selling securityholders,
o their material relationship or position with Novex within the last
three (3) years,
o the number of shares of common stock owned by each selling
securityholder, and
o the percentage of shares of common stock held by each Selling
Securityholder on a fully diluted basis.
<TABLE>
<CAPTION>
Name/Address of Position/Office Class of Amount of
Security Holder Material Relationship Security Owned Security Owned Percentage
- --------------- --------------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
William K. Lavin Director; Secretary Common Stock 95,316 0.40%
190 Beach 137th Street
Belle Harbour, NY 11694
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Name/Address of Position/Office Class of Amount of
Security Holder Material Relationship Security Owned Security Owned Percentage
- --------------- --------------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Edward J. Malloy Director Common Stock 55,316 0.23%
71 W. 23rd Street
Suite 501-03
New York, NY 10010
Douglas Friedenberg Director, Treasurer Common Stock 81,982 0.34%
c/o American High Growth
725 Fifth Avenue, 24th Fl.
New York, NY 10022
Douglas Friedenberg (IRA) (See above) Common Stock 112,500 0.47%
c/o American High Growth
725 Fifth Avenue, 24th Fl.
New York, NY 10022
Peter Sosnkowski (IRA) Investor Common Stock 310,735 1.29%
c/o American High Growth
725 Fifth Avenue, 24th Fl.
New York, NY 10022
Firebird Capital Management Investor Common Stock 25,000 0.10%
c/o American High Growth
725 Fifth Avenue, 24th Fl.
New York, NY 10022
Firebird Overseas Ltd. Investor Common Stock 1,027,537 4.27%
c/o American High Growth
725 Fifth Avenue, 24th Fl.
New York, NY 10022
Firebird Partners, Ltd. Investor Common Stock 575,988 2.39%
c/o American High Growth
725 Fifth Avenue, 24th Fl.
New York, NY 10022
Euro-Dutch Trust Ltd. Investor Common Stock 419,335 1.74%
c/o American High Growth
725 Fifth Avenue, 24th Fl.
New York, NY 10022
Daniel W. Dowe Director; President Common Stock 432,357 1.79%
16 Cherry Street
Clifton, NJ 07014
The Sherwin-Williams Company Secured Creditor Common Stock 1,000,000 4.15%
101 Prospect Avenue N.W.
Cleveland, OH 44115
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Name/Address of Position/Office Class of Amount of
Security Holder Material Relationship Security Owned Security Owned Percentage
- --------------- --------------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Little Wing L.P. Investor Common Stock 5,134,617 21.32%
c/o Quilcap Corp.
275 Park Avenue, Suite 1404
New York, NY 10152
Little Wing Too, L.P. Investor Common Stock 289,890 1.20%
c/o Quilcap Corp.
275 Park Avenue, Suite 1404
New York, NY 10152
Trade Winds Funds L.P. Investor Common Stock 2,054,439 8.53%
c/o Quilcap Corp.
275 Park Avenue, Suite 1404
New York, NY 10152
Michael Capelli Investor Common Stock 10,000 0.04%
150 East 85th Street, #5H
New York, NY 10028-2302
Edward J. Cushing Investor Common Stock 146,680 0.61%
c/o Lazard Frere & Co. LLC
30 Rockefeller Plaza
New York, NY 10020
M. C. MacDougall Employee Common Stock 5,000 0.02%
8 Kings Court Crescent
Exeter, Ontario N0M 1S1
Allan H. MacLean Employee Common Stock 20,000 0.08%
9 Wedgewood Drive
Brantford, Ontario N0R 6J2
</TABLE>
50
<PAGE>
Class B Warrants
As of the filing of this registration statement, there were 738,365 Class B
warrants outstanding. The following table sets forth:
o the names and addresses of the selling securityholders,
o their material relationship or position with Novex within the last
three (3) years,
o the number of Class B warrants owned by each selling securityholder,
and
o the percentage of Class B warrants held by each Selling Securityholder
on a fully diluted basis.
<TABLE>
<CAPTION>
Name/Address of Position/Office Class of Amount of
Security Holder Material Relationship Security Owned Security Owned Percentage
- --------------- --------------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Firebird Overseas Ltd. Investor Class B Warrants 159,000 21.53%
Firebird Partners, Ltd. Investor Class B Warrants 90,000 12.19%
Euro-Dutch Trust Ltd. Investor Class B Warrants 56,000 7.58%
Dime Commercial Corp. Secured Creditor Class B Warrants 233,365 31.61%
1180 Avenue of the Americas
Suite 510
New York, NY 10036
Ross Financial Services Creditor Class B Warrants 32,000 4.33%
230 Park Avenue
Suite 1440
New York, NY 10169
Michael Capelli Investor Class B Warrants 5,000 0.68%
Edward J. Cushing Investor Class B Warrants 50,000 6.77%
Wayne Peacock Investor Class B Warrants 50,000 6.77%
4042 Post Road
Warwick, RI 02886
</TABLE>
Common Stock Options
As of the filing of this registration statement, there were 1,373,424
common stock options outstanding. The following table sets forth:
o the names and addresses of the selling securityholders,
o their material relationship or position with Novex within the last
three (3) years,
o the number of shares of common stock options owned by each selling
securityholder, and
o the percentage of shares of common stock options held by each Selling
Securityholder on a fully diluted basis.
51
<PAGE>
<TABLE>
<CAPTION>
Name/Address of Position/Office Class of Amount of
Security Holder Material Relationship Security Owned Security Owned Percentage
- --------------- --------------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
William K. Lavin Director; Secretary Stock Options 200,000 14.56%
Edward J. Malloy Director Stock Options 200,000 14.56%
Daniel W. Dowe Director; President Stock Options 575,924 41.93%
Edward J. Cushing Investor Stock Options 50,000 3.64%
John Fenlin Investor Stock Options 50,000 3.64%
c/o Lazard Frere & Co. LLC
30 Rockefeller Plaza
New York, NY 10020
M. C. MacDougall Employee Stock Options 55,000 4.00%
Raj Bhagrath Employee Stock Options 55,000 4.00%
30 Black Locust Way
Brantford, Ontario N3R 7C7
</TABLE>
PLAN OF DISTRIBUTION
After the Effective Date of this registration statement, the securities
offered in this Prospectus will be registered under the Securities Act. Novex
will be required, from time to time, to file post-effective amendments to this
registration statement to maintain a current prospectus with respect to these
securities. Novex has undertaken to file post-effective amendments and to use
its best efforts to cause the post-effective amendments to become effective. If
for any reason a post-effective amendment to the registration statement does not
become effective or is not maintained with respect to the securities registered
pursuant to this registration statement, the respective holders of these
securities will be prevented from transferring the securities and/or exercising
the Class B warrants or common stock options.
After the Effective Date of this registration statement, the securities
offered in this registration statement may be sold from time to time directly by
the selling securityholders or through underwriters, dealers or agents. The
distribution of securities by the selling securityholders may be effected in one
or more transactions that may take place on the over-the-counter market
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of the securities as
principals. The price of the securities may be the market prices prevailing at
the time of sale, a price related to the prevailing market price or some other
negotiated price. Selling securityholders may pay customary or specifically
negotiated brokerage fees in connection with the sales of securities.
The securities offered by the selling securityholders may be sold by one or
more of the following methods, without limitation:
(a) a block trade in which a broker or dealer will attempt to sell the
securities as agent for the selling securityholder. However he or she may
purchase and resell a portion of the block for his or her own account to
facilitate the transaction;
52
<PAGE>
(b) purchases by a broker or dealer and resale by that broker or dealer for its
account pursuant to this Prospectus;
(c) ordinary broker transactions and transactions in which the broker solicits
purchasers, and
(d) in effecting sales, brokers or dealers engaged by the selling
securityholders may arrange for other brokers or dealers to participate.
The selling securityholders and intermediaries through whom their
securities are sold may be deemed "underwriters" within the meaning of the Act
with respect to the securities offered, and any profits realized or commissions
received may be deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the terms of the offering including:
o the number of shares being offered,
o the name or names of any underwriters, dealers or agents,
o the purchase price paid by any underwriter for securities purchased
from the selling securityholders and any discounts, commissions or
concessions allowed, and
o the proposed Selling price to the public.
Sales of securities by the selling securityholders or even the potential of
sales would likely have an adverse effect on the market prices of the securities
offered in this registration statement.
Novex has agreed to pay substantially all the expenses incurred by the
selling securityholders incident to the offering and sale of the securities
offered by the selling securityholders to the public, but excluding any
underwriting discounts, commissions or transfer taxes.
Novex has agreed to indemnify certain selling securityholders against
certain liabilities including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the registration statement of
which this Prospectus is made part are being passed upon for Novex by Dowe,
Capetanakis & Preite, 67 Wall Street, Suite 2001, New York, New York 10005.
EXPERTS
The financial statements included in this registration statement have been
examined and certified by Feldman Sherb Horowitz & Co., P.C., independent
certified public accountants, as set forth in their report appearing elsewhere
in this registration statement. The financial statements are included in
reliance upon this report and upon the authority of said firm as experts in
accounting and auditing. There has been no change in or disagreements with
Feldman Sherb Horowitz & Co., P.C. on accounting or financial disclosures.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
Independent Auditors' Report F-2
Consolidated Balance Sheets as of May 31, 1999 and 1998
and February 29, 2000 and February 28, 1999 (Unaudited) F-3
Consolidated Statement of Operations for the nine
months ended February 29, 2000 and February 28, 1999 (Unaudited) F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
for the years ended May 31, 1999, 1998 and 1997 and the
nine months ended February 29, 2000 (Unaudited) F-5
Consolidated Statement of Cash Flows for the
years ended May 31, 1999, 1998 and 1997 and the nine
months ended February 29, 2000 and February 28, 1999 (Unaudited) F-6
Notes to Consolidated Financial Statements F-7-25
Financial Statement Schedule - Valuation and Qualifying Acounts F-26
ARM PRO, Inc.
Independent Auditors' Report F-27
Balance Sheets as of May 31, 1998 and 1997 and
September 16, 1998 (Unaudited) F-28
Statement of Income for the years ended May 31, 1998 and 1997 and
from June 1, 1998 to September 16, 1998 (Unaudited)
and for the four months ended September 30, 1997 (Unaudited) F-29
Statement of Cash Flows for the years ended May 31, 1998 and 1997 and
for the period from June 1, 1998 to September 16, 1998 (Unaudited)
and for the four months ended September 30, 1997 (Unaudited) F-30
Notes to Financial Statements F-31-33
ALLIED/POR ROK
Independent Auditors' Report F-34
Statement of Assets Acquired as of August 13, 1999 F-35
Statements of Revenues and Cost of Goods Sold
for the years ended December 31, 1998 and 1997 and from January 1,
1999 to August 13, 1999 (Unaudited)
for the nine months ended September 30, 1998 (Unaudited) F-36
Notes to Statement of Assets and Statement of Revenues
and Cost of Goods Sold F-37-39
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Description of Unaudited Pro Forma Consolidated Financial Statements F-40
Unaudited Pro Forma Consolidated Statement of Operations
For the nine months ended February 29, 2000 F-41
Unaudited Pro Forma Consolidated Statement of Operations
For the year ended May 31, 1999 F-42
Notes to Unaudited Pro Forma Consolidated Financial Statements F-42
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Novex Systems International, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Novex Systems
International, Inc. and Subsidiary (formerly Stratford Acquisition corp. and
subsidiary) as of May 31, 1999 and 1998 and the related consolidated statements
of operations, changes in shareholders' equity (deficiency) and cash flows for
the years ended May 31, 1999, 1998 and 1997. We have also audited the financial
statement schedule on page F-26. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amount and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Novex
Systems International, Inc. and Subsidiary (formerly Stratford Acquisition Corp.
and Subsidiary) as of May 31, 1999 and 1998 and the consolidated results of its
operations, changes in shareholders' equity (deficiency) and cash flows for the
years ended May 31, 1999, 1998 and 1997 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
/s/ Feldman Sherb Horowitz & Co., P.C.
--------------------------------------
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
September 8, 1999
F-2
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31,
February 29, --------------------------
2000 1999 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,020 $ 1,788 49,108
Accounts receivable, net 585,929 20,690 9,250
Inventories 450,751 221,707 122,134
Other receivables -- -- 17,367
Prepaid expenses and other current assets 59,536 8,600 2,801
----------- ----------- -----------
Total Current Assets 1,098,236 252,785 200,660
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 1,461,126 80,914 106,598
GOODWILL, net of accumulated amortization 842,758 316,300 --
OTHER ASSETS -- 6,059 11,282
----------- ----------- -----------
$ 3,402,120 $ 656,058 318,540
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 217,670 $ 393,548 520,470
Due to factor 78,118 56,700 --
Note payable 1,281,351 -- --
Bank line of credit 601,172 -- --
Accounts payable 605,957 241,424 162,115
Loans payable - shareholder 31,925 -- 37,000
Accrued expenses and other current liabilities 244,442 115,190 --
----------- ----------- -----------
Total Current Liabilities 3,060,635 806,862 719,585
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
LONG TERM DEBT, net of current portion 799,613 772,582 --
SHAREHOLDERS' DEFICIENCY:
Common stock - $0.001 par value,
50,000,000 shares authorized,
21,987,738, 15,250,771 and 11,965,646 shares
issued and outstanding, respectively 21,987 15,251 11,966
Additional paid-in capital 5,730,916 4,408,753 3,542,039
Accumulated deficit (6,211,031) (5,347,390) (3,955,050)
----------- ----------- -----------
Total shareholders' deficiency (458,128) (923,386) (401,045)
----------- ----------- -----------
$ 3,402,120 $ 656,058 $ 318,540
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended
---------------------------- Year ended May 31,
February 29, February 28, -------------------------------------------
2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES $ 1,390,412 $ 220,842 $ 321,311 $ 9,073 --
COST OF GOOD SOLD 959,358 80,929 113,305 5,444 --
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 431,059 139,913 208,006 3,629 --
SELLING, GENERAL AND ADMINISTRATIVE 1,027,423 1,009,963 1,389,259 999,282 2,310,397
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (596,364) (870,050) (1,181,253) (995,653) (2,310,397)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income -- 333 335 409 314
Interest expense (192,803) (75,374) (97,905) (17,548) (12,917)
Amortization of debt discount (32,553) (69,529) (146,674) (84,535) --
Foreign currency gain (loss) (41,921) 16,151 33,157 (15,267) (3,144)
------------ ------------ ------------ ------------ ------------
OTHER EXPENSES, net (267,277) (128,419) (211,087) (116,941) (15,747)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (863,641) $ (998,469) $ (1,392,340) $ (1,112,594) (2,326,144)
============ ============ ============ ============ ============
NET LOSS PER COMMON SHARE, basic and diluted $ (0.04) $ (0.08) $ (0.10) $ (0.10) (0.24)
============ ============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, basic and diluted 20,818,206 13,194,542 13,720,171 11,472,508 9,590,212
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Total
Common Stock Additional Shareholders'
------------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficiency)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, June 1, 1996 7,801,950 $ 7,802 $ 975,494 $ (516,312) $ 466,984
Sale of common stock 1,513,500 1,514 266,015 -- 267,529
Issuance of common stock
for services 626,531 627 1,171,287 -- 1,171,914
Issuance of options
for services -- -- 151,032 -- 151,032
Issuance of common stock
for compensation 171,400 171 59,829 -- 60,000
Net loss -- -- -- (2,326,144) (2,326,144)
----------- ----------- ----------- ----------- -----------
BALANCE, May 31, 1997 10,113,381 10,114 2,623,657 (2,842,456) (208,685)
Sale of common stock 720,750 721 258,521 -- 259,242
Issuance of common stock
for services 295,000 295 47,505 -- 47,800
Issuance of common stock
for debt 988,824 989 325,533 -- 326,522
Issuance of common stock
for compensation 331,441 331 98,119 -- 98,450
Redemption of common stock (483,750) (484) 484 -- --
Value of warrants issued with debt -- -- 154,065 -- 154,065
Value of warrants and options issued
for services -- -- 34,155 -- 34,155
Net loss -- -- -- (1,112,594) (1,112,594)
----------- ----------- ----------- ----------- -----------
BALANCE, May 31, 1998 11,965,646 11,966 3,542,039 (3,955,050) (401,045)
Sale of common stock 300,000 300 97,700 -- 98,000
Issuance of common stock
for services 179,164 179 48,437 -- 48,616
Issuance of common stock
for debt 2,730,737 2,731 562,444 -- 565,175
Issuance of common stock
for compensation 195,224 195 66,555 -- 66,750
Redemption of common stock (120,000) (120) 120 -- --
Value of options issued for services -- -- 6,949 -- 6,949
Value of warrants issued with debt -- -- 106,014 -- 106,014
Cancellation of options issued for services -- -- (21,505) -- (21,505)
Net loss -- -- -- (1,392,340) (1,392,340)
----------- ----------- ----------- ----------- -----------
BALANCE, May 31, 1999 15,250,771 15,251 4,408,753 (5,347,390) (923,386)
Issuance of common stock
in connection with acquisition
of Allied/Por Rok Division (Unaudited) 1,000,000 1,000 259,000 -- 260,000
Issuance of common stock
for compensation (Unaudited) 69,474 69 14,931 -- 15,000
Conversion of debt to equity (Unaudited) 5,667,493 5,667 1,027,832 -- 1,033,499
Value of warrants issued with debt -- -- 20,400 -- 20,400
Net loss (Unaudited) -- -- -- (863,641) (863,641)
----------- ----------- ----------- ----------- -----------
BALANCE, February 29, 2000 (Unaudited) 21,987,738 $ 21,987 $ 5,730,916 $(6,211,031) $ (458,128)
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
-------------------------- Year ended May 31,
February 29, February 28, ---------------------------------------
2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (863,641) $ (998,469) $(1,392,340 $(1,112,594) $(2,326,144)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 84,262 26,989 55,184 13,805 345
Common stock and options issued for payment
of services and compensation 15,000 72,450 122,315 146,250 1,254,280
Common stock issued for payment of interest expense -- 15,175 15,175 11,522 --
Options issued as payment for services -- -- -- 34,155 --
Cancellation of options for services -- -- (21,505 -- --
Amortization of debt discount 32,553 69,529 146,674 84,535 128,666
Changes in assets and liabilities, net of the
effect from acquisitions:
Accounts receivables (253,256) (12,632) (11,440 (9,250) --
Inventories (229,044) (141,313) (99,573 21,179 143,313
Other receivables -- 3,868 17,367 23,212 (28,711)
Prepaid expenses and other current assets (50,936) (11,908) (5,799 (2,801) --
Refundable deposits -- -- -- -- 178,148
Other assets 6,059 3,300 5,223 (1,147) 10,135
Accounts payable and accrued expenses 497,676 75,082 194,499 48,897 100,587
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (761,327) (897,929) (974,220 (742,237) 846,277
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- 5,678 (15,564) (118,246) (2,503)
Proceeds from the sale (purchase) of
marketable securities -- -- -- 13,250 (13,250)
Acquisition of business, net of cash acquired (800,000) (296,318) (330,236) -- --
----------- ----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (800,000) (290,640) (345,800) (104,996) (15,753)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor 21,418 -- 56,700 -- --
Proceeds from (repayment of)
loans payable - shareholder 31,925 (32,000) (37,000) 37,000 134,405
Proceeds from issuance of notes payable -- 85,000 -- -- --
Proceeds from bridge financing -- 1,050,000 -- -- 265,230
Proceeds from bank line of credit 601,172 -- -- -- --
Proceeds from debt financing 907,044 65,866 1,155,000 480,470 --
Proceeds from issuance of debt with warrants -- -- -- 69,530 --
Proceeds from issuance of debt without warrants -- -- -- 40,000 49,770
Proceeds from the sale of common stock
and exercise of options -- 98,000 98,000 259,243 267,529
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,561,559 1,266,866 1,272,700 886,243 716,934
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 232 78,297 (47,320) 39,010 (145,096)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,788 49,108 49,108 10,098 155,194
----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,020 $ 127,405 $ 1,788 $ 49,108 $ 10,098
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 146,447 $ -- $ 36,513 $ 691 $ 1,269
=========== =========== =========== =========== ===========
Income taxes $ -- $ -- $ 689 $ 689 $ --
=========== =========== =========== =========== ===========
Non-cash financing and investing activities:
Conversion of debt to equity $ 1,033,499 $ -- $ 550,000 $ 315,000 $ --
=========== =========== =========== =========== ===========
Common stock issued for assets acquired $ 260,000 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Note payable issued for assets acquired $ 1,294,973 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Novex Systems International , Inc. ("Novex") (formerly known as "Stratford
Acquisition Corp.") and, through its wholly-owned Subsidiary, Novex Systems
International, Ltd. ("Novex Canada")(collectively the "Company"), is
engaged in the business of manufacturing and marketing a diversified line
of construction products including a proprietary admixture for enhancing
cement based products ("Novacrete products"), polypropylene fibers used in
concrete products, and pre-packaged concrete repair, grouting and patching
products ("Por-Rok products").
In fiscal 1999, Novacrete Technology (Canada) Inc. was renamed Novex
Systems International, Ltd. Effective May 11, 1999, Stratford Acquisition
Corp. merged into its newly-formed wholly-owned subsidiary, Novex Systems
International, Inc., for the purpose of re-domesticating the Company from
the State of Minnesota to the State of New York. Accordingly, all
historical financial information presented is that of Stratford Acquisition
Corporation. On May 11, 1999, Novex Systems International, Inc. had no
assets or operations.
In January, 1997, Novex, which was then operating as Stratford Acquisition
Company, acquired 100% of the outstanding stock of Novex Canada, a
newly-created company established to manufacture and distribute the
Company's Novacrete product line. The acquisition was accounted for as a
purchase whereby the Company, in exchange for having incorporated Novex
Canada, received 100% of its common stock. The cost of incorporation of
$636 represents the Company's investment in Novex Canada, and accordingly
has been eliminated in consolidation. No goodwill arose from this
acquisition because the cost of the purchase was equal to the net asset
acquired.
In September 1998, Novex Canada acquired all the issued and outstanding
common stock of Arm Pro Inc., located in Teeswater, Ontario. Arm Pro
manufactured and marketed polypropylene fibers which are blended into
cementitious products to provide secondary reinforcement and to reduce
cracking.
In December 1998, Arm Pro was merged into Novex Canada, the surviving
corporation.
F-7
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
During fiscal 1998, the Company was a development stage enterprise, in
fiscal 1999 Novex and Novex Canada emerged from the development stage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation - The consolidated financial statements
include the accounts of the Novex and its Subsidiary, Novex Canada.
All material intercompany transactions and balances have been
eliminated.
(b) Cash and Cash Equivalents - Novex maintains funds in both US and
Canadian financial institutions. It considers highly-liquid
investments with maturities of three months or less to be cash and
cash equivalents.
(c) Income Taxes - Novex utilizes the asset and liability method of
accounting for income taxes as set forth in SFAS No.109, Accounting
for Income Taxes. Under the asset and liability method, deferred taxes
are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
(d) Property and Equipment - Property and equipment are recorded at cost.
Depreciation is provided on the straight-line method based upon the
estimated useful lives of the respective assets. Property and
equipment are being depreciated over a period of five years.
Maintenance, repairs and minor renewals are charged to operations as
incurred, whereas the cost of significant betterments is capitalized.
Upon the sale or retirement of property and equipment, the related
costs and accumulated depreciation are eliminated from the accounts
and gains or losses are reflected in operations.
(e) Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
(f) Fair Value of Financial Instruments - The carrying value of cash and
cash equivalents, accounts receivable, other receivables, due to
factor, accounts payable and accrued expenses approximate their fair
values based on the short-term maturity of these instruments. The
carrying amounts of long-term debt was also estimated to approximate
fair value.
F-8
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
(g) Loss Per Share - Basic net loss per common share is computed by
dividing net loss by the weighted average number of shares of common
stock outstanding. For the years ended May 31, 1999, 1998, and 1997
diluted loss per share is the same as basic loss per share since the
inclusion of stock options and warrants would be antidilutive.
(h) Foreign Currency Translation - Novex Canada's functional currency is
the US dollar and therefore translates the nonmonetary assets and
liabilities at the historical exchange rates, while monetary assets
and liabilities are translated at the current exchange rates in effect
at the balance sheet date. Sales and expenses are translated at the
weighted average exchange for the year. Accordingly, all gains and
losses arising from foreign currency translation have been recorded in
the accompanying consolidated statements of operations.
(i) Stock Options -The Company accounts for all transactions under which
employees, officers and directors receive shares of stock in the
Company in accordance with the provisions of Accounting Principles
Board Opinion No. 25. "Accounting for Stock Issued to Employees." In
accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," the Company
adopted the pro forma disclosure requirements of SFAS 123.
Accordingly, no compensation has been recognized in the results of
operations for the employees, officers and directors stock option plan
other than for options issued to non-employees for consulting
services.
(j) Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(k) Reclassification - Certain reclassifications have been made to the
1998 consolidated financial statements in order to conform with the
1999 presentation.
(l) Impairment of Long-Lived Assets - Novex periodically reviews for
impairment all long-lived assets including goodwill whenever certain
events indicate that the carrying amount of an asset may not be
recoverable. If the sum of expected future cash flow is less than the
carrying amount of the asset, the Company will recognize an impairment
loss. Measurement of the impairment is based on the fair value of the
asset.
F-9
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
(m) Revenue Recognition - Revenue is recognized when the product is
shipped to the customer. Allowances for estimated bad debts, sales
returns and allowances are provided when sales are recorded.
(n) Advertising Costs - All advertising costs, excluding cooperative
advertising programs, are expensed as incurred or the first time the
advertisement takes place. Novex establishes an allowance for
cooperative advertising costs at the time the related sale is
recognized. Advertising expense charge to operations for the nine
months ended February 29, 2000 and for the years ended May 31, 1999,
1998 and 1997 amounted to approximately $5,600, $12,700, $1,100 and
$0, respectively.
(o) Unaudited Interim Financial Statements - The consolidated balance
sheet at ended February 29, 2000, the consolidated statements of
operations and cash flows for the nine months ended February 29, 2000
and February 28, 1999 and the consolidated statement of changes in
shareholders' deficiency at February 29, 2000, are unaudited but
include all adjustments which in the opinion of management, are
necessary to the fair presentation of the financial position and
results of operations for the periods then ended. All such adjustments
are of a normal recurring nature. The results of the operations for
any interim periods are not necessarily indicative of results for a
full fiscal year.
3. CONCENTRATION OF CREDIT RISK
(a) Cash and Cash Equivalents - Novex maintains cash balances at several
commercial banks. Accounts at these financial institution are insured
by the Federal Deposit Insurance Corporation up to $100,000.
(b) Accounts Receivable - The concentration of credit risk in the Novex's
accounts receivable is mitigated by its credit evaluation process,
credit limits, monitoring procedures and reasonably short collection
terms. Credit losses have been within management's expectations and
Novex does not require collateral to support accounts receivable.
F-10
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
4. INVENTORIES
Inventories consist of the following:
May 31,
February 29, ----------------------
2000 1999 1998
-------- -------- --------
(Unaudited)
Raw Material $261,134 $113,288 $ 76,276
Work in Progress -- 3,217 440
Finished Goods 189,617 105,202 45,418
-------- -------- --------
$450,751 $221,707 $122,134
======== ======== ========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
May 31,
February 29, --------------------------
2000 1999 1998
----------- ----------- -----------
(Unaudited)
Land $ 400,000 $ -- $ --
Building 448,889 -- --
Property and equipment 815,821 231,095 103,247
Leasehold Improvements 17,330 17,330 17,330
----------- ----------- -----------
1,682,040 248,425 120,577
Less: Accumulated
depreciation and
amortization (220,914) (167,511) (13,979)
----------- ----------- -----------
$ 1,461,126 $ 80,914 $ 106,598
=========== =========== ===========
6. GOODWILL
Goodwill arose in connection with the acquisition of Arm Pro by the Company
in September, 1998, and is being amortized on the straight-line method over
10 years. As of May 31, 1999, goodwill, net of accumulated amortization of
$30,795, is $316,300 (see Note 16). Amortization expense charged to
operations for February 29, 2000 and fiscal years 1999 and 1998 was
approximately $58,400, $31,000 and $0, respectively.
F-11
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
7. DUE TO FACTOR
During February 1999, Novex Canada entered into a commercial factoring
arrangement, with a Canadian financial institution, where they sold certain
accounts receivable to the commercial factor, with recourse as to
nonpayment of customer's receivable at maturity. In addition, this
arrangement provides for advances based on working capital requirements.
Advances bear interest at the commercial factor's prime rate plus one
thousand four hundred and twenty five basis points (20.50% at May 31,
1999).
At May 31,1999, receivables assigned to the factor were offset against
factor advances of approximately $70,000.
Advance availability was limited to the lesser of 75% of eligible
inventory, not to exceed $25,000 (Canadian dollars), or 25% of the lower of
cost or market value of the eligible inventory, not to exceed $25,000
(Canadian dollar), plus 25% of the appraised value of the Novex Canada's
equipment.
The arrangement was collateralized by substantially all assets of Novex
Canada and was guaranteed by Novex. The arrangement also required that the
benefits of Novex Canada's business insurance be assigned to the commercial
factor.
Effective December 31, 1999, the company terminated its agreement with
Montcap and no longer factors its receivables.
8. LOANS PAYABLE - SHAREHOLDERS
During fiscal 1998, the Company was advanced $37,000 from existing
shareholders to provide working capital for operations. In fiscal 1999, the
Company issued 100,000 shares of its common stock as payment for the funds
advanced in 1998.
At February 29, 2000 the loans payable to shareholders for $31,925 is
uncollateralized, non-interest bearing and has no specific due date for
repayment.
9. INCOME TAXES
At May 31, 1999, the Company had federal, state and city net operating loss
carryforwards of approximately $3,175,000 that may be applied against
future taxable income and expire at various times through May 31, 2014. The
Company has established a valuation allowance for the full amount of such
net deferred tax assets at May 31, 1999 and 1998, as management of the
Company has not been able to determine that it is more likely than not that
the deferred tax assets will be realized.
F-12
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
Novex Canada has not had to pay Canadian income taxes as they have
generated operating losses since its inception.
1999 1998 1997
----------- ----------- -----------
Deferred tax asset:
Net operating loss
carryforward $ 1,260,000 $ 848,000 $ 402,000
Valuation Allowance (1,260,000) (848,000) (402,000)
----------- ----------- -----------
Net deferred tax asset $ -0- $ -0- $ -0-
=========== =========== ===========
10. NOTES PAYABLE (UNAUDITED)
Notes payable at February 29, 2000 include $1,281,351 owing to The Sherwin
Williams Company in connection with the acquisition of the Allied/Por-Rok
division by Novex Systems International, Inc. (See Note 18). The terms of
the note call for no principle payments and for interest to accrue at the
rate of 10% per annum. Payment of interest is at the rate of 5% per year
with the balance payable when the note matures on August 12, 2000. Under
the present terms the Company will be obligated for $1,334,513 on August
12, 2000 inclusive of accrued interest of $53,162. The Sherwin Williams
Company has a security interest in substantially all of the assets of the
company which is subordinate to the security interest of Dime Commercial
Corp.
In connection with the acquisition of the Allied/Por-Rok division of The
Sherwin Williams Company, Novex Systems International, Inc. obtained a
$750,000 line of credit from Dime Commercial Corp. The line provides
working capital and is secured by accounts receivable and inventory.
Advances under the line are based on 80% of eligible accounts receivables
and 50% of eligible inventory. As of February 29, 2000, the Bank Line of
Credit was $601,172 inclusive of accrued interest of $13,000. Interest is
computed on the average monthly balance under the line based on 2% over the
prime rate (currently 10.5%).
F-13
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
11. LONG TERM DEBT
Long-term debt consists of the following:
May 31,
February 29, --------------------------
2000 1999 1998
------------ ---------- ----------
(Unaudited)
Debentures payable (a) $ -- $ -- $ 550,000
Notes payable (b) -- 40,000 40,000
Debentures payable (c) -- 800,000 --
Debenture payable (d) 125,000 250,000 --
Notes payable (e) -- 105,000 --
Dime Note (f) 890,000 -- --
Other 19,000 --
---------- ---------- ----------
1,034,000 1,950,000 590,000
Less: unamortized discount
on debt 16,717 28,870 69,530
---------- ---------- ----------
1,017,283 1,166,130 520,470
Less: Current Portion 217,670 393,548 520,470
---------- ---------- ----------
$ 799,613 $ 772,582 $ --
========== ========== ==========
(a) At May 31, 1998, the Company was obligated to debenture holders for
$550,000 with 1,100,000 detachable stock warrants exercisable at
$0.30. A total of $104,296 was allocated to the warrant portion of the
debt, with an un-amortized discount of $69,530 at year end resulting
in a net note payable of $480,470. The debentures bore interest at 10%
per annum and were converted with accrued interest of $15,175 into
2,730,737 shares of common stock in October, 1998, (see Note 12(d)).
(b) In May 1998, the Company issued notes payable for a total of $40,000,
to unrelated parties that bear interest at 10% per annum. The
principal of the notes and all outstanding interest are due 90 days
from the date of issuance. Interest on the notes, are payable with the
Company's common stock at the rate of $0.40 per share. Furthermore, if
the notes are not fully satisfied at the maturity date, the Company is
obligated to grant half of a warrant to purchase one share of its
common stock for each dollar of the outstanding principal. As of May
31, 1999, these notes have not been satisfied (see Notes 12(e) and
18).
F-14
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
(c) Included in long-term debt are debentures owing to a stockholder of
the Company, Quilcap Corp., in the amount of $800,000. These
debentures from September 4, 1998, bear interest at 9% per annum and
mature on September 4, 2000. There are 1,500,000 stock warrants
attached, exercisable at $0.45, with an expiration date of two years
from the date of the notes' issuance. A total of $ 104,241 was
allocated to the warrant portion of the debt, with an un-amortized
discount of $27,417 as of May 31, 1999 (see Notes 12(e), 16 and 18).
(d) Included in long-term debt are debentures owing to a stockholder of
the company, Quilcap, Corp., in the amount of $250,000. This debenture
from February 25, 1999, bears interest at 15% per annum and matures on
May 31, 1999. There are 150,000 stock warrants attached, exercisable
at $0.45, with an expiration date of two years from the date of the
notes' issuance. A total of $1,773 was allocated to the warrant
portion of the debt, with an unamortized discount of $1,453 as of May
31, 1999 (see Notes 12(e) and 18).
(e) At various dates during fiscal 1999, the Company issued promissory
notes payable for a total of $105,000, to unrelated parties that bear
interest at 10% per annum. The principal of the notes and all
outstanding interest are due 90 days from the date of issuance.
Interest on the notes, are payable with the Company's common stock at
the rate of $.40 per share. Furthermore, if the notes are not fully
satisfied at the maturity date, the Company is obligated to grant half
of a warrant to purchase one share of its common stock for each dollar
of the outstanding principal. As of May 31, 1999, these notes have not
been satisfied (see Notes 12(e) and 18).
(f) Novex is obligated to Dime Commercial Corp. for $890,000 under a term
loan. The loan provides for monthly interest payments based on prime
plus two hundred basis points (currently 10.5%). Installments due
under the loan begin on March 13, 2000 in the amount of $7,500 per
month. The loan matures on August 13, 2002 with a balloon payment of
$655,000. There was a warrant granted with the term loan, exercisable
at $.25 and having an expiration date of September 1, 2002. A total of
$20,400 was allocated to the warrant portion of the debt, with an
unamortized discount of $16,717 as of February 29, 2000. The note is
collateralized by all of Novex's plant and equipment at the Clifton
facility. (See Note 18).
F-15
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
12. SHAREHOLDERS' DEFICIT
(a) During fiscal 1996, former management of the Company issued 1,800,000
shares for an amount that present management is unable to determine.
The Company has been contacting the registered shareholders to
determine if appropriate consideration was received for these shares.
The shares have been recorded as outstanding with no consideration
received for their issuance. During the years ended May 31, 1999 and
1998, a total of 120,000 and 483,750 shares of common stock,
respectively, were returned by the registered shareholders and have
been canceled by the Company. The Company intends to continue to
pursue litigation against the remaining shareholders who it alleges
have received securities without paying fair consideration to the
Company.
(b) During fiscal 1997, the Company issued 500,000 shares of common stock
for the purchase of the Novacrete Admixture formulation.
During fiscal 1997, the Company's president, at the time, accepted
171,400 shares of the Company's common stock as partial payment for
his annual salary. The shares issued were based on $60,000 of
compensation and the remaining unpaid compensation of $31,250 was
included in accrued expenses and other current liabilities at May 31,
1997. During fiscal 1998, the Company issued 97,665 shares of common
stock as payment for the $31,250 in compensation owed to him.
During fiscal 1997, the Company issued 126,531 shares as consideration
for various services.
(c) During fiscal 1998, the Company issued 295,000 shares of its common
stock as payment for services provided by the current president prior
to assuming his role as a Company officer, and to a financial
consultant. These shares were valued at prices ranging from $0.14 to
$0.40 per share.
In fiscal 1998, the Company issued 331,441 of its common stock to its
former and current president as compensation. These shares were valued
at a price range of $ .20 to $ .35 per share.
The Company issued 988,824 shares of its common stock as full payment
for the notes payable of $315,000 plus accrued interest of $11,522
during fiscal 1998.
F-16
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
During fiscal 1998, the Company sold 720,750 shares of its common
stock to various shareholders, at market prices ranging from $ .24 to
$ .40 per share to raise working capital.
(d) During fiscal 1999, the Company issued 96,474 shares of its common
stock as compensation to three board members for their services. These
shares were valued at prices ranging between $ .25 to $ .40 per share.
The Company issued 98,750 shares of its common stock to various
employees as a work incentives during fiscal 1999. These shares were
valued at prices ranging from $ .30 to $ .44 per share.
The Company issued 179,164 shares of its common stock for consulting
services during fiscal 1999. These shares were valued at prices
ranging from $.25 to $.33 per share.
During fiscal 1999, the Company issued 2,730,737 shares of its common
stock as full payment for debentures payable of $550,000 plus accrued
interest of $15,175 (see note 11(a)).
During fiscal 1999, the Company sold 300,000 shares of its common
stock to various shareholders, at market prices ranging from $ .29 to
$ .37 per share to raise working capital.
(e) During the nine months ended, February 29, 2000, Novex issued
1,000,000 shares of its common stock in connection with the
acquisition of the Allied/Por-Rok business. These shares were valued
at market prices of approximately $.26 per share.
During the nine months ended, February 29, 2000, Novex issued 69,474
shares of stock as compensation for services rendered. These shares
were valued at an average market price of $.22 per share.
During the nine months ended February 29, 2000, Novex converted
approximately $1,016,532 of various note and debenture debt including
accrued interest into 5,667,493 shares of its common stock. These
shares were valued at market prices ranging from $.22 to $.27 per
share.
F-17
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
13. STOCK OPTIONS AND WARRANTS
The following table summarizes the activity with regard to options and
warrants for the years ended May 31, 1999, 1998 and 1997 (See page F-19 for
chart references).
<TABLE>
<CAPTION>
Stock Options Warrants
---------------------------------------------- --------------------------------------------
Shares Exercise Exercisable Shares Exercise Exercisable
Price Price
--------- -------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
May 31, 1996 -- -- -- -- -- --
Granted -- $ -- --(3) 768,000 $0.50 768,000
Exercised -- -- -- (768,000) -- (768,000)
Granted -- -- --(3) 91,504 0.50 91,504
Outstanding at
May 31, 1997 -- -- -- 91,504 0.50 91,504
(1) Granted 1,727,772 0.50 1,727,772(2) 308,000 0.35 308,000
(3) Granted 40,000 0.25 40,000(3) 60,000 0.50 60,000
(1) Granted 300,000 0.40 300,000(2) 1,100,000 0.30 308,000
(1) Granted 25,000 0.30 25,000 -- -- --
(3) Granted 20,000 0.25 20,000 -- -- --
(1) Granted 65,000 0.35 65,000 -- -- --
(3) Granted 25,000 0.31 25,000 -- -- --
--------- ---------- --------- ---------- --------- ---------
Outstanding at
May 31, 1998 2,202,772 $0.25-0.50 2,202,772 1,559,504 0.30-0.50 1,559,504
(1) Granted 195,000 0.40 195,000(2) 1,650,000 0.45 1,650,000
(1) Granted 100,000 0.45 100,000(2) 5,000 0.20 5,000
(1) Granted 12,500 0.30 12,500 -- -- --
(1) Granted 27,500 0.50 27,500 -- -- --
(3) Canceled (60,000) (0.25) (60,000) -- -- --
(3) Canceled (25,000) (0.31) (25,000) -- -- --
--------- ---------- --------- ---------- --------- ---------
Outstanding at
May 31, 1999 2,452,772 $0.25-0.50 2,452,772 3,214,504 $0.20-0.50 3,214,504
========= ========== ========= ========== ========== =========
</TABLE>
F-18
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
(1) issued for employee services, including directors fees
(2) issued with debt
(3) issued for consulting services
During fiscal 1997, stock options were granted and exercised by certain
individuals and organizations. These options were granted at an exercise
price of $.50 and expire five years from the date of grant. Novex has
recorded $22,366 in consulting expenses in the accompanying consolidated
statement of operations. According to current management, the individuals
and organizations who received the grants have not earned them. Therefore,
Novex is currently seeking to have all shares issued to these parties
returned and canceled.
On April 1, 1998, Novex's board of directors approved a resolution to adopt
a Non-Qualified Stock Option Plan which shall be subject to shareholder
approval to become effective. During fiscal 1999, Novex's board of
directors and management decided not to establish a Non-Qualified Stock
Option Plan and therefore no formal shareholder approval will be required.
The Novex granted 135,000 options and warrants to various consultants for
services rendered during the year ended May 31, 1998. The options and
warrants expire five years from the date of grant and have an exercise
price ranging from $ .25 to $ .50 per share. Novex has recorded $34,155 in
consulting expenses in the accompanying consolidated statement of
operations.
During fiscal 1999, Novex granted 100,000 options for services. Novex has
recorded $6,949 in consulting expenses in the accompanying consolidated
statement of operations.
14. STOCK-BASED COMPENSATION
Novex accounts for its stock option plans under APB No. 25, Accounting for
Stock Issued to Employees, under which no compensation cost is recognized.
In fiscal 1997, Novex adopted SFAS no. 123 Accounting for Stock-Based
Compensation for disclosure purposes; accordingly, no compensation has been
recognized in the results of operations for its stock option plan as
required by APB 25, other than for options and warrants issued for services
or with debt. The valuation for options and warrants issued for services
during the years ended May 31, 1999, 1998 and 1997 was $6,949, $34,155 and
$151,032, respectively. The valuation for options and warrants issued with
debt during the years ended May 31, 1999, 1998 and 1997 was $106,014,
$154,065 and $0 respectively. The valuation of the warrant issued with debt
was $20,400 for the nine months ended February 29, 2000. (See Notes 11(f)
and 18).
F-19
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
For disclosure purposes, the fair value of options is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for stock options granted during fiscal
year ended May 31, 1999, 1998 and 1997 respectively: annual dividends of
$0; expected volatility of 50%; risk free interest rate of 6%; and expected
lives ranging from 2.5 to 5. The weighted average fair values of stock
options granted during the years ended May 31, 1999, 1998 and 1997, was
$0.17, $.20 and $.08, respectively.
<TABLE>
<CAPTION>
Nine Months
Ended Year ended May 31
February 29, --------------------------------------------------------
2000 1999 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Loss to shareholders:
As reported $ (863,641) $ (1,392,340) $ (1,112,954) $ (2,326,144)
Pro forma $ (869,476) $ (1,432,076) $ (1,562,387) $ (2,320,553)
Net Loss per share:
As reported $ (.04) $ (0.10) $ (0.10) $ (0.24)
Pro forma $ (.04) $ (0.10) $ (0.14) $ (0.24)
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. The Companies employee stock options have
characteristics significantly different from those of traded options, and
since changes in subjective input assumptions can materially affect the
fair value estimate, in managements' opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options and warrants.
15. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") as of June 1, 1997. SFAS 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS 131
also establishes standards for related disclosures about products and
services, and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operation decision
maker or decision making group, in making decisions how to allocate
resources and assess performance. To date, the Company has viewed its
operations as principally two segments, the fiber business and the
Allied/Por-Rok business. Key financial information by operating segment and
country are as follows:
F-20
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
<TABLE>
<CAPTION>
United States Canada
--------------------- ---------------------
Allied Allied
Por-Rok Fiber Por-Rok Fiber Adjustments(1) Consolidated
---------- -------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended February 29,
2000 (Unaudited)
Sales to unaffiliated customers $1,038,024 $ -- $ -- $ 352,388 $ -- $1,390,412
Interest Income -- -- -- -- -- --
Interest Expense 157,454 -- -- 35,349 -- 192,803
Depreciation and Amortization 40,671 -- -- 43,591 -- 84,262
Segment Loss 592,366 -- -- 271,486 -- 863,852
Segment Assets 2,819,401 -- -- 582,719 -- 3,402,120
Long Lived Asset Expenditures 1,433,615 -- -- -- 1,433,615
Year Ended May 31, 1999
Sales to unaffiliated customers $ -- $ 128,909 $ -- $ 192,402 $ -- $ 321,311
Interest Income -- -- -- -- 335 335
Interest Expense -- -- -- 66,640 31,265 97,905
Depreciation and Amortization -- -- -- 50,182 5,002 55,184
Segment Loss -- -- -- 1,017,944 374,396 1,392,340
Segment Assets -- -- -- 604,961 51,097 656,058
Long Lived Asset Expenditures -- -- -- 345,800 -- 345,800
Year Ended May 31, 1998
Sales to unaffiliated customers $ -- $ -- $ -- $ 9,703 $ -- $ 9,703
Interest Income -- -- -- -- 409 409
Interest Expense -- -- -- 15,666 1,882 17,548
Depreciation and Amortization -- -- -- 13,805 -- 13,805
Segment Loss -- -- -- 368,637 743,957 1,112,594
Segment Assets -- -- -- 311,777 6,763 318,540
Long Lived Asset Expenditures -- -- -- 118,246 -- 118,246
Year Ended May 31, 1997
Sales to unaffiliated customers $ -- $ -- $ -- $ -- $ -- $ --
Interest Income -- -- -- -- 314 314
Interest Expense -- -- -- 2,111 10,806 12,917
Depreciation and Amortization -- -- -- -- 345 345
Segment Loss -- -- -- 10,266 2,315,878 2,326,144
Segment Assets -- -- -- 205,839 13,694 219,533
Long Lived Asset Expenditures -- -- -- -- 2,503 2,503
</TABLE>
(1) This column represents the amount of non-segment information necessary to
reconcile reportable segment information with consolidated totals.
F-21
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
16. ACQUISITION
On September 16, 1998 Novex Canada purchased all the issued and outstanding
common stock of Arm Pro. The purchase price was $592,000 ($891,000 Canadian
dollars) and the funds used to purchase Arm Pro were raised from the sale
of debentures for $800,000 (see Note 11(c)). The acquisition is accounted
for as a purchase business combination. The following table summarizes the
acquisition:
Purchase price
$ 592,400
Acquisition costs
10,638
---------
603,038
---------
Assets acquired 403,313
Liabilities assumed (147,370)
---------
255,943
---------
Goodwill $ 347,095
=========
The following schedule combines the unaudited pro-forma results of
operations of the Company and Arm Pro, as if the acquisition occurred on
June 1, 1996 and includes such adjustments which are directly attributable
to the acquisition, including the amortization of goodwill. It should not
be considered indicative of the results that would have been achieved had
the acquisition not occurred or the results that would have been obtained
had the acquisition actually occurred on June 1, 1996.
Year ended May 31,
------------------------------
1999 1998
------------ ------------
Net Sales $ 421,305 $ 327,554
Cost of Sales 212,059 133,988
------------ ------------
Gross profit 209,246 193,566
Operating expenses 1,406,026 1,189,113
------------ ------------
Loss from operations (1,196,780) (995,547)
Net other expenses 180,254 138,269
------------ ------------
Net loss $ (1,377,034) $ (1,133,816)
============ ============
Net loss per share $ (0.10) $ (0.10)
============ ============
Shares used in calculation 13,720,171 11,472,508
============ ============
F-22
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
17. COMMITMENTS AND CONTINGENCIES
(a) Novex has a verbal month to month sublease arrangement for its
headquarters in New York City as of fiscal 1999. Novex Canada has a
lease arrangement for office and production facilities commencing May
1, 1997 and expiring on April 30, 2002. This lease requires monthly
rental payments of approximately $3,400 in the first two years of the
lease and $3,600 in the last three years of the lease.
The Company leases telecommunication, reproduction and computer
equipment and office furnishings under long-term operating lease
agreements. These lease agreements require cumulative monthly payments
of approximately $1,656 per month for the terms of the respective
leases expiring between October 1998 and January 2001.
Future noncancellable lease payments are as follows:
Year ending
May 31, Amount
------- ------
1999 $ 56,893
2000 57,137
2001 48,530
2002 40,115
--------
$202,675
========
Total rental expenses for the years ended May 31, 1999, 1998 and 1997
was approximately $57,000, $61,000 and $64,000 respectively.
(b) Novex has a licensing agreement for certain concrete related products,
including an admixture that is capable of enhancing the basic
characteristic of cementitious products. Novex is obligated to pay
royalties based on a percentage of sales, subject to an annual
guaranteed minimum royalty only when sales of the admixture commence.
Currently, Novex has not had to pay royalties since the licensed
products are still in the development stage and therefore have not
been ready for sale to customers. Future annual guaranteed minimum
payments once the product emerges from development is $5,000 per year
with a maximum total that can be paid over the life of this agreement
of $250,000.
F-23
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
(c) During fiscal 1997, a shareholder commenced an action against the
Company and its former President to enjoin the Company and the former
President from taking any action that would restrict the sale of
common stock that the shareholder allegedly owns. In the opinion of
management, this action is without merit and will not have a material
adverse effect on the Company's financial position or results of
operations.
(d) SEC Investigation - The Company was informed that the United States
Securities and Exchange Commission (the "SEC") had commenced an
investigation involving the Company. The Company has cooperated with
the SEC. Although the Company has not received any further inquiries
from the SEC regarding this investigation, it is the Company's
understanding that the investigation is still pending. The Company has
no information as to the results, if any, of such investigation, or
what action, if any, the SEC may take pursuant to the investigation.
18. SUBSEQUENT EVENT
During August 1999, the Company acquired from The Sherwin Williams Company
("Sherwin") substantially all the assets of their Allied Composition and
Por Rok ("Allied/ Por-Rok") business line. Allied/Por-Rok manufactures and
distributes specialty building products.
Pursuant to the purchase agreement Novex (i) paid $800,000 to Sherwin, (ii)
issued 1,000,000 shares of restricted common stock to Sherwin with the
requirement to register the common stock with the Securities and Exchange
Commission and (iii) issued a note payable for $1,294,973, as adjusted from
$1,300,000, which bears interest at 10% per annum and is payable over a one
year period. In order, to induce Sherwin to accept the note payable, the
Company had to convert all the previously issued debt to equity, except for
the $250,000 debenture which will be paid as a condition of the
Allied/Por-Rok acquisition (see Note 11(d)). Further, Sherwin has a
subordinated security interest in substantially all the assets of the
company.
Novex has entered into a $890,000 installment term note with Dime
Commercial Corp. of which $800,000 was used for the purchase of Allied /
Por Rok and the remaining $90,000 was used for working capital needs in
fiscal 2000. This financing arrangement also provides for a $750,000
revolving note payable to fund future working capital
F-24
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
(Information at February 29, 2000 and the Nine Months Ended
February 29, 2000 and February 28, 1999 are unaudited)
requirements. The bank has a senior secured interest in substantially all
the assets of Novex. In addition, the Company granted a class B warrant
with a "put" right to purchase 233,365 shares of restricted common stock at
an exercise price of $.25. Dime Commercial Corp. has the right to demand
the purchase of the warrant if Novex completes a refinancing of all or a
portion of the Dime term loan and/or revolving line of credit from funds
provided by someone other than Dime. Therefore, Dime has the option of
requesting payment in cash or waiving its right to sell the warrant to
Novex. If Dime requests payment the amount they will receive is either (i)
if the closing stock price is less than or equal to the exercise price,
then Novex pays $58,341, which is the exercise price times the 233,365
shares underlying the warrant or (ii) if the closing price exceeds the
exercise price, then Novex pays the closing price up to a maximum of $.51
per share underlying the warrant or $119,016. Alternatively, if Dime
decided to exercise the warrant, they can issue a 60-day non-interest
bearing note for the entire amount due to Novex for the 233,365 shares of
common stock underlying the warrant.
A total of $20,400 has been allocated to the warrant, resulting in a
discount on the debt. The fair value of the warrant was estimated on the
date of grant using the Black-Scholes option pricing model with the
following assumptions: stock price of $.26 per share; annual dividend of
$0; expected volatility of 50%; risk free interest rate of 6%; and an
expected life of two years.
F-25
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
Nine Months Ended February 29, 2000 (Unaudited) and the
Years Ended May 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning cost and Deductions- end of
Description of year expenses describe Year
------------------------------- ------- ------- ------------ ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
Accounts
Nine Months ended
February 29, 2000
(Unaudited) $ 890 $36,410 $ -- $37,300
Year ended May 31,1999 $ -- $ 890 $ -- $ 890
Year ended May 31,1998 $ -- $ -- $ -- $ --
Year ended May 31,1997 $ -- $ -- $ -- $ --
</TABLE>
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Arm Pro, Inc.
Teeswater, Ontario
We have audited the accompanying balance sheets of Arm Pro Inc., as of May 31,
1998 and 1997 and the related statements of income and retained earnings and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Arm Pro, Inc. as of May 31,
1998 and 1997 and the results of its operations, and cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
-------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
Certified Public Accountants
New York, New York
November 20, 1998
F-27
<PAGE>
ARM PRO INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 16, May 31, May 31,
1998 1998 1997
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 158,275 $ 175,559 $ 13,935
Accounts receivable 90,131 69,250 67,180
Inventories 65,458 104,655 161,454
Due from Teeswater Concrete -- -- 82,356
--------- --------- ---------
Total Current Assets 313,864 349,464 324,925
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 3,636 17,095 18,870
OTHER ASSETS 550 571 595
--------- --------- ---------
$ 318,050 $ 367,130 $ 344,390
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 62,592 20,909 113,108
--------- --------- ---------
Total Current Liabilities 62,592 20,909 113,108
LOANS PAYABLE - SHAREHOLDERS -- 83,234 51,610
SHAREHOLDERS' EQUITY:
Common stock - no par value,
unlimited authorized,
1,000 issued and outstanding 720 720 720
Translation adjustment (3,938) 8,596 6,854
Retained Earnings 258,676 253,671 172,098
--------- --------- ---------
Total shareholders' equity 255,458 262,987 179,672
--------- --------- ---------
$ 318,050 $ 367,130 $ 344,390
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
ARM PRO INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
From Four months
June 1, 1998 to ended Year ended May 31,
September 16, September 30, --------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ 99,994 281,002 $ 318,481 373,712
COST OF SALES 98,754 131,504 133,988 174,364
--------- --------- --------- ---------
GROSS PROFIT 1,240 149,498 184,493 199,348
SELLING, GENERAL AND ADMINISTRATIVE 9,068 201,716 153,592 257,476
--------- --------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (7,828) (52,218) 30,901 (58,128)
OTHER INCOME (EXPENSE):
Gain on foreign currency exchange 16,727 74,311 62,825 103,328
Interest expenses (111) (1,268) (438) (1,568)
--------- --------- --------- ---------
OTHER INCOME, net 16,616 73,043 62,387 101,760
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 8,788 20,825 93,288 43,632
PROVISION FOR INCOME TAXES 3,783 7,860 11,715 16,029
--------- --------- --------- ---------
NET INCOME 5,005 12,965 81,573 27,603
RETAINED EARNINGS - Beginning of period 253,671 172,098 172,098 144,495
--------- --------- --------- ---------
RETAINED EARNINGS - End of period $ 258,676 $ 185,063 $ 253,671 $ 172,098
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-29
<PAGE>
ARM PRO INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From Four months
June 1, 1998 to ended Year ended May 31,
September 16, September 30, ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,005 $ 12,965 $ 81,573 $ 27,603
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 241 1,323 1,800 3,839
Translation adjustment (12,534) -- 1,742 6,854
Changes in assets and liabilities:
Accounts receivables (20,881) 4,818 (2,070) 163,940
Inventories 39,197 (3,478) 56,799 (70,126)
Due from Teeswater Concrete -- -- 82,356 (87,107)
Other assets 21 24 24 75,901
Accounts payable and accrued expenses 41,683 (525) (92,199) (16,244)
--------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 52,732 15,127 130,025 104,660
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale (purchase) of property and equipment 13,218 -- (25) (4,466)
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 13,218 -- (25) (4,466)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) loans payable - shareholder (83,234) -- 31,624 (86,259)
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (83,234) -- 31,624 (86,259)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (17,284) 15,127 161,624 13,935
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 175,559 13,935 13,935 --
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 158,275 $ 29,062 $ 175,559 $ 13,935
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-30
<PAGE>
ARMPRO INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS DESCRIPTION
The Company is located in Ontario, Canada and is in the business of
manufacturing a fiber reinforcement material used in the manufacturing of
cement products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash Equivalents - The Company considers all highly liquid temporary
cash investments, with an original maturity of three months or less
when purchased, to be cash equivalents.
(b) Inventories - Inventories consisting of raw materials and finished
goods are stated at the lower of cost, average cost or market.
(c) Property, Plant and Equipment - Property, plant and equipment are
stated at cost. Depreciation is calculated on the straight-line method
over the estimated useful lives of the assets, which range from 3 to
40 years.
(d) Income Taxes - The Company accounts for income taxes under Statement
of Financial Accounting Standards No. 109, the Company accounts for
income taxes under the liability method. Under the liability method, a
deferred tax asset or liability is determined based upon the tax
effect of the differences between the financial statement and tax
basis of assets and liabilities as measured by the enacted rates which
will be in effect when these differences reverse.
(e) Revenue Recognition - Revenue is recognized when the product is
shipped to the customer. Allowances for returns are provided when
sales are recorded.
(f) Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principals requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
(g) Fair Value of Financial Instruments - The carrying amounts reported in
the balance sheet for cash, trade receivables, accounts payable and
accrued expenses approximate fair value based on the short-term
maturity of these instruments.
F-31
<PAGE>
ARMPRO INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(h) Foreign currency - The accompanying financial statements are
translated from Canadian dollars into US dollars assuming the
functional currency is the Canadian dollar. Accordingly a translation
adjustment is recorded as an item of shareholders' equity. Foreign
currency transaction gains and losses are recorded in the statement of
income.
(i) Unaudited Interim Financial Statements - The financial statements for
the period June 1, 1998 through September 16, 1998 are unaudited, but
reflect all adjustments which, in the opinion of management, are
necessary to the fair presentation of the results of operations for
the interim period then ended. All such adjustments are of a normal
recurring nature. The results of the operations for any interim
periods are not necessarily indicative of results for a full fiscal
year.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
May 31, May 31,
Life 1998 1997
----------- -------- --------
Land, building and improvements 10-40 years $ 26,596 $ 26,596
Machinery and equipment 3-40 years 130,413 130,404
-------- --------
157,009 157,000
Less: accumulated depreciation 139,914 138,130
-------- --------
$ 17,095 $ 18,870
======== ========
4. INCOME TAXES
The provision for income taxes consists of current Canadian federal and
provincial taxes payable. There were no material temporary differences at
May 31, 1998 and 1997.
5. RELATED PARTY TRANSACTIONS
The Company occupies facilities owned by Teeswater Concrete, a company
related through common ownership. Teeswater does not charge the Company any
rent for the facilities.
F-32
<PAGE>
ARMPRO INCORPORATED
NOTES TO FINANCIAL STATEMENTS
6. MAJOR CUSTOMERS AND FOREIGN SALES
During the fiscal year ended May 31, 1998, two customers accounted for
approximately 20% and 10% of sales. During the fiscal year ended May 31,
1997, two customers accounted for approximately 22% and 13% of sales. The
Company ships a large portion of its sales to companies within the United
States. These sales are made up of approximately 56% of the Company's total
sales for fiscal year ended May 31, 1998 and approximately 71% of the
Company's total sales for fiscal year ended May 31, 1997.
7. INVENTORIES
Inventory consisted of the following:
May 31, May 31,
1998 1997
-------- --------
Raw Materials $ 67,851 $132,731
Finished Goods 36,804 28,723
-------- --------
$104,655 $161,454
======== ========
8. SUBSEQUENT EVENT
On September 16, 1998, 100% of the Company's outstanding common stock was
acquired by Novex Systems International, Ltd. for approximately $592,000.
F-33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors Novex Systems International, Inc. and
Subsidiary
We have audited the accompanying special-purpose statement of assets acquired of
Allied/Por-Rok (formerly a division of The Sherwin Williams Company) as of
August 13, 1999 and the special-purpose statements of revenues and costs of
goods sold for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these special-purpose financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion
The accompanying special-purpose financial statements were prepared for the
purpose of complying with SEC Rule 3-05 of Regulation S-X, in reporting the
Company's acquisition of Allied/Por Rok (formerly a division of The
Sherwin-Williams Company). As discussed in Note 1, these special-purpose
financial statements are not intended to be a presentation of the financial
position, results of operations, and cash flows of Allied/Por-Rok (formerly a
division of The Sherwin Williams Company) in conformity with generally accepted
accounting principles.
In our opinion, the special-purpose financial statements referred to above
present fairly, in all material respects, the assets acquired of Allied/Por Rok
(formerly a division of The Sherwin Williams Company) as of August 13, 1999 and
the results of its revenues and cost of goods sold for the years ended December
31, 1998 and 1997 on the basis of accounting described in Note 1.
/s/ Feldman Sherb Horowitz & Co., P.C.
--------------------------------------
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
January 26, 2000
F-34
<PAGE>
ALLIED / POR ROK
STATEMENT OF ASSETS ACQUIRED
August 13, 1999
ASSETS
CURRENT ASSETS:
Accounts receivable $ 311,983
Inventories 225,661
----------
Total Current Assets 537,644
FURNITURE AND EQUIPMENT 566,360
BUILDING 415,000
LAND 400,000
----------
$1,919,004
==========
See notes to statement of assets.
F-35
<PAGE>
ALLIED/POR ROK
STATEMENTS OF REVENUES AND COST OF GOODS SOLD
<TABLE>
<CAPTION>
From January 1, Nine Months
1999 to Ended Year ended December 31,
August 13, September 30, --------------------------------
1999 1998 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 1,010,012 $ 1,345,592 $ 1,725,853 $ 1,262,008
COST OF GOOD SOLD 811,192 938,743 1,400,222 1,283,769
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) $ 198,820 $ 406,849 $ 325,631 $ (21,761)
=========== =========== =========== ===========
</TABLE>
See notes to statement of revenues and cost of goods sold.
F-36
<PAGE>
ALLIED / POR ROK
NOTES TO STATEMENTS OF ASSETS
AND STATEMENTS OF REVENUE AND COST OF GOODS SOLD
1. BASIS OF PRESENTATION
Allied / Por Rok, formerly a division of Sherwin Williams Inc. ("Sherwin")
as of August 13, 1999, operates as a manufacturer of building materials.
Because the division was not a separate legal entity and did not maintain
separate financial records, a complete set of financial statements has not
been presented. Instead a statement of assets using the historical cost of
Sherwin as of the date of acquisition (August 13, 1999) and statements of
revenue and cost of goods sold for the years ended December 31, 1998 and
1997 have been presented. Accordingly certain expenses incurred by the
division while operating as part of Sherwin have been omitted because they
are not essential to its revenue producing activities.
On August 13, 1999 substantially all the assets of Allied / Por Rok were
acquired by Novex Systems International, Inc. ("Novex") from Sherwin. The
transaction was accounted for as a purchase, whereby Novex acquired assets
in exchange for $800,000 cash, 1,000,000 shares of Novex's common stock
valued at $260,000, and a note payable to Sherwin in the amount of
approximately $1,300,000 which bears interest at 10% per annum payable over
a one year period.
Included in cost of goods sold are all of the costs charged to cost of
goods sold by Sherwin including materials, direct labor and factory
overhead. Factory overhead includes indirect labor, related benefits for
pension, stock compensation, medical, payroll taxes, production management
and supervisor salaries, related benefit costs, depreciation on fixed
assets, real estate taxes, repairs and maintenance, utilities, shop
supplies, waste removal and other indirect costs.
The expenses omitted from the financial statements represent professional
fees and certain advertising costs of approximately $60,000 for the year
ended December 31, 1998 and $5,000 for the year ended December 31, 1997.
The financial statements do not include any allocations of corporate
overhead or interest from other divisions or units within The Sherwin
William Company.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Recognition of revenue - revenues are recognized upon completion of
the sale which is when goods are shipped to the customer.
F-37
<PAGE>
ALLIED / POR ROK
NOTES TO STATEMENTS OF ASSETS
AND STATEMENTS OF REVENUE AND COST OF GOODS SOLD
(b) Use of estimates - The preparation of financial statements in
conformity with generally accounting principles requires management to
make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(c) Depreciation - Fixed assets are depreciated over the estimated useful
life of the related asset using the straight line method.
(d) Unaudited Interim Financial Statements - The statements of revenues
and cost of goods sold from January 1, 1999 to August 13, 1999 and for
the nine months ended September 30, 1998 are unaudited but include all
adjustments which in the opinion of management, are necessary to the
fair presentation of the results of operations for the periods then
ended. All such adjustments are of a normal recurring nature. The
results of the operations for any interim periods are not necessarily
indicative of results for a full fiscal year. The annual financial
statements presented are not indicative of results of operations going
forward because of the difference in cost structure of Novex Systems
International, Inc. ("Novex") from that of The Sherwin Williams
Company from which the Por-Rok business was acquired. Other than
medical benefits, Novex does not currently offer any other employee
benefits. In addition, Novex has omitted approximately $65,000 in
indirect labor that was included in the historical financial
statements of The Sherwin-Williams Company. Novex will incur other
expenses, namely interest, sales commissions and goodwill amortization
and certain administrative expenses that were not incurred by The
Sherwin Williams Company. See the Notes to Unaudited Pro Forma
Consolidated Financial Statements for further discussion.
3. INVENTORIES
Inventories consist of the following at August 13, 1999.
Raw materials $160,470
Finished goods 65,191
--------
$225,661
========
F-38
<PAGE>
ALLIED / POR ROK
NOTES TO STATEMENTS OF ASSETS
AND STATEMENTS OF REVENUE AND COST OF GOODS SOLD
4. FURNITURE AND EQUIPMENT
Furniture and equipment are comprised of the following at August 13, 1999:
Machinery and equipment $539,860
Furniture and fixtures 5,000
Computers 7,500
Vehicles 14,000
--------
$566,360
========
F-39
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated statements of operations for the
year ended May 31, 1999 reflect the combined results of the Company and the
acquisition on September 16, 1998 of Arm Pro, Inc. and the acquisition on August
13, 1999 of the Allied/Por-Rok division of the Sherwin Williams Company
("Sherwin") as if the acquisitions had occurred on June 1, 1998, and for the
nine months ended February 29, 2000 reflect the combined results of the Company
and the Allied/Por-Rok division of Sherwin as if the acquisition had occurred on
June 1, 1998.
The unaudited pro forma consolidated statements of operations do not necessarily
represent actual results that would have been achieved had the companies been
together at the beginning of each respective period, nor are they necessarily
indicative of future results. These unaudited pro forma consolidated financial
statements should be read in conjunction with the companies' respective
historical financial statements and notes thereto.
F-40
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended February 29, 2000
<TABLE>
<CAPTION>
Historical Adjustments Pro - Forma
--------------------------------- ------------------------------- -------------
Novex Systems Allied/ Debit Credit
International, Inc. Por Rok Amount Amount Total
------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 1,390,412 $ 265,978 $ -- $ -- $ 1,656,390
COST OF GOOD SOLD 959,353 241,992 -- -- 1,201,345
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 431,059 23,986 455,045
SELLING, GENERAL AND ADMINISTRATIVE 1,027,423 -- 4,873(2) 1,092,296
60,000(4)
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (596,364) 23,986 64,873 -- (637,251)
INTEREST EXPENSE (192,803) -- 36,859(1) -- (229,662)
OTHER EXPENSE (74,474) -- -- -- (74,474)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (863,641) $ 23,986 $ 101,732 $ -- $ (941,387)
============ ============ ============ ============ ============
LOSS PER SHARE $ (0.04) $ (0.04)
============ ============
WEIGHTED AVERAGE SHARES 20,818,206 20,818,206
============ ============
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
F-41
<PAGE>
<TABLE>
<CAPTION>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended May 31, 1999
Historical Adjustments Pro-Forma
----------------------------------------------- -------------------------- ------------
Novex Systems Allied/ Debit Credit
International, Inc. Arm Pro, Inc. Por Rok Amount Amount Total
------------------ ------------ ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES $ 321,311 $ 99,994 $ 1,639,077 $ -- $ -- $ 2,060,382
COST OF GOOD SOLD 113,305 98,754 1,386,333 -- -- 1,598,392
------------ ------------ ------------ --------- ----------- ------------
GROSS PROFIT 208,006 1,240 252,744 461,990
SELLING, GENERAL AND ADMINISTRATIVE 1,389,259 9,068 -- 35,243(2) -- 1,678,370
244,800(4) --
------------ ------------ ------------ --------- ----------- ------------
LOSS FROM OPERATIONS (1,181,253) (7,828) 252,744 280,043 -- (1,216,380)
INTEREST EXPENSE (97,905) (111) -- 241,148(1) (339,164)
OTHER INCOME (EXPENSE), net (113,182) 16,727 -- -- -- (96,455)
------------ ------------ ------------ --------- ----------- ------------
NET INCOME (LOSS) BEFORE INCOME TAXES (1,392,340) 8,788 252,744 521,191 -- (1,651,999)
INCOME TAXES -- (3,783) -- -- -- (3,783)
------------ ------------ ------------ --------- ----------- ------------
NET INCOME (LOSS) $ (1,392,340) $ 5,005 $ 252,744 $ 521,191 $ -- $ (1,655,782)
============ ============ ============ ========= =========== ============
LOSS PER SHARE $ (0.10) $ (0.11)
=========== ============
WEIGHTED AVERAGE SHARES 13,720,171 1,000,000(3) 14,720,171
============ ========= ============
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
F-42
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Acquisition of Arm Pro, Inc.
On September 16, 1998, Novex Canada purchased all the issued and outstanding
common stock of Arm Pro, Inc. The purchase price was $592,000 ($891,000 Canadian
dollars) and the funds used to purchase Arm Pro were raised from the sale of
debentures for $800,000. The acquisition is accounted for as a purchase business
combination. Goodwill of $347,095 resulted from this acquisition and is
determined as follows:
Purchase price $ 592,400
Acquisition costs 10,638
---------
603,038
Assets acquired 403,313
Liabilities assumed (147,370)
255,943
---------
Goodwill $ 347,095
=========
Acquisition of Allied/Por-Rok
On August 13, 1999, Novex Systems International, Inc. ("Novex") acquired from
The Sherwin Williams Company ("Sherwin") certain assets representing their
Allied / Por Rok business. The transaction was accounted for as a purchase,
whereby Novex acquired assets in exchange for $800,000 in cash, 1,000,000 shares
of its common stock valued at $260,000, and a note payable to Sherwin in the
amount of $1,294,973, which bears interest at 10% per annum payable over a one
year period. Goodwill of $584,867 resulted from this acquisition and is
determined as follows:
Assets acquired:
Accounts receivable $ 311,983
Inventory 225,661
Furniture and equipment 566,360
Building 415,000
Land 400,000
----------
Total 1,919,004
Purchase price 2,354,973
----------
435,969
Acquisition costs 148,898
----------
Goodwill $ 584,867
==========
Pro Forma Adjustments
(1) - To record interest expense on the debt incurred to finance the
acquisition of the Allied/Por Rok business of Sherwin.
(2) - To record amortization on the goodwill arising from the acquisition of
the Allied/Por Rok business of Sherwin.
(3) - To record issuance of 1,000,000 shares of Novex common stock in the
acquisition of the Allied/Por Rok business of Sherwin.
(4) - To record additional expenses expected for sales commissions, bad
debts, office expenses and salaries.
F-43
<PAGE>
================================================================================
You should rely on the information contained in this Prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospects. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
Prospectus, regardless of the time of delivery of this prospectus or any sale of
the common stock. document or to which we have made reference..
----------
TABLE OF CONTENTS
Page
----
Additional Information ..................................
Prospectus Summary ......................................
The Company .............................................
The Offering ............................................
Summary Financial Information ...........................
Risk Factors ............................................
Use of Proceeds .........................................
Dividend Policy .........................................
Capitalization ..........................................
Dilution ................................................
Selected Financial Information ..........................
Management's Discussion and Analysis
of Financial Condition and
Results of Operations ...............................
Business ................................................
Management ..............................................
Principal Shareholders ..................................
Selling Securityholders .................................
Certain Transactions ....................................
Description of Securities ...............................
Securities Eligible for Future Sale .....................
Legal Matters ...........................................
Experts .................................................
Index to Financial Statements ...........................
Until ________, 2000 (90 days after the date of this Prospectus), all dealers
effecting transactions in these securities, whether or not participating in this
Offering, may be required to deliver a Prospectus. This is in addition to the
dealer's obligation to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
================================================================================
NOVEX SYSTEMS
INTERNATIONAL, INC.
11,796,692 Shares of Common Stock
675,365 Class B Warrants and underlying Shares
1,185,924 Stock Options and
underlying Shares
----------
May ____, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13 Other Expenses of Issuance and Distribution.
The following is an itemized statement of estimated expenses to be incurred
by the Registrant in connection with this Offering:
SEC Registration Fee $ 3,000
Blue Sky fees and expenses 5,000
Printing expenses 3,000
Legal fees and expenses 15,000
Accounting fees and expenses 15,000
Miscellaneous 5,000
-------
TOTAL $46,000*
=======
*Estimated
Item 14. Indemnification of Directors and Officers
Section 722 of the Business Corporation Law provides, in general, that a
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or the right of the corporation), because he is or was
a director or officer of the Corporation. The indemnity may be against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with the action, suit or
proceeding, if the indemnitee acted in good faith and in a manner reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
with respect to any criminal action or proceeding, the indemnitee must not have
had reasonable cause to believe his conduct was unlawful.
Section 722 of the Business Corporation law provides, in general, that a
corporation shall have power to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
because he is or was a director or officer of the corporation (including
attorneys' fees) actually reasonably incurred by him in connection with the
defense or settlement of the action or suit if he acted in good faith and in a
manner he reasonable believed to be in, or not opposed to, the best interest of
the corporation.
Section 726 of the Business Corporation Law provides in general that a
corporation shall have the power to purchase and maintain insurance on behalf of
any person who is or was a director or officer of the corporation against any
liability asserted against him or incurred by him in any capacity, or arising
out of his status as a director or officer whether or not the corporation would
have the power to indemnify him against liability under the provision of the
law.
Novex's By-Laws and Certificate of Incorporation provide that Novex will
indemnify its officers, directors, employees and agents to the fullest extent
permitted by the General Corporation Law.
Section 719 of the Business Corporation Law permits a New York corporation,
by so providing in its Certificate of Incorporation, to eliminate or limit the
personal liability of a director to the corporation for damages arising out of
certain alleged breaches of the director's duties to the corporation. The
Business Corporation Law, however, provides that no such limitation of liability
may affect a director's liability with respect to any of the following: (i) for
breach of the director's duty of loyalty to the corporation of its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful
II-1
<PAGE>
payment of dividends or unlawful purchase or redemption of its capital stock, or
(iv) for any transaction from which the director derived an improper personal
benefit.
Novex's Certificate of Incorporation eliminates the personal liability of
the directors to the fullest extent permitted by Section 722 of the Business
Corporation Law.
Item 15 Recent Sales of Unregistered Securities.
Within the past three years, the Registrant sold the following securities:
Unless otherwise noted, the sale of the securities were exempt from registration
under the Securities Act under Section 4(2) and/or Regulation D promulgated
thereunder. All sales being made to sophisticated investors and/or accredited
investors who had access to information about Novex and were able to bear the
risk of loss of their investment. The Registrant did not retain an underwriter
for any of the foregoing transactions.
In the opinion of the Registrant, the persons to whom the securities were
offered had access to the kinds of information that would have been included in
a registration statement filed under the Act based on their family, business or
other relationship to the Registrant. These investors have covenanted to
purchase and hold the securities for investment without a view to distribution.
The certificates evidencing the securities contain a restrictive legend
prohibiting transfers of the securities, except in compliance with the Act or an
exemption therefrom.
1. On March 20, 1997, pursuant to Section 4(2) of the Securities Act, Novex
issued 450,000 shares of its common stock for an aggregate price of $157,500 to
four (4) accredited investors--Euro-Dutch Trust Funds (100,000); Firebird
Overseas Partners (150,000); Douglas Friedenberg (IRA) (100,000) and Peter
Sosnkowski (100,000). Novex received net proceeds of $157,500 which were used to
provide working capital.
2. On June 6, 1997, pursuant to Section 4(2) of the Securities Act, Novex
conducted a private offering of its 10% Redeemable $1,000,000 Debenture and
Stock Warrant Agreement. The Debenture was sold to three (3) accredited
investors for net proceeds of $215,090. The investors received warrants to
purchase an aggregate of 215,090 shares of common stock--Euro-Dutch Trust Fund
(56,000 shares), Firebird Overseas Ltd. (159,000 shares) and Firebird Partners
Ltd. (90,000 shares)--at the exercise price of $.50 per share until February 1,
2000. The net proceeds were used for working capital.
3. On July 9, 1997, Novex converted $315,000 of its promissory notes into
907,150 shares of its common stock as follows: Euro-Dutch Trust Fund (181,900
shares), Firebird Overseas Ltd. (435,300 shares) and Firebird Partners Ltd.
(289,950 shares).
4. On August 12, 1997, pursuant to former Rule 903(c)(2) of Regulation S
promulgated under the Securities Act as was in effect at that date, Novex issued
100,000 shares of its common stock to a non-U.S. investor. The investor
covenanted that he (i) is not a U.S. person; (ii) understands the shares
purchased are not registered and cannot be sold in the U.S. unless registered or
otherwise exempt from registration; (iii) understands that the stock certificate
representing the shares purchased will bear a restrictive legend prohibiting
their transfer; and (iv) understands that any subsequent purchaser will be
subject to the same provisions. The Registrant received net proceeds of $34,000
which were used for working capital.
II-2
<PAGE>
5. On August 12, 1997 pursuant to Section 4(2) of the Securities Act, Novex
issued 100,000 shares of its common stock to two (2) non-affiliated accredited
investors--Gil Aboodi (50,000) and Ezra Aboodi (50,000)--for aggregate proceeds
of $32,000. The investors were sophisticated investors who had access to
information about Novex necessary to make an informed investment decision and
were able to bear the risk of loss of their investment. The proceeds of the
placement were used for working capital.
6. On September 4, 1997, Novex issued 64,857 shares of its common stock to
Daniel Dowe for legal services rendered.
7. On September 16, 1997, pursuant to former Rule 903(c)(2) of Regulation S as
was in effect at that date, Novex issued 81,674 shares of its common stock to
Firebird Overseas Ltd. The investor covenanted that it (i) is not a U.S. person;
(ii) understands the shares purchased are not registered and cannot be sold in
the U.S. unless registered or otherwise exempt from registration; (iii)
understands that the stock certificate representing the shares purchased will
bear a restrictive legend prohibiting their transfer; and (iv) understands that
any subsequent purchaser will be subject to the same provisions. The Net
proceeds were used for working capital.
8. On October 31, 1997, pursuant to Section 4(2) of the Securities Act, Novex
issued an aggregate of 62,500 shares of its common stock to three (3)
investors--G. Cohen (25,000), Douglas Friedenberg (IRA) (12,500) and P.
Sosnkowski (25,000). The investors were sophisticated investors who had access
to information about Novex necessary to make an informed investment decision and
were able to bear the risk of loss of their investment Novex received net
proceeds of $25,000 which were used for working capital.
9. From September 29 through October 31, 1997, pursuant to former Rule 903(c)(2)
under Regulation S as was in effect at that date, promulgated under the
Securities Act, Novex issued an aggregate of 258,250 shares of its common stock
to the following nine (9) non-U.S. investors:
R. Foltys 4,500 shares
Mr. Hamo 37,500 shares
H. Poulious 18,750 shares
S. Seymour 18,750 shares
M. Sourlis 18,750 shares
T. Toliopoulis 30,000 shares
N. Tsioubris 10,000 shares
P. Tsoubris 20,000 shares
W. Tsoubris 100,000 shares
The investors each covenanted that he/she (i) is not a U.S. person; (ii)
understands the shares purchased are not registered and cannot be sold in the
U.S. unless registered or otherwise exempt from registration; (iii) understands
that the stock certificate representing the shares purchased will bear a
restrictive legend prohibiting their transfer; and (iv) understands that any
subsequent purchaser will be subject to the same provisions. The Registrant
received net proceeds of $97,300 which were used for working capital.
10. On November 24, 1997, pursuant to Section 4(2) of the Securities Act, Novex
issued 4,200 shares of its common stock to G. Cohen. The investor was a
sophisticated investor who had access to information about Novex necessary to
make an informed investment decision and was able to bear the risk of loss of
her investment The Net proceeds were used for working capital.
11. On December 2, 1997, pursuant to former Rule 903(c)(2) under Regulation S as
was in effect at that date, promulgated under the Securities Act, Novex issued
150,000 shares of its common stock to two non-U.S. investors--Euro-Dutch Trust
Fund (50,000) and Firebird Overseas (100,000). The Registrant received net
proceeds of $36,500 which were used for working capital.
II-3
<PAGE>
12. In February 1998, pursuant to Section 4(2) of the Securities Act, Novex
conducted a private offering of its 10% Convertible Debenture and Stock Warrant
Agreement ("First 1998 Debenture Financing). The Debenture was sold to three (3)
accredited investors for net proceeds of $550,000. The investors received
warrants to purchase an aggregate of 1,100,000 shares of common stock--Little
Wing, L.P. (1,000,000 shares), E. Cushing (50,000 shares) and W. Peacock (50,000
shares)--at the exercise price of $.30 per share for a three year period. The
Debenture was due to mature on October 31, 1998. The net proceeds were used
primarily for the purchase of industrial blending and bagging equipment that was
installed in Novex's Canadian operating subsidiary in March 1998, to renovate
Novex's offices and for working capital purposes. In October 1998, the First
1998 Debenture together with accrued interest of $15,175 was converted into
2,730,737 shares of common stock.
13. On May 17, 1998, Novex issued 25,000 shares of its common stock to a Douglas
Friedenberg for financial advisory services rendered.
14. From June 18, 1998, to July 6, 1998, pursuant to Section 4(2) of the
Securities Act, Novex issued an aggregate of 300,000 shares of its common stock
to four (4) accredited investors--Firebird Partners, Ltd. (140,000), Firebird
Overseas Ltd. (110,000) and Euro-Dutch Trust Fund (50,000 shares). Novex
received net proceeds of $32,000 which were used for working capital.
15. In September 1998, pursuant to Section 4(2) of the Securities Act, Novex
conducted a private offering of its 9% Convertible Debenture and Stock Warrant
Agreement ("Second 1998 Debenture Financing). The Debenture was sold to three
(3) accredited investors for net proceeds of $800,000. The investors received
warrants to purchase an aggregate of 1,500,000 shares of common stock--Little
Wing, L.P. (802,500 shares), Little Wing Too, L.P. (86,250 shares), and Trade
Wind Funds Ltd. (611,250 shares)-- having an exercise price of $.45 per share
for a three year period. The Debenture is due to mature on September 4, 2000.
The net proceeds were $800,000 of which $610,000 was used to purchase ARM PRO
Inc. The balance was used for working capital, transaction expenses and to move
the ARM PRO operations to Novex's Mississauga, Ontario facility. In September
1999, the warrants were subsequently canceled in exchange for the investors'
agreement to convert the outstanding debt and all accrued interest totaling
$857,067 into 5,041,569 shares of Novex's common stock .
16. In September 1999, Novex issued 100,000 common stock options to two (2)
financial advisors for services rendered. The options have an exercise price of
$.45 and are exercisable until September 4, 2000.
17. In October 1998, the outstanding principal and accrued interest relating to
the First 1998 Debenture Financing of totaling $565,175 was converted into
2,730,737 shares of common stock.
18. On November 30, 1998, Novex issued 40,000 shares of its common stock to a
business consulting firm for services rendered.
19. On January 5, 1999, Novex issued 5,000 Class B warrants to a creditor in
exchange for the creditor's agreement to loan Novex $5,000. The warrants have an
exercise price of $.20 per share and are exercisable until January 21, 2001. The
net proceeds of the loan were used for working capital.
20. In February 1999, pursuant to Section 4(2) of the Securities Act, Novex
conducted a private offering of its 15% Senior Debenture and Stock Warrant
Agreement. The Debenture was sold to one (1) of the three (3) accredited
investors which had purchased the Second 1998 Debenture Financing. Novex
received net proceeds of $250,000. The investor, Little Wing, L.P., received
warrants to purchase an aggregate of 150,000 shares of common stock at the
exercise price of $.45 per share for a two year period. The Debenture was due to
mature on May 31, 1999. The net proceeds were used primarily for working capital
purposes.
21. From March 2 to May 5, 1999, Novex issued an aggregate of 176,666 shares of
its common stock to two (2) financial advisors and one (1) technical consultant
for services rendered.
II-4
<PAGE>
22. In August, 1999, as partial consideration for financing Novex's acquisition
of the Por-Rok/Allied Composition business from The Sherwin Williams Company,
Novex issued 1 million shares of its common stock to the seller and 233,365
Class B warrants to purchase shares of its common stock at an exercise price of
$.25 to Dime Commercial Corp. The Class B warrants expire September 1, 2002.
23. On September 1, 1999, Novex issued 5,041,569 shares of its common stock to
the three (3) holders of the Second 1998 Debenture Financing in conversion of
the outstanding principle and accrued interest totaling $857,067.
24. On the same date, Novex converted $166,434 of its 10% promissory notes dated
from July 29, 1998 to May 14, 1999 plus all accrued interest into an aggregate
of 575,924 shares of its common stock as follows:
P. Sosnkowski 185,735
G. Cohen 56,153
Firebird Partners Ltd. 146,038
Firebird Overseas Ltd. 150,563
Euro-Dutch Trust Fund 37,435
25. On September 30, 1999, pursuant to Section 4(2) of the Securities Act, Novex
sold 40,000 shares of its common stock to one of Novex's directors in exchange
for the director's $10,000 cash investment in Novex. As a director of the
company, the investor had access to information about Novex necessary to make an
informed investment decision and is able to bear the risk of loss of their
investment
26. On September 30, 1999, Novex issued 10,000 shares of its common stock to a
creditor in exchange for the creditor's forbearance with respect to the overdue
loan which the creditor had extended to Novex in January 1999.
27. On October 21, 1999, Novex issued 32,000 Class B warrants to a investment
banker in exchange for services rendered. The warrants have an exercise price of
$0.25 and are exercisable until October 20, 2002.
Item 16 Exhibits.
The exhibits to be incorporated in this registration statement by
reference:
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Incorporated Document
- ------- ------------------------------------------------ ----------------------
<S> <C> <C>
2.1 Plan of Merger of Stratford Acquisition Form 10-K for the period ended
Corp. and the Registrant into the Registrant May 31, 1999
3.1(i) Articles of Incorporation of Stratford Form 10-K/A for the period ended
Acquisition Corp. May 31, 1996
3.1(ii) Certificate of Incorporation of the Registrant Form 10-K for the period ended
May 31, 1999
3.1(iii) New York Certificate of Merger of Stratford Form 10-K for the period ended
Acquisition Corp. into Registrant May 31, 1999
3.1(iv) Minnesota Certificate of Merger of Stratford Form 10-K for the period ended
Acquisition Corp. into Registrant May 31, 1999
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit Incorporated Document
- ------- ---------------------- ----------------------
<S> <C> <C>
3.2 By-Laws Form 10-K for the period ended
May 31, 1999
4.3 Form of 10% $550,000 Convertible Debenture Form 10-K for the period ended
and Stock Warrant Agreement May 31, 1998
4.4 Form of 9% $800,000 Convertible Debenture Form 10-K for the period ended
and Stock Warrant Agreement May 31, 1999
4.5 Form of 15% $250,000 Senior Debenture and Form 10-K for the period ended
Stock Warrant Agreement May 31, 1999
4.6 Term Sheets re Director Loans to Company dated Form 10-K for the period ended
July 29, 1998; August 13, 1998; August 20, 1998; May 31, 1999
August 27, 1998; September 4, 1998; and May 14,
1999
10.1 Employment Agreement between Registrant and Form 10-K for the period ended
Daniel W. Dowe May 31, 1998
13.1 Annual Report on Form 10-K for the period --
ended May 31, 1999
13.2 Quarterly Report on Form 10-Q for the period --
ended August 31, 1999
13.3 Quarterly Report on Form 10-Q For the period --
ended November 30, 1999
99.1 Battista Agreement Form 10-K/A for the period ended
May 31, 1997
99.2 Supercrete N/A Limited Agreement dated Form 10-K for the period ended
December 20, 1996 May 31, 1997
</TABLE>
The exhibits filed in this registration statement:
Exhibit
No. Description of Exhibit
- ------- ----------------------
4.1 Specimen Common Stock Certificate
4.2 Form of Class B Warrants
5.1 Opinion of Dowe, Capetanakis & Preite, Counsel for the Registrant, as
to the legality of the Securities being registered
10.2 Amendment to Employment Agreement between Registrant and Daniel W.
Dowe
II-6
<PAGE>
Exhibit
No. Description of Exhibit
- ------- ----------------------
10.3 Amended and Restated Purchase Agreement between The Sherwin-Williams
Company and Registrant
10.4 Form of Promissory Note to Dime Commercial Corp.
10.5 Form of Promissory Note to The Sherwin-Williams Company
10.6 Bill of Sale from The Sherwin-Williams Company to Registrant
21.1 Subsidiaries of Novex
23.1 Consent of Feldman, Sherb, Horowitz & Co., P.C., Certified Public
Accountants
23.2 Consent of Dowe, Capetanakis & Preite, Counsel to Registrant (included
in Exhibit 5.1 of this Registration Statement)
24.1 Power of Attorney (contained on signature page of this Registration
Statement)
27.1 Financial Data Sheet
Item 17 Undertakings.
The Registrant undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities
Act.
(ii) reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent post-effective
amendment to the registration statement which, individually or together,
represent a fundamental change in the information in the registration statement;
and
(iii) include any material information relating the plan of distribution
not previously disclosed in the registration statement or any material change in
the information.
(2) for the purpose of determining liability under the Securities Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that, in the opinion of the Securities and Exchange Commission,
this indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
If a claim for indemnification against liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action
suit or proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered, the Registrant, will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Securities
Act and will be govern by the final adjudication of the issue.
II-7
<PAGE>
For purpose of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of the
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of the registration statement as
of the time it was declared effective.
For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement for the securities offered in the registration
statement, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering of those securities.
If Novex becomes aware after the effective date of this registration
statement that either any underwriter or dealer intends to acquire securities
from any selling securityholders, a post-effective amendment will be required to
reflect the acquisition of 10% or more of Novex's unrestricted securities and a
sticker supplement will be required if the amount involved falls between the
range of 5% and 10% of Novex's unrestricted securities.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing this Amendment No. 2 to Form SB-2 on Form S-1 and
authorized this registration statement to be signed on its behalf by the
undersigned, in the City of Clifton, State of New Jersey on May 15, 2000.
NOVEX SYSTEMS INTERNATIONAL, INC.
By: /s/ DANIEL W. DOWE
--------------------
Name: Daniel W. Dowe
Title: President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Daniel W. Dowe and William K. Lavin, each or
either of them, his or her true and lawful attorney-in- fact and agent, with
full power of substitution and resubstitution for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement and to file
the same with all exhibits to the registration statement, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitutes, may
lawfully do or cause to be done by virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
amendment to registration statement has been signed below on May 15, 2000, by
the following persons in the capacities indicated:
Name Title
---- -----
/s/ William K. Lavin Chairman of the Board and Secretary
- ------------------------
/s/ Daniel W. Dowe Director, President and Chief Executive
- ------------------------ Officer (Principal Executive Officer)
/s/ Douglas Friedenberg Director and Treasurer
- ------------------------
/s/ Edward J. Malloy Director
- ------------------------
/s/ Bruce W. Parker Chief Financial Officer (Principal
- ------------------------ Financial and Accounting Officer)
II-9
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
- ------- ----------------------
2.1 Plan of Merger of Stratford Acquisition Corp. and the Registrant
into the Registrant**
3.1(i) Articles of Incorporation of Stratford Acquisition Corp.**
3.1(ii) Certificate of Incorporation of the Registrant**
3.1(iii) New York Certificate of Merger of Stratford Acquisition Corp.
into Registrant**
3.1(iv) Minnesota Certificate of Merger of Stratford Acquisition Corp.
into Registrant**
3.2 By-Laws**
4.1 Specimen Common Stock Certificate**
4.2 Form of Class B Warrants**
4.3 Form of 10% $550,000 Convertible Debenture and Stock Warrant
Agreement**
4.4 Form of 9% $800,000 Convertible Debenture and Stock Warrant
Agreement**
4.5 Form of 15% $250,000 Senior Debenture and Stock Warrant
Agreement**
4.6 Term Sheets re Director Loans to Company dated July 29, 1998;
August 13, 1998; August 20, 1998; August 27, 1998; September 4,
1998; and May 14, 1999**
5.1 Opinion of Dowe, Capetanakis & Preite, Counsel for the
Registrant, as to the legality of the Securities being
registered***
10.1 Employment Agreement between Registrant and Daniel W. Dowe**
10.2 Amendment to Employment Agreement between Registrant and Daniel
W. Dowe**
10.3 Amended and Restated Purchase Agreement between The
Sherwin-Williams Company and Registrant**
10.4 Form of Promissory Note to Dime Commercial Corp.**
10.5 Form of Promissory Note to The Sherwin-Williams Company**
10.6 Bill of Sale from The Sherwin-Williams Company to Registrant**
13.1 Annual Report on Form 10-K for the period ended May 31, 1999**
13.2 Quarterly Report on Form 10-Q for the period ended August 31,
1999**
13.3 Quarterly Report on Form 10-Q for the period ended November 30,
1999**
13.4 Quarterly Report on Form 10-Q for the period ended February 29,
2000**
21.1 Subsidiaries of Novex**
23.1 Consent of Feldman, Sherb, Horowitz & Co., P.C., Certified Public
Accountants***
23.2 Consent of Dowe, Capetanakis & Preite, Counsel to Registrant
(included in Exhibit 5.1of this Prospectus)***
24.1 Power of Attorney (contained on signature pageof this
Prospectus).
27.1 Financial Data Sheet***
99.1 Battista Agreement**
99.2 Supercrete N/A Limited Agreement dated December 20, 1996**
* To be filed by amendment
** Previously filed
*** Filed herewith
II-10
Exhibit 5.1
Dowe, Capetanakis & Preite
Counsellors at Law
67 Wall Street
New York, New York 10005
May 17, 2000
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Novex Systems International, Inc. (The "Company")
Amendment No. 2 to Form SB-2 on Form S-1 Relating to the Registration
of Shares of Common Stock, par value $.001 per share, Class B
Warrants and Common Stock Options
Gentlemen:
We have been requested by the Company, a New York corporation, to furnish
you with our opinion as to the matters hereinafter set forth in connection with
the above-referenced Registration Statement (the "Registration Statement")
covering all of the shares of Common Stock, Class B Warrants and Common Stock
Options and the shares of common stock underlying such warrants and options,
which will be offered by the Selling Securityholders who acquired such shares,
warrants and stock options pursuant to various agreements including, but not
limited to, Subscription Agreements, Convertible Debentures, Stock Purchase
Warrant Agreements, Common Stock Option Agreements and Registration Rights
Agreement, the number of shares, warrants and stock options as set forth in the
calculation chart to the cover page of the Company's aforementioned Registration
Statement.
In connection with this opinion, we have examined the Registration
Statement, the Certificate of Incorporation and the related Merger Certificates,
and the By-Laws of the Company each as amended to date, copies of the records of
corporate proceedings of the Company and copies of such other materials,
instruments and documents as we have deemed necessary to enable us to render the
opinion hereafter expressed.
Based upon and subject to the foregoing, we are of the opinion that the
shares of Common Stock, the Class B Warrants, the Common Stock Options and the
shares of common stock underlying such warrants and options which are referred
to above, when sold in the manner described in the Registration Statement, will
be legally issued, fully paid and non-assessable.
<PAGE>
We render no opinion as to the laws of any jurisdiction other than the
internal laws of the State of New York. We hereby consent to the use of this
opinion as an Exhibit to the Registration Statement and to the reference to our
firm's name under the caption "Legal Matters" in the prospectus included in the
Registration Statement.
Sincerely,
DOWE, CAPETANAKIS & PREITE
EXH 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated September 8, 1999, of Novex Systems International, Inc.
and Subsidiary, our report dated November 20, 1999 of Arm Pro, Inc., and our
report dated January 26, 2000 of Allied/Por Rok (formerly a division of The
Sherwin Williams Company) in the registration statement on Amendment No. 2 to
Form SB-2 on Form S-1 and the related Prospectus of Novex Systems International,
Inc. and Subsidiary.
/s/ Feldman Sherb Horowitz & Co., P.C.
-------------------------------------
FELDMAN SHERB HOROWITZ & CO., P.C.
Certified Public Accountants
New York, New York
May 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> MAY-31-1999 MAY-31-2000
<PERIOD-START> JUN-01-1998 JUN-01-1999
<PERIOD-END> MAY-31-1999 FEB-29-2000
<CASH> 1,788 2,020
<SECURITIES> 0 0
<RECEIVABLES> 20,690 623,229
<ALLOWANCES> 0 (37,300)
<INVENTORY> 221,707 450,751
<CURRENT-ASSETS> 252,785 1,098,236
<PP&E> 248,425 1,682,040
<DEPRECIATION> (167,511) (220,914)
<TOTAL-ASSETS> 656,058 3,402,120
<CURRENT-LIABILITIES> 806,862 3,060,635
<BONDS> 772,582 799,613
0 0
0 0
<COMMON> 15,251 21,987
<OTHER-SE> (938,637) (480,115)
<TOTAL-LIABILITY-AND-EQUITY> 656,058 3,402,120
<SALES> 321,311 1,390,412
<TOTAL-REVENUES> 321,311 1,390,412
<CGS> 113,305 959,358
<TOTAL-COSTS> 1,502,564 1,986,781
<OTHER-EXPENSES> 113,182 74,474
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 97,905 192,803
<INCOME-PRETAX> (1,392,340) (863,641)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,392,340) (863,641)
<EPS-BASIC> (.10) (.04)
<EPS-DILUTED> (.10) (.04)
</TABLE>
