AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL __, 2000
REGISTRATION NO.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.1 TO FORM SB-2 ON FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE EGISTRATION
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 ............................. ---- ---- ---- $ -0-
Total Amount Due ............................ ---- ---- $ 649.03
====================================================================================================================================
</TABLE>
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
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
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 Operation
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
<PAGE>
DATED APRIL ___, 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"
Novex Systems International, Inc. manufactures and markets a
diversified line of building products including its Por-Rok line of pre-packaged
concrete repair, grouting and patching products and its Fiberforce line of
polypropylene fibers which are used to provide secondary reinforcement and to
reduce cracking in concrete.
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.
Novex issued all of the common stock, Class B warrants and common stock
options which are the subject of this registration statement to the selling
securityholders as restricted securities. We are registering these securities
pursuant to our obligations under certain agreements with certain selling
securityholders to register the securities and pursuant to the request of
certain Novex officers and directors. The registration of these securities does
not necessarily mean that any of these securities will be offered or sold
immediately upon the effectiveness of this registration statement. When a
selling security holder is prepared to sell any of his or her securities, to the
extent required, a Prospectus will be distributed which will set forth the
number of shares offered and other terms of the offering, including the proposed
selling price to the public and the name(s) of any underwriter, dealer or agent,
if any.
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.
1
<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 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 November 30, 1999 and 1998 and for the six months
ended November 30, 1999 and 1998 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 Operations" and "Consolidated Financial
Statements."
<TABLE>
Pro-Forma
-------------------------
Historical Historical
Six months ended Year ended Six months Year
------------------------------- ------------------------------- ended ended
Nov. 30, Nov. 30, May 31, May 31, Nov. 30, May 31,
1999 1998 1999 1998 1999(1) 1999(2)
--------------- -------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
Statement of
Operations Data:
Net Sales . . . . . . . . . 851,474 128,276 321,311 9,073 1,117,452 2,060,382
Cost of Sales . . . . . . . 556,127 30,573 113,305 5,444 798,119 1,598,392
Loss from
Continuing Operations (347,440) (490,135) (1,181,253) (995,653) (418,327) (1,216,380)
Net Loss . . . . . . . . . (542,368) (640,016) (1,392,340) (1,112,594) (620,114) (1,651,999)
Net Loss
Per Share . . . . . . . . (.03) (.05) (.10) (.10) (.03) (.11)
Number of
Shares . . . . . . . . . 20,233,440 12,310,302 13,720,171 11,472,508 20,233,440 14,720,171
Balance Sheet Data:
Current Assets . . . . . . . 1,082,134 397,519 252,785 200,660 n/a n/a
Total Assets . . . . . . 3,435,221 792,166 656,058 318,540 n/a n/a
Current Liabilities . . . . 2,719,924 1,125,652 750,162 719,585 n/a n/a
Long-Term Debt . . . 819,552 -0- 772,582 -0- n/a n/a
Stockholders' Equity . . (157,255) (333,486) (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 six months ended November 30, 1999.
(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, which is largely
attributable to Novex not having owned the Por-Rok Unit for a full year. In
addition, a significant portion of our assets are attributable to goodwill. 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."
Novex has not yet identified new acquisitions. 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".
Novex may need additional financing to operate its business and pay off its
debt. Our ability to generate sufficient cash flow from operations that will be
necessary to pay off the debt owed to Dime Commercial Corp. And The
Sherwin-Williams Company for the financing they provided to Novex to acquire the
Por-Rok facility 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. 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. See "Business", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Statements and Notes."
Novex has only a limited product line. 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.
While having a smaller product line does not mean that Novex will no longer be
able to market its products, 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."
7
<PAGE>
Novex cannot prevent competitors from making and marketing similar products
under another name. If Novex's competitors were to learn of the secret formulae
for making its products, they could easily duplicate the products without
infringement by integrating other chemicals into Novex's proprietary
formulations to mask the infringement of the Novex's technology. 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. While Novex would rely on laws of trade secrets to prove that it was
the original owner of proprietary technology if it were to learn of a competitor
infringing upon its proprietary technology, proving these claims can be costly
and would divert monies that would otherwise be available for expanding our
operations. In addition, Novex has learned that another company has a trademark
for the name "Novex". We do not believe that our company will be injured by
another company's use of the name Novex nor do we consider our use of the name
Novex to be an infringement upon this trademark since the other company is not
in the same industry as Novex. 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.
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 "
Consolidated Financial Statements and Notes", "Management Discussion and
Analysis of Financial Condition and Results of Operations", and "Business".
Novex' success depends upon the services of two executive officers. There are
currently only two executive officers of Novex. If Novex expands its operations
as intended, current management would not be able to continue to properly manage
Novex's affairs. Furthermore, if the company were to lose the services of either
of these officers, its operations may be hampered until their replacement was
secured. Further, there can be no assurance that Novex will be able to identify
additional qualified managers on terms economically feasible to Novex. See
"Management."
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. 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. 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".
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."
8
<PAGE>
Novex could be forced to repurchase certain Class B warrants. Certain of the
Class B warrants are subject to a "put" provision. If the holder of these Class
B warrants were to exercise its "put" option, Company could be forced to buy
back the warrants at a time when it may be disadvantageous for Novex to do so.
See "Description of Securities-Class B Warrants."
Novex is very dependent on its president and on key personnel. Novex is relying
on a relatively small number of key individuals to implement Novex's operations,
and, in particular, the services of Mr. Daniel W. Dowe, its President and Chief
Executive Officer. Novex has entered into an employment agreement with Mr. Dowe.
Novex intends to apply for key personnel life insurance. To the extent that the
services of Mr. Dowe or other key personnel become unavailable, there can be no
assurances that Novex will be able to attract or retain personnel who would be
able to adequately perform the functions previously performed by the personnel
whose services have been lost. See "Management".
Some states may impose additional restrictions on the sale of the securities
registered in this registration statement. 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 jurisdiction in which the purchaser resides, or an exemption from
registration or qualification exists in that jurisdiction. No assurance can be
given that Novex will be able to effect any required registration or
qualification. See "Description of Securities".
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.
9
<PAGE>
NOVEX'S CURRENT CAPITAL STRUCTURE
The following table sets forth as of May 31, 1999 and November 30, 1999
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>
<S> <C> <C>
November 30, May 31,
1999 1999
------------ ------------
(unaudited)
TOTAL DEBT: (1) $ 2,812,023 $ 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 5,710,516 4,408,753
Accumulated deficit (5,889,758) (5,347,390)
----------- ------------
TOTAL STOCKHOLDERS' DEFICIENCY (157,255) (923,386)
------------- -----------
TOTAL CAPITALIZATION $ 2,654,768 $ 299,444
=========== ============
</TABLE>
(1) As of November 30, 1999, Total Debt includes:
Current portion of long-term debt of $209,757;
Due to factor of $53,000;
Note payable to The Sherwin Williams Company of $1,294,973;
Bank line of credit of $434,741; and
Long-term debt of $819,552
As of May 31, 1999, total debt includes:
Current portion of long-term debt of $393,548;
Due to factor of $56,700; 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.
10
<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. 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 result 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)
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)
</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.
11
<PAGE>
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 November 30, 1999)
SIX MONTHS ENDING NOVEMBER 30, 1999 VS. NOVEMBER 30, 1998.
While net sales for the six month period ending November 30, 1999 were
$851,474, net sales for the same period ending November 30, 1998 were $128,276.
The increase in sales resulted primarily from Novex's acquisition of the Allied
Composition/Por-Rok business unit from The Sherwin-Williams Company (Por-Rok)
on August 13, 1999.
While net sales in the three month periods ending November 30, 1999
were $570,187 net sales for the same period ending November 30, 1998 were
$118,559. The revenues in the second quarter ending November 30, 1999, were
higher than revenues in the first quarter ending August 31, 1999 because the
second quarter reflected a full quarter of revenues derived from the Por-Rok
Unit versus there only being two weeks of revenue from the Por-Rok Unit in the
first quarter. Novex experienced a decrease in its gross margin in the three
months ending November 30, 1999 to 22% versus 34% for November 30, 1998. The
decrease was due to a change in Novex's inventory valuation methodology.
At the time of preparing the Form 10-Q for the quarter ended August 31,
1999, Novex had only owned the Por-Rok unit for two weeks in the first quarter
and used a cost of goods sold rate of 40% versus the actual amount for the
period. When Novex prepared its financial statements for the quarter ending
November 30, 1999 it conducted a physical inventory and then valued the
inventory. When doing this it realized that the estimated value it placed on
inventory in the first quarter was too high. As of November 30, 1999, we
adjusted our inventory level based on actual inventory counts. Accordingly, this
resulted in combined gross margins for the six month period ended November 30,
1999 of approximately 35%. Because average margins were only 35% for the
six-month period, margins for the three month period ended November 30, 1999
were only 22% which is reflective of the overstated inventory at August 31,
1999.
In the third quarter ending February 28, 2000, Novex anticipates that
its gross margin will return to a higher level. Management's targeted goal of
generating a 50% gross margin could be achieved, if net sales increased to an
annualized level of approximately $4 million dollars. This higher level of sales
volume would reduce fixed factory overhead expenses as a percentage of net
sales, thus resulting in a higher gross margin.
In the three month period ending November 30, 1999, Novex generated a
loss from operation of $191,332. In this period, however, Novex estimates that
the change in its inventory valuation methodology caused Novex to generate
approximately $50,000 in additional costs. Novex also incurred $100,000 in
freight expenses which Novex will pass on to its customers through a new
shipping policy that will become effective June 1, 2000. Also, in this period,
Novex had incurred non-cash charges for depreciation and amortization of
$42,000. The net effect of these non-cash accounting charges and the cash
expenses relating to shipping costs, would have resulted in Novex posting a
nominal operating profit for the three month period ending November 30, 1999,
before expenses for interest which in the quarter totaled $80,496. Novex's
overall operating results for the six month period ending November 30, 1999, is
less reflective of Novex's current operations since the first quarter only
includes two weeks of the revenues and expenses generated by the Por-Rok Unit.
On November 30, 1999, Novex had $1,082,134 in current assets, which
consisted principally of accounts receivable of $516,406 and inventory of
$495,015. Novex's net property, plant and equipment totaled $1,477,138 and
goodwill was $875,949. All of Novex's asset categories increased substantially
when compared to its year ending balance sheet dated May 31, 1999 because of the
assets it acquired in the Por-Rok transaction.
12
<PAGE>
LIQUIDITY AND FINANCIAL RESOURCES AT NOVEMBER 30, 1999
In the period ending November 30, 1999, Novex had $2,719,924 in current
liabilities, which includes a seller's note for $1,300,000 that was issued to
The Sherwin-William Company when we acquired the Por-Rok Unit ( Sherwin-Williams
Note). Novex also has $434,741 outstanding on its secured revolving line of
credit with Dime Commercial Corp. which is used to fund Novex's operations and
it has accounts payable of $546,384, and accrued expense of $203,691. The
officer's loan of $30,378 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 $872,552 consists of the long-term portion of a three
year $890,000 term loan that was made by Dime Commercial Corp. ("Dime Note") to
enable Novex 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 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
$157,255 on November 30, 1999. 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)
13
<PAGE>
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 November 30, 1999,
of $495,015 was sold at current prices it would have a value of approximately
$990,030. The proceeds from the sale of inventory would pay off all accounts
payable and the bank line of credit totaling $981,125. In addition, if the
entire accounts receivable balance of $516,406 was paid at one time it would pay
off the entire amount of the current portion of long-term debt, officers loan
and accrued expenses totalling $443,826.
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.
14
<PAGE>
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 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
$1,928 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 $323,989 in interest expenses relating to the
financing of the Allied/Por-Rok acquisition and other non-operating expenses of
$111,630 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 the unit on a pro forma basis
would have generated a loss before income taxes of $1,651,999.
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
- SIX MONTHS ENDED NOVEMBER 30, 1999
The Unaudited Pro Forma Consolidated Statements of Operations for the
six month period ended November 30, 1999 reflects the consolidated operations of
Novex and the Allied Composition/Por-Rok Business Unit on a six month fiscal
period beginning on June 1, 1999 and ending on November 30, 1999. The historical
presentation of the financial statements consists of the full six months of
operations for Novex Systems International Inc. and the operations of the
Allied/Por-Rok business unit from August 13, 1999 to November 30, 1999. 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 six month period
ending November 30, 1999. In this period, the combined entity would have net
sales of $1,117,452 and a gross profit of $319,333, which would have produced a
gross margin of 29%. After deducting operating expenses of $737,600 which
includes an additional $64,873 in general and administrative expenses, the
combined business unit would have generated a loss from operations of $418,327.
Of this loss $377,440 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 $149,931 in interest expenses and another $51,856 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 $620,114.
15
<PAGE>
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 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.
16
<PAGE>
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.
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 decreased (excluding stock compenstation
depreciation and amortization expense) 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.
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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 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:
- produces higher compressive, bonding, flexural and tensile strengths,
- reduces shrinkage,
- increases workability and, most importantly,
- 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.
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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 which
Novex was required to issue to Dime a warrant to purchase 233,365 shares of
Novex's common stock having 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 .
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 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. There have been no discussions
on price. In fact, the decision as to which companies would be suitable
acquisition candidates rests not as much on price as it does on the breadth of
its product line, its management, its distribution channels and how easily its
operations could be integrated with Novex' existing facilities in Clifton or
Mississauga. Although we have identified acquisition targets, there can be no
assurances that Novex will close these transactions, or that the terms of any
acquisition or its refinancing will be favorable to Novex and its shareholders.
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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 will be required to undertake
internal research and development by using the resources of its staff cement
chemist. The cost to develop new products becomes less of an issue than 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 APor-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.
To meet its business objectives, Novex will need to recruit additional
sales, marketing and manufacturing personnel. One other 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 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' 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
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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.
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
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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:
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
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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:
Compressive strength Flexural strength (flexibility) Tensile strength
(splitting) Bonding strength (adherence) Shrinkage Resistance to water
penetration 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.
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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.
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
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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 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.
1FREEDONIA Group Study Reported in Construction Marketing Today, April, 1997
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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.
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.
2Based on Statistics Canada Report.
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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 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:
C acquiring additional premium building products,
C increasing market share, and
C 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.
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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
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
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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 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.
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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. In addition, Novex will
undertake as part of its post-closing work with the Por-Rok acquisition to have
all employees sign confidentiality agreement to protect all trade secrets,
whether it involves formulae for making products or marketing strategy. By
keeping all laboratory developments in close confidence Novex seeks to limit
misappropriation of company secrets by employees or third parties.
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
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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.
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.
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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:
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
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.
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.
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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
AOne 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. 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:
C offer early entry price discounts for distributors that
purchase additional products from Novex;
C arrange pre-scheduled store visits to demonstrate to the
distributors' customers and employees the benefits of the
new products;
C provide point-of-purchase (POP) displays and other marketing
materials to assist the distributors' sale of the new
products; and
C 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' 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.
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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.
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 manufacturer's 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 manufacturer's 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.
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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.
FUTURE ACQUISITIONS
Novex is currently considering the acquisition of
companies that would expand 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.
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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.
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 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 that Novex
alleges were associated with the plaintiff. Novex's position is that the
plaintiff and the two third-party defendants which Novex has named in the
lawsuit 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 based
upon news that was not factually correct. 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
and press releases that at best could be interpreted as a disservice to Novex.
These actions were the very actions and omissions that have caused the U.S.
Securities Exchange Commission to commence an investigation of Novex. It is
Novex's understanding that the investigration is still pending and the company
has no information as to what action , if any, the SEC may take pursuant to the
investigation of Novex. Mel Greenspoon vs. Stratford Acquisition
Corporation, et. al., Ontario Court (General Division), Index No. 97-Cv-126814.
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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
Bruce W. Parker 43 Chief Financial Officer
* 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
AVenator@) 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. He is
currently 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.
BRUCE W. PARKER. As Chief Financial Officer Mr. Parker is responsible for all
treasury functions, taxation and financial reporting and is actively involved in
Novex's acquisition strategy. Mr. Parker is a certified public accountant.
Before joining Novex, Mr. Parker held positions at Price Waterhouse (now Price
Waterhouse Coopers)
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<PAGE>
and Carter-Wallace, Inc. In addition, from April 1997
through January 1998, Mr. Parker was employed by the Novex' outside auditors,
Feldman, Sherb Horowitz & Co., P.C. (Formerly Feldman Radin & Co. P.C.) He did
not hold any financial interest in that firm. During his tenure with Feldman
Radin, Mr. Parker was assigned to the Novex account in connection with the Form
10-Q for the quarter ended November 30, 1997. Mr. Parker left Feldman Radin in
January 1998 to join Leon M. Reimer & Co., P.C. Mr. Parker was contacted by Mr.
Dowe in June 1999 with respect to the position of Chief Financial Officer. Mr.
Parker accepted Novex's offer in September 1999 and began working at Novex on
October 12, 1999.
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 and Malloy
(the ACompensation 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 $100,000 paid
by Novex and its subsidiaries through May 31, 1999, to all directors and
officers:
<TABLE>
<CAPTION>
TABLE 1
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Name Other
Securi-
and Annual Restrict- ties
ing Underly- All
Princi- Compen- ed Stock ing Other
LTIP sation Awards Options LTIP Compen-
pal Fisc. Salary Bonus SARs Payout sation
sation
POSITION YEAR ($) ($) ($) (#) (#) ($) ($)
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
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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 $800,000 if a
Change of Control were to occur on or before November 10, 2000.
The term AChange 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
director's 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 attorney's
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
39
<PAGE>
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 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.
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<PAGE>
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)
Bruce W. Parker
Chief financial officer(7) 70,000 0.29%
----------- -------
All Directors and Officers
As a group 6,924,367 28.76%
--------- ------
(1) The address for Messrs. Friedenberg, Dowe, Lavin, Malloy and
Parker 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.
(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.
(7) Mr. Parker presently owns 70,000 shares of common stock.
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<PAGE>
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 F 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.
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.
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<PAGE>
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:
0 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;
0 585,114 were issued to officers, directors and
employees of Novex between November 1997 and September
1999;
0 64,857 were issued as compensation for services
rendered by Mr. Dowe before he became interim
president in November 1997; and
0 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.
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<PAGE>
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 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
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<PAGE>
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:
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;
32,000 were issued to a financial consultant in October 1999 for
services rendered; and
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.
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;
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;
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;
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
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 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:
45
<PAGE>
C 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
C 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.
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;
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;
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;
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;
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;
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;
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;
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
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 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.
46
<PAGE>
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 Apiggyback@ 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:
0 the names and addresses of the selling securityholders,
0 their material relationship or position with Novex within the last
three (3) years,
0 the number of shares of common stock owned by each selling
securityholder, and
0 the percentage of shares of common stock held by each Selling
Securityholder on a fully diluted basis.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NAME/ADDRESS OF POSITION/OFFICE CLASS OF AMOUNT OF
SECURITY HOLDER MATERIAL RELATIONSHIP SECURITY OWNED SECURITY OWNED PERCENTAGE
William K. Lavin Director; Secretary Common Stock 95,316 0.40%
190 Beach 137th Street
Belle Harbour, NY 11694
48
<PAGE>
NAME/ADDRESS OF POSITION/OFFICE CLASS OF AMOUNT OF
SECURITY HOLDER MATERIAL RELATIONSHIP SECURITY OWNED SECURITY OWNED PERCENTAGE
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
49
<PAGE>
NAME/ADDRESS OF POSITION/OFFICE CLASS OF AMOUNT OF
SECURITY HOLDER MATERIAL RELATIONSHIP SECURITY OWNED SECURITY OWNED PERCENTAGE
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:
0 the names and addresses of the selling securityholders,
0 their material relationship or position with Novex within the last three
(3) years,
0 the number of Class B warrants owned by each selling securityholder, and
0 the percentage of Class B warrants held by each Selling Securityholder
on a fully diluted basis.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NAME/ADDRESS OF POSITION/OFFICE CLASS OF AMOUNT OF
SECURITY HOLDER MATERIAL RELATIONSHIP SECURITY OWNED SECURITY OWNED PERCENTAGE
Firebird Overseas Ltd. Investor Class B Warrants 159,0002 1.53%
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:
0 the names and addresses of the selling securityholders,
0 their material relationship or position with Novex within the last
three (3) years,
0 the number of shares of common stock options owned by each selling
securityholder, and the percentage of shares of common stock
options held by each Selling Securityholder on a fully diluted basis.
51
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NAME/ADDRESS OF POSITION/OFFICE CLASS OF AMOUNT OF
SECURITY HOLDER MATERIAL RELATIONSHIP SECURITY OWNED SECURITY OWNED PERCENTAGE
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:
0 the number of shares being offered,
0 the name or names of any underwriters, dealers or agents,
0 the purchase price paid by any underwriter for securities
purchased from the selling securityholders and any discounts,
commissions or concessions allowed, and
0 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
Page
---------
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
Independent Auditors' Report F-2
Consolidated Balance Sheets as of May 31, 1999 and 1998
and November 30, 1999 and 1998 (Unaudited) F-3
Consolidated Statement of Operations for the
years ended May 31, 1999, 1998 and 1997 and the six
months ended November 30, 1999 and 1998 (Unaudited) F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficiency)
for the years ended May 31, 1999, 1998 and 1997 and the
six months ended November 30, 1999 (Unaudited) F-5
Consolidated Statement of Cash Flows for the
years ended May 31, 1999, 1998 and 1997 and the six
months ended November 30, 1999 and 1998 (Unaudited) F-6
Notes to Consolidated Financial Statements F-7-24
Financial Statement Schedule - Valuation and Qualifying Acounts F-25
ARM PRO, Inc.
Independent Auditors' Report F-26
Balance Sheets as of May 31, 1998 and 1997 and
September 16, 1998 (Unaudited) F-27
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-28
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-29
Notes to Financial Statements F-30-32
ALLIED/POR ROK
Independent Auditors' Report F-33
Statement of Assets Acquired as of August 13, 1999 F-34
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-35
Notes to Statement of Assets and Statement of Revenues
and Cost of Goods Sold F-36-38
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Description of Unaudited Pro Forma Consolidated Financial Statements F-39
Unaudited Pro Forma Consolidated Statement of Operations
For the six months ended November 30, 1999 F-40
Unaudited Pro Forma Consolidated Statement of Operations
For the year ended May 31, 1999 F-41
Notes to Unaudited Pro Forma Consolidated Financial Statements F-42
F-1
<PAGE>
INDEPENDENT AUDITOR'S 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-25. 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 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
<TABLE>
<CAPTION>
ASSETS
November 30, May 31,
------------ -------- --------
1999 1999 1998
------- -------- -------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 27,979 $ 1,788 49,108
Accounts receivable, net 516,406 20,690 9,250
Inventories 495,015 221,707 122,134
Other Receivables - - 17,367
Prepaid expenses and other current assets 42,734 8,600 2,801
--------- ------- --------
Total Current Assets 1,082,134 252,785 200,660
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 1,477,138 80,914 106,598
GOODWILL, net of accumulated amortization 875,949 316,300 -
OTHER ASSETS - 6,059 11,282
--------- ------- --------
$ 3,435,221 $ 656,058 318,540
========= ======= ========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 209,757 $ 393,548 520,470
Due to factor 53,000 56,700 -
Note Payable 1,294,973 - -
Bank Line of Credit 434,741 - -
Accounts payable 546,384 241,424 162,115
Loans payable - shareholder 30,378 - 37,000
Accrued expenses and other current liabilities 203,691 115,190 -
--------- ------- --------
Total Current Liabilities 2,772,924 806,862 719,585
--------- ------- --------
COMMITMENTS AND CONTINGENCIES
LONG TERM DEBT, net of current portion 819,552 772,582 -
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 5,710,516 4,408,753 3,542,039
Accumulated deficit (5,889,758) (5,347,390) (3,955,050)
----------- ---------- -----------
Total shareholders' deficiency (157,255) (923,386) (401,045)
----------- ---------- -----------
$ 3,435,221 $ 656,058 $ 318,540
=========== ========== ===========
See notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
November 30, Year ended May 31,
--------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1999 1998 1997
----------- ----------- ----------- ----------- -------------
(Unaudited) (Unaudited)
NET SALES $ 851,474 $ 128,276 $ 321,311 $ 9,073 -
COST OF GOOD SOLD 556,127 30,573 113,305 5,444 -
--------- --------- ---------- ----------- -----------
GROSS PROFIT 295,347 97,703 208,006 3,629 -
SELLING, GENERAL AND ADMINISTRATIVE 672,787 587,838 1,389,259 999,282 2,310,397
--------- --------- ----------- ----------- -----------
LOSS FROM OPERATIONS (377,440) (490,135) (1,181,253) (995,653) (2,310,397)
--------- --------- ----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest income - 330 335 409 314
Interest expense (113,072) (45,177) (97,905) (17,548) (12,917)
Amortization of debt discount (28,870) (69,529) (146,674) (84,535) -
Foreign currency gain (loss) (22,986) (35,505) 33,157 (15,267) (3,144)
---------- ----------- ----------- ---------- -----------
OTHER EXPENSES, net (164,928) (149,881) (211,087) (116,941) (15,747)
---------- ----------- ----------- ---------- -----------
NET LOSS $ (542,368) $ (640,016) $ (1,392,340) $ (1,112,594) (2,326,144)
========== =========== =========== =========== ===========
NET LOSS PER COMMON SHARE, basic and diluted $ (0.03) $ (0.05) $ (0.10) $ (0.10) (0.24)
========== =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, basic and diluted 20,233,440 12,310,302 13,720,171 11,472,508 9,590,212
========== =========== ============ ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
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
Net loss (Unaudited) - - - (542,368) (542,368)
------------- ------------- ------------- ------------- -------------
BALANCE, November 30, 1999 (Unaudited) 21,987,738 $ 21,987 $ 5,710,516 $ (5,889,758) $ (157,255)
============= ============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
November 30, Year ended May 31,
--------------------- -----------------------------------
1999 1998 1999 1998 1997
-------- ---------- -------- ------------ -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (542,368) $ (640,016) $ (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 51,902 15,713 55,184 13,805 345
Common stock and options issued for payment
of services and compensation 7,500 44,400 122,315 146,250 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 28,870 69,529 146,674 84,535 128,666
Changes in assets and liabilities, net of the
effect from acquisitions:
Accounts receivables 34,719 (68,259) (11,440) (9,250) -
Inventories (47,647) (113,154) (99,573) 21,179 143,313
Other receivables - 15,122 17,367 23,212 (28,711)
Prepaid expenses and other current assets (34,134) (13,530) (5,799) (2,801) -
Refundable deposits - - - - 178,148
Other assets 6,059 (1,840) 5,223 (1,147) 10,135
Accounts payable and accrued expenses 393,461 38,538 194,499 48,897 100,587
--------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (101,638) (638,322) (974,220) (742,237) 846,277
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment - - (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 (2,503,871) (290,640) (330,236) - -
---------- --------- --------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,503,871) (290,640) (345,800) (104,996) (15,753)
---------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor - - 56,700 - -
Proceeds from (repayment of)
loans payable - shareholder 30,378 (37,000) (37,000) 37,000 134,405
Proceeds from issuance of notes payable - 85,000 - - -
Proceeds from bridge financing - 800,000 - - 265,230
Proceeds from bank line of credit 434,741 - - - -
Proceeds from debt financing 2,166,581 - 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 2,631,700 946,000 1,272,700 886,243 716,934
--------- --------- --------- --------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 26,191 17,038 (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 $ 27,979 $ 66,146 $ 1,788 $ 49,108 $ 10,098
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 91,999 $ 45,177 $ 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 $ - $ - $ - $ -
========== ========== ========== ============ ==========
</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 November 30, 1999 and the
Six Months Ended November 30, 1999 and 1998 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>
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>
(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>
(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, including those incurred
under cooperative advertising programs, are expensed as incurred.
Advertising expense charge to operations for the six months ended
November 30, 1999 and for the years ended May 31, 1999, 1998 and 1997
amounted to approximately $3,300, $12,700, $1,100 and $0,
respectively.
(o) Unaudited Interim Financial Statements - The consolidated balance
sheet at November 30, 1999, the consolidated statements of operations
and cash flows for the six months ended November 30, 1999 and 1998 and
the consolidated statement of changes in shareholders' deficiency at
November 30, 1999, 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>
<TABLE>
<CAPTION>
4. INVENTORIES
Inventories consist of the following:
MAY 31,
NOVEMBER 30, --------------------------------
1999 1999 1998
--------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Raw Material $ 269,216 $ 113,288 76,276
Work in Progres --- 3,217 440
finished good 225,799 105,202 45,418
------------------ -------------- ------------
$ 495,015 $ $ 221,707 $ 122,134
================= ============== ============
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
MAY 31,
NOVEMBER 30, -----------------------------------
1999 1999 1998
------------------ -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land $ 400,000 $ --- $ ---
Building 447,374 --- ---
Property and equipment 807,327 231,095 103,247
Leasehold improvements 17,330 17,330 17,330
--------------- --------------- -------------
1,672,031 248,425 120,577
Less: Accumulated
depreciation and
Amortization (194,893) (167,511) (13,979)
--------------- --------------- ----------
$ 1,477,138 $ 80,914 $ 106,598
=============== =============== ==========
</TABLE>
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 November 30, 1999 and fiscal years
1999 and 1998 was approximately $25,000, $31,000 and $0, respectively.
F-11
<PAGE>
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 is 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 is collateralized by substantially all assets of Novex
Canada and is guaranteed by Novex. The arrangement also requires that
the benefits of Novex Canada's business insurance be assigned to the
commercial factor.
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 November 30, 1999, the loans payable to shareholders for $30,378 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 Canada has not had to pay Canadian income taxes as they have
generated operating losses since its inception.
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
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-
==================== ================ ================
</TABLE>
10. NOTES PAYABLE (UNAUDITED)
Notes payable at November 30, 1999 include $1,294,973 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 $1,359,722 on August 12, 2000 inclusive of accrued
interest of $64,749. 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
November 30, 1999, the Bank Line of Credit was $434,741 inclusive of
accrued interest of $4,892. Interest is computed on the average
monthly balance under the line based on 2% over the prime rate
(currently 10.5%).
F-13
<PAGE>
11. LONG TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
------------------------------------
1999 1999 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
(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 14,309 --- ---
--------------- --------------- ---------------
1,029,309 1,950,000 590,000
Less: unamortized discount
on debentures --- 28,870 69,530
--------------- --------------- ---------------
1,029,309 1,166,130 520,470
less: current portion 209,757 393,548 520,470
--------------- --------------- ---------------
$ 819,552 $ 772,582 $ ---
=============== =============== ===============
</TABLE>
(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>
(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. The note is collateralized
by all of Novex's plant and equipment at the Clifton facility.
F-15
<PAGE>
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>
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 six months ended November 30, 1999, 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 six months ended November 30, 1999, 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 six month period ended November 30, 1999, 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>
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
------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Exercise Exercise
Shares Price Exercisable Shares Price Exercisable
-------------- ------------- --------------- --------------- ------------- -----------------
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>
(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 options issued with debt was $3,893 for
the six months ended November 30, 1999.
F-19
<PAGE>
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>
Six Months
Ended
November 30, Year ended May 31
---------------------------------------------
1999 1999 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Loss to shareholders:
As reported $ (542,368) $(1,392,340) $(1,112,954) $(2,326,144)
Pro forma $ (548,203) $(1,432,076) $(1,562,387) $(2,320,553)
Net Loss per share:
As reported $ (.03) $ (0.10) $ (0.10) $ (0.24)
Pro forma $ (.03) $ (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>
<TABLE>
<CAPTION>
UNITED STATES CANADA
--------------------- --------------------
Allied Allied
POR-ROK FIBER POR-ROK FIBER ADJUSTMENTS(1) CONSOLIDATED
------- ------- ------- ------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended November 30,
1999 (UNAUDITED)
- -----------------------------
Sales to unaffiliated customers $ 537,935 $ ---- $ ---- $ 313,539 $ ---- $ 851,474
Interest Income ---- ---- ---- ---- ---- ----
Interest Expense 73,762 ---- ---- 31,005 8,305 113,072
Depreciation and Amortization 23,060 ---- ---- 26,642 2,200 51,902
Segment Loss 391,080 ---- ---- 144,613 6,675 542,368
Segment Assets ---- ---- ---- 562,000 92,300 3,435,221
Long Lived Asset Expenditures 2,503,871 ---- ---- ---- ---- 2,503,871
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>
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.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------------
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Net Sales $ 421,305 $ 327,554 $ 373,712
Cost of Sales 212,059 133,988 174,364
-------------- --------------- ----------------
Gross profit 209,246 193,566 199,348
Operating expenses 1,406,026 1,189,113 2,576,302
-------------- --------------- ----------------
Loss from operations (1,196,780) (995,547) (2,376,954)
Net other expenses 180,254 138,269 2,016
-------------- --------------- ----------------
Net loss $ (1,377,034) $ (1,133,816) $ (2,378,970)
============== =============== ================
Net loss per share $ (0.10) $ (0.10) $ (0.25)
============== =============== ================
Shares used in calculation 13,720,171 11,472,508 9,590,212
============== =============== ================
</TABLE>
F-22
<PAGE>
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>
(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 (UNAUDITED)
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
requirements. In addition, the Company granted class B warrants with
"put" rights to purchase 233,365 shares of restricted common stock at
an exercise price of $.25 to Dime Commercial Corp. The value of the
warrants subject to "put" rights has been included in current
liabilities in the amount of $3,893. The bank has a senior secured
interest in substantially all the assets of Novex.
F-24
<PAGE>
<TABLE>
<CAPTION>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS
Six Months Ended November 30, 1999 (Unaudited) and the
Years Ended May 31, 1999, 1998 and 1997
<S> <C> <C> <C> <C>
Additions
Balance at charged to Balance at
beginning cost and Deductions- end of
Description of Year expenses describe Year
- ---------------------- ---------- ---------- ----------- ----------
Allowance for doubtful
Accounts
Six Months ended
November 30, 1999
(Unaudited) $ 890 $ 32,500 $ --- $ 33,390
Year ended May 31,1999 $ --- $ 890 $ --- $ 890
Year ended May 31,1998 $ --- $ --- $ --- $ ---
Year ended May 31,1997 $ --- $ --- $ --- $ ---
</TABLE>
F-25
<PAGE>
INDEPENDENT AUDITOR'S 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 operations 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-26
<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 shares 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-27
<PAGE>
ARM PRO INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
From Four months
June 1, 1998 to ended
September 16, September 30, Year ended May 31,
----------------------
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-28
<PAGE>
ARM PRO INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From
June 1, 1998 Four months
to ended Year ended May 31,
September 16, September 30, -------------------------
1998 1997 1998 1997
(Unaudited) (Unaudited)
------------ ------------ ------------ ------------
<S> <C> <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-29
<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-30
<PAGE>
(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:
<TABLE>
<CAPTION>
May 31, May 31,
LIFE 1998 1997
---------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
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
========= =========
</TABLE>
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-31
<PAGE>
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-32
<PAGE>
INDEPENDENT AUDITOR'S 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-33
<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-34
<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-35
<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-36
<PAGE>
(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-37
<PAGE>
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-38
<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 six months ended November 30, 1999 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-39
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended November 30, 1999
<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 $ 851,474 $ 265,978 $ - $ - $ 1,117,452
COST OF GOOD SOLD 556,127 241,992 - - 798,119
--------------- --------------- ----------- ----------- --------------
GROSS PROFIT 295,347 23,986 319,333
SELLING, GENERAL AND ADMINISTRATIVE 672,787 - 4,873 (2) 737,660
60,000 (4)
--------------- --------------- ----------- ----------- --------------
LOSS FROM OPERATIONS (377,440) 23,986 64,873 - (418,327)
INTEREST EXPENSE (113,072) - 36,859 (1) - (149,931)
OTHER EXPENSE (51,856) - - - (51,856)
--------------- --------------- ----------- ----------- --------------
NET INCOME (LOSS) $ (542,368) $ 23,986 $ 101,732 $ - $ (620,114)
=============== =============== =========== =========== ==============
LOSS PER SHARE $ (0.03) $ (0.03)
=============== ==============
WEIGHTED AVERAGE SHARES 20,233,440 20,233,440
=============== ==============
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
F-40
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31, 1999
Historical Adjustments Pro - Forma
--------------------------------------------- ------------------- ------------
Novex Systems Allied/ Debit Credit
International, Arm Pro, Inc. Por Rok Amount Amount Total
--------------- ------------- --------- ------ ------ ------------
<S> <C> <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-41
<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-42
<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 NOVEX SYSTEMS
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS INTERNATIONAL, INC.
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..
11,796,692 Shares of Common Stock
TABLE OF CONTENTS 675,365 Class B Warrants and
underlying Shares
1,185,924 Stock Options and
PAGE underlying Shares
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
or Plan 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.
II-1
<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:
<TABLE>
<CAPTION>
<S> <C>
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 *
==========
</TABLE>
*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 attorney'sfees), 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's 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.
II-1
<PAGE>
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 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 Rule 903(c)(2) under Regulation S promulgated
under the Securities Act, 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 Rule 903(c)(2) under Regulation S, 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 Rule 903(c)(2) under
Regulation S 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 Rule 903(c)(2) under Regulation S
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 (AFirst 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 (ASecond 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>
<S> <C> <C>
Exhibit
NO. DESCRIPTION OF EXHIBIT INCORPORATED DOCUMENT
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
II-5
<PAGE>
Exhibit
NO. DESCRIPTION OF EXHIBIT INCORPORATED DOCUMENT
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 form 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 on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Clifton,
State of New Jersey on April 13, 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
registration statement has been signed below on April 13, 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; August13,
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**
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**
** Previously filed
*** Filed herewithin
- --------
1FREEDONIA GROUP STUDY REPORTED IN CONSTRUCTION MARKETING TODAY, April, 1997.
2Based on Statistics Canada Report.
II-10
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.1 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
April 12, 2000
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