FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST
31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO .
NOVEX SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 0-26112 41-1759882
(State of Jurisdiction) (Commission (IRS Employer
File Number) Identification No.)
67 WALL STREET, SUITE 2001, NEW YORK, NEW YORK 10005
(Address of Principal Executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 212-825-9292
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to FILING REQUIREMENTS FOR THE
PAST 90 DAYS. YES X NO .
The Company had 21,898,264 shares of its $.001 par value common stock issued and
outstanding on August 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
LOCATION IN FORM 10-Q INCORPORATED DOCUMENT
Part II, Item 6 Form 8-K filed August 23, 1999
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NOVEX SYSTEMS INTERNATIONAL, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet - dated
August 31, 1999 and May 31, 1999..........................F-1
Statement of Operations - for the
three months ended August 31, 1999 and
August 31, 1998...........................................F-2
Statement of Cash Flows - for the three
months ended August 31, 1999 and
August 31, 1998...........................................F-3
Notes to Financial Statements.............................F-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................1
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................4
Item 2. Changes in Securities................................................5
Item 3. Defaults Upon Senior Securities......................................6
Item 4. Submission of Matters to a Vote of Security Holders..................6
Item 5 Other Information....................................................6
Item 6. Exhibits and Reports on Form 8-K.....................................7
ii
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PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) PAGE
Balance Sheet - dated
August 31, 1999 and May 31, 1999..........................F-1
Statement of Operations - for the
three months ended August 31, 1999 and
August 31, 1998...........................................F-2
Statement of Cash Flows - for the three
months ended August 31, 1999 and
August 31, 1998...........................................F-3
Notes to Financial Statements.............................F-5
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NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
August 31, May 31,
1999 1999
----------- -------------
CURRENT ASSETS:
Cash and cash equivalents ................... $ 15,961 $ 1,788
Accounts receivable, net of allowances ...... 466,226 20,690
Inventory ................................... 476,125 221,707
Prepaid expenses and other current assets ... 10,064 8,600
----------- -----------
Total Current Assets .................... 968,376 252,785
PROPERTY, PLANT, AND EQUIPMENT, net of
accumulated depreciation and amortization ... 1,452,794 80,914
GOODWILL, net of accumulated amortization ........ 818,972 316,300
OTHER ASSETS ..................................... 6,091 6,059
----------- -----------
$ 3,246,233 $ 656,058
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Due to factor ............................... $ 73,204 $ 56,700
Bank line of credit ......................... 192,577 --
Current portion of long term debt ........... 1,696,745 393,548
Accounts payable and accrued expenses ....... 399,474 356,614
Advances from shareholder ................... 43,884 --
----------- -----------
Total Current Liabilities ............... 2,405,884 806,862
COMMITMENTS AND CONTINGENCIES
LONG TERM DEBT, net of current portion ........... 743,278 772,582
SHAREHOLDERS' EQUITY:
Common stock - $0.001 par value
50,000,000 shares authorized ............
21,898,264 and 15,250,771 shares
issued and outstanding, respectively .... 21,898 15,251
Additional paid-in capital .................. 5,670,737 4,386,387
Accumulated deficit ......................... (5,595,564) (5,325,024)
----------- -----------
Shareholders' Equity (Deficit) .......... 97,071 (923,386)
----------- -----------
$ 3,246,233 $ 656,058
=========== ===========
See notes to financial statements.
F-1
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NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
August 31,
--------------------------
1999 1998
------------ ------------
NET SALES ........................................ $ 281,287 $ 9,677
Cost of goods sold ............................... 111,637 4,155
------------ ------------
Gross Profit ................................ 169,650 5,522
OPERATING EXPENSES
General and administrative costs ............ 355,758 258,744
Non-Cash imputed stock compensation ......... -- 18,750
------------ ------------
Total operating expenses ............. 355,758 277,494
------------ ------------
LOSS FROM OPERATIONS ............................. (186,108) (271,972)
------------ ------------
OTHER INCOME (EXPENSES)
Interest expense ............................ (49,201) (15,264)
Amortization of debt discount ............... (28,870) (26,074)
Foreign exchange loss ....................... (6,361) (12,682)
------------ ------------
(84,432) (54,020)
------------ ------------
NET LOSS ......................................... $ (270,540) $ (325,992)
============ ============
Basic loss per weighted-average share of
common stock outstanding .................... $ (0.02) $ (0.03)
============ ============
Weighted-average share of common stock outstanding 15,534,657 12,150,849
============ ============
See notes to financial statements.
F-2
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<TABLE>
<CAPTION>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
August 31,
--------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ................................................ $ (270,540) $ (325,992)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................... 19,400 5,593
Common stock issued as compensation .............. 7,500 36,900
Common stock issued for acquisition of business .. 260,000 --
Conversion of debt into common stock ............. 1,023,497 --
Amortization of debt discount .................... 28,870 26,641
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Increase in accounts receivable ..................... (445,536) (777)
Decrease in other receivables ....................... -- 12,490
Increase in inventory ............................... (254,418) (22,642)
Increase in prepaid expenses and other current assets (1,464) (15,249)
Increase in other assets ............................ (32) (1,526)
Increase in accounts payable and accrued expenses ... 42,860 74,913
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ........................ 410,137 (209,649)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ............... (1,381,360) 4,986
Acquisition of business, net of cash acquired ....... (512,592) --
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES .................... (1,893,952) 4,986
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash deficit ........................................ -- 9,555
Due to factor ....................................... 16,504 --
Proceeds from bank line of credit ................... 192,577 --
Increase (decrease) in advance from shareholder ..... 43,884 (37,000)
Increase in debt .................................... 1,245,023 --
Proceeds from issuance of debentures ................ -- 85,000
Proceeds from sale of common stock .................. -- 98,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 1,497,988 155,555
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ......... 14,173 (49,108)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............. 1,788 49,108
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................... $ 15,961 $ --
=========== ===========
</TABLE>
See notes to financial statements.
F-3
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING FINANCIAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND FOOTNOTES, WHICH ARE ANNEXED HERETO. FORWARD
LOOKING STATEMENTS MADE IN THIS SECTION ARE MADE PURSUANT TO THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying consolidated financial
statements.
The Financial Statements for the period ended August 31, 1999 included in this
Form 10-Q are unaudited; however, such 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDING AUGUST 31, 1999 VS. AUGUST 31, 1998
On August 13, 1999, the Company had completed its acquisition of all the assets
belonging to the Allied Composition/Por-Rok business unit that were formerly
owned by The Sherwin-Williams Company ("Por-Rok"). Due to its expanded
operations in the United States, the Company realized a significant increase in
its revenues and costs versus the prior period even though the Company only
owned this unit for two weeks during the fiscal quarter ending August 31, 1999.
In this three month period, the Company had sales of $281,287 versus $9,677 in
the corresponding three month period in 1998. Cost of goods sold in this period
was $111,637 which was 40% of gross revenues, versus 43% in 1998. The Company
incurred general and administrative costs of $355,758 which resulted in a loss
from operations of $186,108 in this period. In this period, the Company
generated $49,201 in interest expense and $28,870 in amortization of debt
discount which arose from the Company's issuance of common stock warrants to the
holders of the 9% $800,000 note that was sold in September, 1998 to finance the
Company's acquisition of Arm Pro, Inc. In August 1999, the holders of the
$800,000 note agreed to convert the outstanding principal, plus accrued
interest, into common stock at $.17 per share and agreed to forfeit 2,650,000
warrants to purchase the Company's common stock.
1
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Included in the general and administrative costs of $355,758 were approximately
$75,000 of non-recurring expenses for professional fees and miscellaneous costs.
The increase in sales, cost of goods sold and general operating expenses was
attributable primarily to the Por-Rok acquisition and the increase in sales of
the Company's Fiberforce line of polypropylene fibers.
On August 31, 1999, the Company had $968,376 in current assets which consisted
primarily of inventory of $476,125 and accounts receivable of $466,226. The
Company's property plant and equipment increased to $1,452,794 and goodwill
increased by $502,672 net of amortization to $818,972. These increases were
directly attributable to the Por-Rok transaction.
LIQUIDITY AND FINANCIAL RESOURCES AT AUGUST 31, 1999
In the three month period ending August 31, 1999, the Company had $2,405,884 in
current liabilities, which includes $1,696,745 that represents the current
portion of long-term debt obligations. Of this amount, $1,294,973 is owed to The
Sherwin-Williams Company as a one-year seller's note bearing interest at 10% per
annum which was accepted as partial payment on the Company's acquisition of
Por-Rok. Long-term debt of $743,278 consists of the long-term portion owing to
Dime Commercial Corp. for issuing to the Company a three year $890,000 note the
proceeds of which were used to pay Sherwin-Williams $800,000 and the remaining
$90,000 was allocated to transaction expenses and reserved for working capital.
In addition to this note, the Company secured a $750,000 revolving line of
credit from Dime Commercial Corp. to be used for working capital.
INFLATION AND CHANGING PRICES
The Company does not foresee any risks associated with inflation or substantial
price increases in the near future. In addition the raw materials that are used
by the Company in the manufacturing of its products are available locally
through many sources and are for the most part commodity items. The one raw
material that the Company uses in all its products that cannot be classified as
a pure commodity is currently in sufficient supply although the Company
presently owns approximately 600,000 lbs. of this product. Because a portion of
the Company's operations are in Canada the devaluation of the Canadian dollar
against the U.S. dollar has allowed the Company to manufacture its products less
costly than if manufactured in the United States and any funds raised from the
sale of securities to fund its operations are U.S. dollar denominated and then
transferred to the Canadian subsidiary at favorable exchange rates. As such,
while the Company has exposure to inflation, it does not believe that inflation
will not have any materially significant impact on its operations in the near
future.
2
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August, 1997, a shareholder, Mel Greenspoon, commenced an action
against the Company and its former President, Mr. A. Roy MacMillan, to
enjoin the Company and Mr. MacMillan from taking any action that would
restrict the sale of common stock that he allegedly owns. The Company has
raised several defenses to this action and believes the lawsuit is without
MERIT. MEL GREENSPOON V. STRATFORD ACQUISITION CORPORATION, ET. AL.,
ONTARIO COURT (GENERAL DIVISION), INDEX NO. 97-CV-126814.
ITEM 2. CHANGES IN SECURITIES
In the three month period ended August 31, 1999, the Company issued 1,000,000
shares of its $.001 par value common stock ("Common stock") to The
Sherwin-Williams Company as part of the acquisition of Por-Rok and also issued a
warrant to purchase 233,365 shares of the Company's common stock at $.30 per
share to Dime Commercial Corporation as part of the financing of the Por-Rok
transaction.
In exchange for converting a $800,000 note plus interest into common stock at
$.17 per share, the Company issued 5,041,569 shares to the note holders who
agreed to forfeit ownership of 2,650,000 warrants to purchase common stock.
As part of its policy regarding directors' compensation, the Company issued a
total of 30,000 shares of common stock to its three non-management directors as
compensation for the second quarter board meeting.
As part of a termination agreement entered into with a former director and
officer, the Company canceled a warrant to purchase 575,924 common shares at
$.37 per share and an option to purchase 91,504 shares of common stock. The
company was obligated to pay this party $10,000 and to remove restrictive
legends on common shares previously issued to the party and held in excess of
the minimum holding periods pursuant to Rule 144.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Part II, Item 6 Form 8-K filed August 23, 1999
3
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Novex Systems International Incorporated has duly caused
this report to be signed on its behalf by the undersigned person who is duly
authorized to sign on behalf of the Registrant and as chief
accounting officer.
NOVEX SYSTEMS INTERNATIONAL, INC.
BY:
Daniel W. Dowe
President and Chief Executive
Officer
Date: October 20, 1999
4
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<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000945634
<NAME> NOVEX SYSTEMS INTERNATIONAL INC.
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1
<CASH> 15,961
<SECURITIES> 0
<RECEIVABLES> 460,226
<ALLOWANCES> 541
<INVENTORY> 476,125
<CURRENT-ASSETS> 968,376
<PP&E> 1,629,785
<DEPRECIATION> 176,991
<TOTAL-ASSETS> 3,246,233
<CURRENT-LIABILITIES> 2,405,884
<BONDS> 0
0
0
<COMMON> 21,898
<OTHER-SE> 775,173
<TOTAL-LIABILITY-AND-EQUITY> 3,246,233
<SALES> 281,287
<TOTAL-REVENUES> 281,287
<CGS> 111,637
<TOTAL-COSTS> 111,637
<OTHER-EXPENSES> 355,758
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,201
<INCOME-PRETAX> (270,540)
<INCOME-TAX> 0
<INCOME-CONTINUING> (270,540)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (270,540)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
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