U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1996 Commission file number 0-22096
NOVATEK INTERNATIONAL, INC.
----------------------------------------------------------
(Exact name of the registrant as specified in its charter)
Colorado 84-1074891
------------------------------ -------------------------------------
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1401 Neptune Drive, Boynton Beach, Florida 33426
------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 736-6659
Novatek International, Inc. (1) HAS FILED all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) HAS BEEN subject to such filing requirements for the past 90
days.
As of May 6, 1996 there were outstanding 13,078,498 shares of Novatek
International, Inc. Common Stock -no par value.
Transitional Small Business Disclosure format: Yes No X
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<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
Part II OTHER INFORMATION
Items 1 through 6 10
Signatures 11
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31 December 31
1996 1995
ASSETS Unaudited Audited
------ --------- -------
Current assets
Cash $ 107,845 $ 58,234
Costs in excess of billings on
uncompleted contracts 189,067 285,103
Current maturities of notes receivable 1,064,450 64,450
Other current assets 518,139 419,800
------------ ------------
Total current assets 1,879,501 827,587
Property and equipment, net 1,043,684 1,055,920
Distribution license 52,124,835 --
Notes receivable, less current maturities 1,975,579 225,579
Other assets 80,885 66,201
------------ ------------
$ 57,104,484 $ 2,175,287
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Accounts payable and other current liabilities $ 319,985 $ 164,627
Billings and estimated losses in excess of
costs on uncompleted contracts 224,483 78,742
Current maturities of long-term debt 2,732,100 7,472
------------ ------------
Total current liabilities 3,276,568 250,841
------------ ------------
Long-term debt, less current maturities 395,000 322,777
------------ ------------
Convertible debenture payable 36,000,000 --
------------ ------------
Sales contracts to be acquired (36,000,000) --
------------ ------------
Shareholders' Equity (Deficit)
Preferred stock, 10,000,000 shares authorized;
5,000 shares designated series A 10%
cumulative and convertible; $1,000 stated value 1,887,000 1,887,000
Common stock, no par value;
250,000,000 shares authorized 68,733,561 6,228,185
Additional paid-in capital 1,076 1,076
Accumulated (deficit) (9,688,721) (6,514,592)
Deferred consulting fees (7,500,000) --
------------ ------------
53,432,916 1,601,669
------------ ------------
$ 57,104,484 $ 2,175,287
============ ============
See accompanying notes to consolidated financial statements
3
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Three Months Ended Three Months Ended
March 31 March 31
1996 1995
Unaudited Unaudited
--------- ---------
Revenue $ 37,775 $ 639,312
Contract Costs 202,234 700,158
----------- ----------
Gross Loss (164,459) (60,846)
General and Administrative Expenses 614,178 223,929
----------- ----------
Operating Loss (778,637) (284,775)
----------- ----------
Nonoperating Income (Expense)
Financing costs related to convertible
notes (2,376,440) --
Other expense (19,052) (81,940)
----------- ----------
$(2,395,492) (81,940)
----------- ----------
Net Loss $(3,174,129) $ (366,715)
=========== ==========
Loss Per Share $ (0. 96) $ (0.27)
=========== ==========
Weighted Average Number of
Shares Outstanding 3,293,452 1,386,990
=========== ==========
See accompanying notes to consolidated financial statements
4
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31 March 31
1996 1995
Unaudited Unaudited
------------ ------------
<S> <C> <C>
Net cash (used in) operating activities $ (313,662) $ (573,268)
----------- -----------
Cash Flows from Investing Activities
------------------------------------
Purchase of property and equipment -- (1,600)
Collections on notes receivable 250,000 --
Proceeds from sale of investment in
equity securities 27,234 --
Acquisition of subsidiary, net cash acquired 4,691 --
Decrease in due from affiliates 11 --
Decrease in other assets 10,109 --
------------ ------------
Net cash provided by (used in) investing
activities 292,045 (1,600)
------------ ------------
Cash Flows from Financing Activities
------------------------------------
Decrease in outstanding checks in excess of
bank balances -- (39,676)
Proceeds from short and long-term debt 1,665,000 626,653
Principal payments on short and long-term debt (1,569,908) (8,238)
Loan closing costs (23,864) --
------------ ------------
Net cash provided by financing activities 71,228 578,739
------------ ------------
Net increase in cash 49,611 3,871
Cash, beginning of period 58,234 11,946
------------ ------------
Cash, end of period $ 107,845 $ 15,817
============ ============
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash payments for interest $ 11,587 $ 28,305
============ ============
Schedule of Noncash Investing and Financing Activities
------------------------------------------------------
Common stock issued as payment on
long-term debt $ 27,675,000 $ --
============ ============
Common stock issued in advance for
future consulting fees $ 7,500,000 $ --
============ ============
Acquisition of business
Fair value of assets acquired $ 55,380,432 $ --
Fair value of liabilities assumed (30,358,748) --
Common stock issued to purchase business (25,026,375) --
------------ ------------
Net cash received $ (4,691) $ --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Statement of Information Furnished
The accompanying unaudited financial statements have been prepared in
accordance with Form 10-QSB instructions and in the opinion of management
contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of March 31, 1996,
the results of operations for the three month periods ended March 31, 1996
and 1995 and the cash flows for the three month periods ended March 31,
1996 and 1995. These results have been determined on the basis of generally
accepted accounting principles and practices applied consistently with
those used in the preparation of the company's 1995 Annual Report on Form
10-KSB. Operating results for the quarter ended March 31, 1996, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that the
accompanying financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for fiscal year ended December 31, 1995.
2. Acquisition of Business
On March 5, 1996, a merger was effected between Novatek International, Inc.
("Company"), its wholly-owned subsidiary Novatek International Holdings,
Inc., ("Holdings"), Medical Products, Inc. ("MPI") and its shareholders,
The Celentano Limited Partnership and Pickeral Cove Trust ("Shareholder").
MPI held an exclusive license to market and distribute Medical diagnostic
devices in South America and the Bahamas. The distribution license is
valued in excess of $50,000,000. As a result of this merger, the business
of MPI will be conducted by Holdings as a wholly-owned subsidiary of the
Company. To purchase MPI the Company issued 2,002,638 shares of its common
stock to The Celentano Limited Partnership and 2,002,637 shares of its
common stock to Pickeral Cove Trust in exchange for all of the outstanding
shares (7,500 shares of common stock) of MPI. The Company issued to Joseph
Roberts & Co., Inc. 1,000,000 shares of its common stock for its assistance
in arranging the merger. The Company also issued 3,453,125 shares of its
common stock, $125,000 in short term notes and paid $1,300,000 to New
England Diagnostics Corporation ("NED") and MPI previously paid $950,000 to
NED which resulted in payment in full of the balance due NED of a
promissory note in the original face amount of $30,000,000 owing from MPI
to NED.
NED subsequently sold its shares in the Company.
3. Current Maturities of Long-term Debt
In connection with the merger, the Company issued convertible notes payable
in the amount of $2,354,000 convertible into the Company's common stock at
$2.50 per share. These notes were converted subsequent to March 31, 1996.
The financing costs related to convertible notes included in the
Consolidated Statement of Operations contains $2,354,000 of incremental
interest expense attributable to the issuance of the convertible notes
payable.
6
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. Convertible Debenture Payable
The Company issued a $36,000,000 face amount, 9% convertible debenture,
convertible into 7,200,000 shares of the Company's common stock, to NED as
consideration for NED acquiring for the Company certain sales contracts for
products for which the Company holds a license to distribute. This
debenture has been placed in escrow pending the performance by NED of its
obligation to acquire these certain sales contracts. Interest on debenture
begins at the time the related sales contracts are delivered.
5. Deferred Consulting Fees
The Company issued 1,000,000 shares of its common stock and paid a $250,000
retainer to four consultants who are to obtain sales contracts for the
Company and further the Company's interests in Honduras, Costa Rica, and
Colombia. The $250,000 retainer is included in Administrative and General
Expenses in the Consolidated Statement of Operations. The stock portion of
the compensation is being held in escrow and will be earned based on a
percentage of the Company's gross revenue produced by sales contracts
obtained by the consultants, calculated annually.
6. Pro Forma Data
Pro forma data for the current interim period and the corresponding interim
period for the preceding fiscal year for the acquisition outlined in Note 2
has not been presented since MPI was not formed until November 3, 1995.
7. Sale of License Agreement
During January 1996, the Company completed the sale of a license agreement
to distribute medical diagnostic devices in the Bahamas. The Company
recognized $3,000,000 of revenue on this transaction with a related cost of
$3,000,000 which represents the value allocated to the Bahamian license
upon the acquisition of MPI.
8. Subsequent Events
On April 11, 1996, the Company entered into a five year agreement with
Importadora Y Expertadora Accmed, Ltd., a twelve year old Medical and
Pharmaceutical company, based in Santiago, Chile, to supply the Quix (tm)
Rapid Cholera Strip Test. The agreement calls for the guaranteed purchase
of $5,000,000 of Quix (tm) Rapid Cholera Strip Tests per year for five
years totaling $25,000,000.
7
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
--------
Since inception, the Company has not been able to generate cash flow from
operations to cover expenses without advances from affiliates and private
placements of securities. This casts significant doubt upon the Company's
ability to continue as a going concern with its past business methodology. As a
result, the Company executed an agreement and plan of merger with Medical
Products, Inc. (See Note 2 to the consolidated financial statements). The
Company has also reviewed its existing construction and manufacturing contracts
and determined to down size its domestic operations and focus primarily on
offshore contracts that management believed will yield profits. Consequently,
the Company negotiated termination of its lease on 1340 Neptune Drive and moved
into 1401 Neptune Drive, which it owns. As a result of the merger, which was
consummated on March 5, 1996, the Company has formed a division for its light
gauge steel and concrete constructions projects in the Commonwealth of the
Bahamas.
The company is focusing its resources on developing sales of rapid medical
diagnostic devices for which the Company acquired rights to South America and
the Bahamas. These test devices include test kits for HIV, cholera, diabetes, as
well as nine other viruses. In addition to having sold a $3,000,000 license for
the Bahamas, the Company has executed a five year contract valued at $5,000,000
per year with Chile for Cholera test kits. The Company is also acting as a
co-broker in an agreement to ship HIV test devices to Mexico. The first shipment
of these devices was made on May 14, 1996.
In April 1996, the Company negotiated and reached an agreement in principle to
acquire the exclusive license to market and distribute the medical diagnostic
devices in Canada, Mexico, and Central America.
RESULTS OF OPERATIONS
---------------------
Revenue for the first quarter decreased from $639,312 in 1995 to $37,775 in
1996. This dramatic decrease in revenues is due to the down sizing of the
Company's construction operations and also due to the completed contract method
of accounting, for which revenues related to various Bimini contracts will not
be recognized until the second and future quarters.
During January 1996, the Company completed the sale of a license agreement to
distribute medical diagnostic devices in the Bahamas. The Company recognized
$3,000,000 of revenue on this transaction with a related cost of $3,000,000
which represents the value allocated to the Bahamian license upon the
acquisition of MPI.
Management believes that revenues in the second quarter will improve
significantly as a result of completed contracts related to the construction
division and revenues generated from the initial shipments of medical diagnostic
devices.
General and administrative expenses, after being adjusted for approximately
$105,000 for expenses directly related to the merger and for approximately
$250,000 in consulting fees (see Note 5), at $259,178 for the first quarter of
1996 are just slightly higher than the $223,929 incurred during the first
quarter of 1995.
The Company incurred nonoperating expenses of $2,395,492 during the three months
ended March 31, 1996, due to financing costs attributable to the convertible
notes (See Note 3 to the Consolidated Financial Statements).
8
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
Liquidity and Capital Resources
-------------------------------
The Company's net cash used in operating activities was $313,662 for the three
months ended March 31, 1996, compared to net cash used in operating activities
of $573,268 during the comparative prior year period. The primary reason for
this decrease in net cash used in operating activities was an increase in
certain liabilities during 1996.
Net cash provided by investing activities during 1996 was $292,045 compared to
net cash used in investing activities of $1,600 during 1995. During 1996, the
Company collected $250,000 on a note receivable.
The net cash provided by financing activities during 1996 was $71,228 compared
to net cash provided by financing activities during 1995 of $578,739. During
1996, the Company received $1,665,000 of proceeds from short and long term debt
while making principal payments on short and long term debt of $1,569,908.
During 1995, the Company received proceeds from long term debt of $626,653.
Without positive cash flow from operations, the Company experiences the typical
problems of obtaining debt and equity capital funding. Management believes that
the merger with Medical Products, Inc., through the profits derived from the
sale of the medical diagnostic devices, will provide sufficient cash flow to
meet the Company's operating needs during 1996. Additionally, the Company has an
understanding with a Bahamian developer to produce townhomes. The developer will
advance funds necessary to complete this project for the next three years.
9
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Securities Holders: None
Item 5. Other Information:
The Company is contemplating filing a Form S-1 Registration
Statement to register certain restricted shares of its common
stock, including shares of common stock underlying
outstanding warrants.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit: Exhibit 27 Financial Data Schedule*
* Electronic filing only
(b) Reports on Form 8-K.
(1) On January 3, 1996, the Company filed Form 8-K
regarding an Agreement and Plan of Merger.
(2) On March 19, 1996, the Company filed Form 8-K
regarding its March 5, 1996, merger.
(3) On April 2, 1996, the Company filed Form 8-KA which
amended Form 8-K dated March 19, 1996, to provide the
following required financial statements relating to such
acquisition:
(i) Financial statements of business acquired:
Independent Auditor's Report on the Financial Statements.
Balance Sheet as of December 31, 1995.
Statement of Operations for the period from November 3,
1995, (Date of Incorporation) through December 31, 1995.
Statement of Stockholder's deficit for the period
from November 3, 1995, (Date of Incorporation)
through December 31, 1995.
Notes to Financial Statements.
(ii) Pro Forma financial information:
Unaudited Pro Forma Balance Sheet as of December 31, 1995.
Unaudited Pro Forma condensed Consolidated Statement of
Operations for the year ended December 31, 1995.
10
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
Dated: May 20, 1996
Novatek International, Inc.
(Registrant)
By:/s/Frank J.Cooney
---------------------------
Frank J. Cooney, President
Chief Executive Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NOVATEK INTERNATIONAL INC. FOR THE THREE MONTHS
ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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<RECEIVABLES> 3,113
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<CURRENT-LIABILITIES> 3,277
<BONDS> 2,999
<COMMON> 68,734
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1,887
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</TABLE>
