FORM 10-Q/A
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 FEBRUARY 29, 2000
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.)
16 Cherry Street Clifton, New Jersey 07014
(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code 973-777-2307
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 21,987,738 shares of its $.001 par value common stock issued and
outstanding on February 29, 2000. On a fully diluted basis, assuming all
outstanding stock options and warrants to purchase common are exercised, the
Company would have 24,084,527 shares of common stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-Q Incorporated Document
None.
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC.
Index
Page No.
--------
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
February 29, 2000 and May 31, 1999..................................F-1
Consolidated Statement of Operations for the three months
ended February 29, 2000 and February 28, 1999 and for the nine
months ended February 29, 2000 and February 28, 1999................F-2
Consolidated Statement of Cash Flows for the
nine months ended February 29, 2000 and
February 28, 1999 ..................................................F-3
Notes to Financial Statements ......................................F-4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................1
Part II Other Information
Item 1. Legal Proceedings.....................................................5
Item 2. Changes in Securities.................................................6
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......................................6
ii
<PAGE>
PART I
Page No.
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
February 29, 2000 and May 31, 1999..................................F-1
Consolidated Statement of Operations for the three months
ended February 29, 2000 and February 28, 1999 and for the nine
months ended February 29, 2000 and February 28, 1999................F-2
Consolidated Statement of Cash Flows for the
nine months ended February 29, 2000 and
February 28, 1999 ..................................................F-3
Notes to Financial Statements ......................................F-4
iii
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
February 29, May 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,020 $ 1,788
Accounts receivable, net 585,929 20,690
Inventories 450,751 221,707
Other receivables -- --
Prepaid expenses and other current assets 59,536 8,600
----------- -----------
Total Current Assets 1,098,236 252,785
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 1,461,126 80,914
GOODWILL, net of accumulated amortization 842,758 316,300
OTHER ASSETS -- 6,059
----------- -----------
$ 3,402,120 $ 656,058
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 217,670 $ 393,548
Due to factor 78,118 56,700
Note payable 1,281,351 --
Bank line of credit 601,172 --
Accounts payable 605,957 241,424
Loans payable - shareholder 31,925 --
Accrued expenses and other current liabilities 244,442 115,190
----------- -----------
Total Current Liabilities 3,060,635 806,862
----------- -----------
COMMITMENTS AND CONTINGENCIES
LONG TERM DEBT, net of current portion 816,330 772,582
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
Additional paid-in capital 5,710,516 4,408,753
Accumulated deficit (6,207,348) 5,347,390
----------- -----------
Total shareholders' deficiency (474,845) 923,386
----------- -----------
$ 3,402,120 $ 656,058
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-1
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------- ---------------------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 538,938 $ 92,566 $ 1,390,412 $ 220,842
COST OF GOOD SOLD 403,226 50,356 959,358 80,929
------------ ------------ ------------ ------------
GROSS PROFIT 135,712 42,210 431,059 139,913
SELLING, GENERAL AND ADMINISTRATIVE 354,636 422,125 1,027,423 1,009,963
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (218,924) 379,915 (596,364) (870,050)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income -- 3 -- 333
Interest expense (83,625) (30,197) (192,803) (75,374)
Amortization of debt discount -- -- (28,870) (69,529)
Foreign currency gain (loss) (18,935) 51,656 (41,921) 16,151
------------ ------------ ------------ ------------
OTHER EXPENSES, net (102,560) 21,462 (263,594) (128,419)
------------ ------------ ------------ ------------
NET LOSS $ (321,484) $ (358,453) $ (859,958) $ (998,469)
============ ============ ============ ============
NET LOSS PER COMMON SHARE, basic and diluted $ (0.01) $ (0.02) $ (0.04) $ (0.08)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, basic and diluted 21,987,738 15,073,607 20,818,206 13,194,542
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
-----------------------------
February 29, February 28,
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (859,958) $ (998,469)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 84,262 26,989
Common stock and options issued for payment
of services and compensation 15,000 72,450
Common stock issued for payment of interest expense -- 15,175
Options issued as payment for services -- --
Cancellation of options for services -- --
Amortization of debt discount 28,870 69,529
Changes in assets and liabilities, net of the
effect from acquisitions:
Accounts receivables (253,256) (12,632)
Inventories (229,044) (141,313)
Other receivables -- 3,868
Prepaid expenses and other current assets (50,936) (11,908)
Refundable deposits -- --
Other assets 6,059 3,300
Accounts payable and accrued expenses 497,676 75,082
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (761,327) (897,929)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- 5,678
Proceeds from the sale (purchase) of marketable securities -- --
Acquisition of business, net of cash acquired (800,000) (296,318)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (800,000) (290,640)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor 21,418 --
Proceeds from (repayment of)
loans payable - shareholder 31,925 (32,000)
Proceeds from issuance of notes payable -- 85,000
Proceeds from bridge financing -- 1,050,000
Proceeds from bank line of credit 601,172 --
Proceeds from debt financing 907,044 65,866
Proceeds from issuance of debt with warrants -- --
Proceeds from issuance of debt without warrants -- --
Proceeds from the sale of common stock
and exercise of options -- 98,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,561,559 1,266,866
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 232 78,297
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,788 49,108
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,020 $ 127,405
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 146,447 $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash financing and investing activities:
Conversion of debt to equity $ 1,033,499 $ --
=========== ===========
Common stock issued for assets acquired $ 260,000 $ --
=========== ===========
Note payable issued for assets acquired $ 1,294,973 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 29, 2000
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operation results for
the three and nine month periods ended February 29, 2000 are not
necessarily indicative of the result that may be expected for the year
ended May 31, 2000. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended May 31, 1999.
2. 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 nine
months ended February 29, 2000 and February 28, 1999 diluted loss per share
is the same as basic loss per share since the inclusion of stock options
and warrants would be antidilutive.
3. INVENTORIES
Inventories were determined based on the perpetual inventory system and
consisted of the following:
February 29,
2000
----------
(Unaudited)
Raw Material $ 261,134
Work in Progress --
Finished Goods 189,617
---------
$ 450,751
=========
F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 29, 2000
(unaudited)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
February 29,
2000
----------
(Unaudited)
Land $ 400,000
Building 448,889
Property and equipment 815,821
Leasehold Improvements 17,330
----------
1,682,040
Less: Accumulated
depreciation and
amortization (220,914)
----------
$1,461,126
==========
5. NOTES PAYABLE
Notes payable at February 29, 2000 include $1,281,351 owing to The Sherwin
Williams Company in connection with the acquisition of the Allied/Por-Rok
division by Novex Systems International, Inc. (See Note 9). The terms of
the note call for no principle payments and for interest to accrue at the
rate of 10% per annum. Payment of interest is at the rate of 5% per year
with the balance payable when the note matures on August 12, 2000. Under
the present terms the Company will be obligated for $1,334,513 on August
12, 2000 inclusive of accrued interest of $53,162. The Sherwin Williams
Company has a security interest in substantially all of the assets of the
company which is subordinate to the security interest of Dime Commercial
Corp.
In connection with the acquisition of the Allied/Por-Rok division of The
Sherwin Williams Company, Novex Systems International, Inc. obtained a
$750,000 line of credit from Dime Commercial Corp. The line provides
working capital and is secured by accounts receivable and inventory.
Advances under the line are based on 80% of eligible accounts receivables
and 50% of eligible inventory. As of February 29, 2000, the Bank Line of
Credit was $601,172 inclusive of accrued interest of $13,000. Interest is
computed on the average monthly balance under the line based on 2% over the
prime rate (currently 10.5%).
F-5
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 29, 2000
(unaudited)
6. LONG TERM DEBT
Long-term debt consists of the following:
February 29,
2000
----------
(Unaudited)
Debenture payable $ 125,000
Dime note (a) 869,600
Dime put warrants(a) 20,400
Other 19,000
----------
1,034,000
Less: Current Portion 217,670
----------
$ 816,330
==========
(a) Novex is obligated to Dime Commercial Corp. for $890,000 under a term
loan. The loan provides for monthly interest payments based on prime
plus two hundred basis points (currently 10.5%). Installments due
under the loan begin on March 13, 2000 in the amount of $7,500 per
month. The loan matures on August 13, 2002 with a balloon payment of
$655,000. There was a put warrant granted with the term loan,
exercisable at $.25 and having an expiration date of September 1,
2002. In accordance with Emerging Issues Task Force No. 96-13
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled In, a Company's Own Stock," we have allocated
$20,400 to the put warrant and recorded the amount as part of
long-term debt as of February 29, 2000. Subsequent changes in the
measure of fair value of the put warrant will be reported in the
statement of operations. The note is collateralized by all of Novex's
plant and equipment at the Clifton facility. (See Note 9).
F-6
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 29, 2000
(unaudited)
7. SHAREHOLDERS' DEFICIT
During the nine months ended, February 29, 2000, Novex issued 1,000,000
shares of its common stock in connection with the acquisition of the
Allied/Por-Rok business. These shares were valued at market prices of
approximately $.26 per share.
During the nine months ended, February 29, 2000, Novex issued 69,474 shares
of stock as compensation for services rendered. These shares were valued at
an average market price of $.22 per share.
During the nine months ended February 29, 2000, Novex converted
approximately $1,033,499 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.
8. 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-7
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 29, 2000
(unaudited)
<TABLE>
<CAPTION>
United States Canada
--------------------------- ------------------------
Allied Allied
Por-Rok Fiber Por-Rok Fiber Adjustments(1) Consolidated
---------- ---------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended February 29,
2000 (Unaudited)
Sales to unaffiliated customers $1,038,024 $ -- $ -- $ 352,388 $ -- $1,390,412
Interest Income -- -- -- -- --
Interest Expense 157,454 -- -- 35,349 -- 192,803
Depreciation and Amortization 40,671 -- -- 43,591 -- 84,262
Segment Loss 592,366 -- -- 271,486 -- 863,852
Segment Assets 2,819,401 -- -- 582,719 -- 3,402,120
Long Lived Asset Expenditures 1,433,615 -- -- -- -- 1,433,615
Nine Months Ended February 28,
1999 (Unaudited)
Sales to unaffiliated customers $ -- $ 88,600 $ 00,000 $ 132,342 $ -- $ 220,842
Interest Income -- -- -- -- 333 333
Interest Expense -- -- -- 51,304 24,070 75,374
Depreciation and Amortization -- -- -- 24,543 2,446 26,989
Segment Loss -- -- -- 729,984 268,485 998,469
Segment Assets -- -- -- 751,044 68,129 819,173
Long Lived Asset Expenditures -- -- -- 290,640 -- 290,640
</TABLE>
----------
(1) This column represents the amount of non-segment information necessary to
reconcile reportable segment information with consolidated totals.
9. ACQUISITION
On August 13, 1999, the Company acquired from The Sherwin Williams Company
("Sherwin") certain assets representing their Allied/Por-Rok business.
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. At February 29, 2000, the outstanding balance
on the debenture is $125,000 (see Note 6.) Further, Sherwin has a
subordinated security interest in substantially all the assets of the
company.
F-8
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 29, 2000
(unaudited)
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. The
bank has a senior secured interest in substantially all the assets of
Novex. In addition, the Company granted a class B warrant with a "put"
right to purchase 233,365 shares of restricted common stock at an exercise
price of $.25. Dime Commercial Corp. has the right to demand the purchase
of the warrant if Novex completes a refinancing of all or a portion of the
Dime term loan and/or revolving line of credit from funds provided by
someone other than Dime. Therefore, Dime has the option of requesting
payment in cash or waiving its right to sell the warrant to Novex. If Dime
requests payment the amount they will receive is either (i) if the closing
stock price is less than or equal to the exercise price, then Novex pays
$58,341, which is the exercise price times the 233,365 shares underlying
the warrant or (ii) if the closing price exceeds the exercise price, then
Novex pays the closing price up to a maximum of $.51 per share underlying
the warrant or $119,016. Alternatively, if Dime decided to exercise the
warrant, they can issue a 60-day non-interest bearing note for the entire
amount due to Novex for the 233,365 shares of common stock underlying the
warrant.
A total of $20,400 has been allocated to the put warrant, resulting in a
liability. (See Note 6(a)). The fair value of the put warrant was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions: stock price of $.26 per share; annual dividend of
$0; expected volatility of 50%; risk free interest rate of 6%; and an
expected life of two years.
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
==========
F-9
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED FEBRUARY 29, 2000
(unaudited)
The following schedule combines the unaudited pro-forma results of
operations of the Company and Allied/Por-Rok, as if the acquisition
occurred on June 1, 1998 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, 1998.
Nine Months Nine Months
Ended Ended
February 29, February 28,
2000 1999
------------ ------------
Net Sales $ 1,656,390 $ 1,406,551
Cost of Sales 1,201,345 1,083,803
------------ ------------
Gross profit 455,045 322,748
Operating expenses 1,092,296 1,201,212
------------ ------------
Loss from operations (637,251) (878,464)
Net other expenses (304,136) (293,105)
------------ ------------
Net loss $ (941,387) $ (1,171,569)
============ ============
Net loss per share $ (0.04) $ (0.08)
============ ============
Shares used in calculation 20,818,206 14,194,542
============ ============
10. COMMITMENTS AND CONTINGENCIES
(a) 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.
(b) 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.
F-10
<PAGE>
Item 2. 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 February 29, 2000 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.
Results of Operations
Nine months ending February 29, 2000 vs. February 28, 1999
While net sales for the nine month period ending February 29, 2000 was
$1,390,412, net sales for the same period ended February 28, 1999, were
$220,842. The increase in sales was attributable principally to the Company's
acquisition of the Allied Composition/Por-Rok business unit from The
Sherwin-Williams Company ("Por-Rok Unit") on August 13, 1999.
The Company only achieved a gross margin of 31% in the nine months ending
February 29, 2000, which resulted principally from the historically low sales in
this period from it Canadian- subsidiary, Novex Systems International, Ltd.
("Novex, Ltd."). Novex, Ltd. manufactures and markets the Company's Fiberforce
line of concrete-reinforcing synthetic fibers and experiences a significant
slowdown during the months of December through February due to the decline in
the construction business in Eastern Canada and the northeastern region of the
United States.
For the nine month period ending February 29, 2000, the Company generated a
loss from operations of $596,364. The Company also incurred approximately
$52,300 in freight expenses which, going forward, the Company will pass on to
its customers through a new pricing and shipping policy that will become
effective on June 1, 2000. Although the new pricing and shipping policy was
mailed to all Por-Rok customers in March, its implementation was delayed until
June to accommodate major customers who wanted 90 days to implement the new
policy within their own organizations. Also, in this period, the Company
incurred non-cash charges for depreciation and amortization (including
amortization of debt discount) of $113,132, and incurred non-recurring charges
of approximately $20,000 relating to the service agreement it entered into with
Sherwin- Williams which terminated on February 29, 2000 . The net effect of the
non-cash accounting charges, non-recurring costs and the freight expenses, would
have resulted in the Company posting a net operating loss of $410,932 before
expenses for interest which in the nine month period totaled $192,803 and
foreign currency loss of $41,921 which reflects the difference in currency
exchanges between the United States and Canada for funds transferred by the
Company to Novex, Ltd. for operating expenses.
For the nine month period ending February 29, 2000, the Company's overall
operating
<PAGE>
results do not reflect a normalized operation on a consolidated basis due to the
seasonal slowdown at Novex, Ltd. in this period. In addition, these results
reflect only six and one-half months of the Por-Rok operation which was acquired
on August 13, 1999.
As of February 29, 2000, the Company had $1,098,236 in current assets,
which consisted principally of accounts receivable of $585,929 and inventory of
$450,751. The Company's net property, plant and equipment totaled $1,461,126 and
goodwill of $842,758 which is attributable to the two acquisitions that the
Company completed in 1998 and 1999. All of the Company's asset categories
increased substantially when compared to its year ending balance sheet dated May
31, 1999 due to the integration of the assets it acquired in August 1999 as part
of the Por-Rok transaction.
At the time of preparing the Form 10-Q for the first quarter ending August
31, 1999, Novex had owned the Por-Rok unit for two weeks and used a cost of
goods sold rate of 40% (or an estimated gross profit of 60%) to estimate the
ending inventory versus an actual amount based on a physical count for the
period. During the second quarter ending November 30, 1999, Novex conducted a
physical inventory in order to implement a perpetual inventory system. As a
result, Novex determined that they had incorrectly estimated the ending
inventory for the first quarter. Therefore, Novex prepared a roll-forward of the
Por-Rok inventory from the acquisition date of the Por-Rok unit, August 13, 1999
to the end of the quarter and as well analyzed the mix of product gross profit
margins for Arm-Pro and Por-Rok. Thus, Novex has restated its financial
statements in amendments to its reports for the quarters ended August 31, 1999
and November 30, 1999 to reflect the correct inventory and increase in the net
loss. The increase in net loss did not have a material effect on net loss per
share.
Furthermore, Por-Rok's inventory, which was composed of raw materials and
finished goods, was recorded on August 13, 1999, the acquisition date, in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations." In accordance with accounting for business combinations, Novex
recorded the raw materials at its current replacement cost and the finished
goods at its estimated selling price less the sum of the cost of disposal and an
allowance for a reasonable gross profit. The use of the estimated gross profit
method in the first quarter ended August 31, 1999 was in accordance with
Accounting Principles Board Opinion No. 28, "Interim Financial Reporting."
Three months ending February 29, 2000 vs. February 28, 1999
In the three month periods ending February 29, 2000 and February 28, 1999
net sales were $538,938 and $92,566, respectively. In the three month period
ending February 29, 2000, the Company generated a loss from operation of
$321,484. The net effect of the non-cash accounting charges, non-recurring costs
and the freight expenses, would have resulted in the Company posting a net
operating loss of $81,924, before expenses for interest which in the quarter
totaled $83,625 and foreign currency loss of $18,935 which reflects the
difference in currency exchanges between the United States and Canada for funds
transferred by the Company to Novex, Ltd. for operating expenses.
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Liquidity and Financial Resources at February 29, 2000
As of February 29, 2000, the Company had $3,060,635 in current liabilities,
which includes a seller's note for $1,281,351 that was issued to The
Sherwin-Williams Company upon the acquisition of the Por-Rok Unit
("Sherwin-Williams Note"). The Company also had $601,172 outstanding on its
secured revolving line of credit with Dime Commercial Corp. which is used to
fund the Company's operations. It had accounts payable of $605,957 and accrued
expenses of $244,442. The officer's loan of $31,925 was made to Novex by its
current President, Daniel W. Dowe, in June and July, 1999 to assist Novex with
its operating cash flow needs before we acquired the Por-Rok Unit and opened the
line of credit with Dime Commercial Corp. Mr. Dowe has entered into an agreement
with Novex's board of directors to have the loan repaid without interest. There
is no agreement between Novex's board of directors and Mr. Dowe to repay the
loan on a specified date. However, if Novex has adequate cash on hand after it
finances another acquisition, or if it becomes profitable Novex and Mr. Dowe
will agree to a mutually acceptable payment plan. At the present time, Mr. Dowe
has agreed to allow Novex time to repay the loan with no set conditions for
repayment.
Long-term debt of $816,330 consists of the long-term portion of a three
year term loan and put warrant totaling $890,000 that was made by Dime
Commercial Corp. to enable the Company to acquire the Por-Rok Unit. The
remaining portion of the purchase price for the Por-Rok Unit was paid with the
Sherwin-Williams Note. The $78,118 obligation listed as "Due to Factor" is the
value of an equipment loan made to Novex, Ltd. denominated in United States
dollars.
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
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Sherwin Williams Note is also secured by the same assets as, and is subordinated
to, the Dime Note. If the value of all the Por-Rok assets would exceed the
balances on the Dime Note and the Revolving Line of credit then the
Sherwin-Williams Note would be partially secured by the value of the assets that
are in excess of the obligations owing to Dime. Since all the assets at the
Por-Rok operation are secured by the Dime Note and then by the Sherwin-Williams
Note, there are no other assets that can be used to secure new financing if it
were needed.
Novex has already begun the early stage process of refinancing the
Sherwin-Williams Note which matures on August 12, 2000, with an equity or a
partial equity and debt security offering which may be completed as part of
another acquisition, although no acquisition agreement exists as of the filing
of this registration statement. The net effect of this refinancing, assuming a
portion, if not all, of the refinancing is completed through an equity offering,
would enable Novex to increase its shareholders equity which was a negative
$458,128 on February 29, 2000. Although plans to refinance the Sherwin-Williams
Note are being undertaken, no assurance can be made that the refinancing will be
completed, or that it will be on terms that are favorable to Novex.
In September, 1998 Novex sold a 9% $800,000 Debenture to the same entity
that had purchased $500,000 of the debenture that was sold by Novex in February
1998. Of the $800,000 note, $610,000 was used to purchase ARM PRO, Inc. The
balance of the proceeds was used for working capital, transaction expenses and
primarily to move the ARM PRO operations to Novex's Mississauga, Ontario
facility. The debenture holder agreed to convert the principal amount of the
February debenture which was due to mature on October 31, 1998 into Novex's
common stock at a rate equal to the average of the eleven lowest closing trading
prices during the month of October, 1998, which was $.17 per share and resulted
in the issuance of 2,730,737 shares of Novex's common stock.
In addition, Montcap Financial Corporation, loaned Novex Canada $70,000
that is secured by equipment at the Mississauga location, and Mr. Friedenberg
loaned Novex a total of $145,000 in notes to assist with cashflow shortfalls
during the summer of 1998 before Novex acquired ARM PRO and received a bridge
loan of $250,000 during February 1999.
Based on its past sales history since 1993 the Por-Rok product line is sold
to a fairly consistent group of customers and each month it generally sells its
finished goods inventory. However, a few products like Por-Rok Anchoring Cement,
Super Por-Rok and Dash Patch are very popular and inventory of these products
can be converted into cash up to three to four times a month. On the other hand,
other products sell at lower volumes and are converted into cash more on a 45 to
60 day basis. Novex's current management has adopted a new policy to minimize
the amount of inventory on hand so that no excess cash is tied up in slow moving
inventory. If the entire inventory at February 29, 2000, of $450,751 was sold at
current prices it would have a value of approximately $901,502. If this
inventory were sold and if the entire accounts receivable balance of $585,929
were paid at one time, the proceeds would pay off all accounts payable, accrued
expenses, the bank line of credit and the loan payable to shareholder.
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For the fiscal year ended May 31, 1999 (prior to purchasing the assets of
Por-Rok) Novex sold $321,311 of finished goods inventory. This inventory
consisted primarily of the finished goods inventory of the company's fiber
operations (Novex, Ltd.) which, as of that date, had only been owned and
operated by Novex for eight months. This figure further reflects a three-month
slow-down which Novex Ltd. experiences during the winter season. Based on
historical information provided by The Sherwin-Williams Company, sales of the
finished goods inventory of Por-Rok products amounted to approximately $1.8
million for the calendar year ended December 1998. Assuming Novex were to
achieve similar sales, this amount would be sufficient to cover the company's
current liabilities of $1,779,284, excluding the note payable for $1,281,351 to
The Sherwin-Williams Company.
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.
Part II Other Information
Item 1. Legal Proceedings
On August 12, 1997, a shareholder who was once a director and officer of
Novex ("the Plaintiff") commenced an action against Novex and its former
president, Mr. A. Roy Macmillan, to enjoin Novex from taking any action that
would restrict the sale of up to 300,000 shares of common stock that he
allegedly owns and for the costs he will incur to conduct the lawsuit. He has
not asked for, nor does Novex expect him to ask for, damages. The Plaintiff has
since named Novex's current president, Mr. Dowe, in the lawsuit. The Plaintiff
has no other affiliation with Novex other than for being a shareholder. The
plaintiff submitted a motion for summary judgment which the court denied. Novex
has raised several defenses to this action and believes that plaintiff's claims
are without merit. Novex has also asserted multiple counterclaims against the
plaintiff and, in December, 1999, it asserted multiple claims against two
third-party defendants, Herbert Adams, a former consultant to the company, and
Colin Raynor, a former director and former outside counsel to the company Novex
has alleged that the plaintiff and the two third-party defendants (none of whom
are presently affiliated with Novex) had caused the company to issue them stock
for work that was never done and at a time when current management believes that
fraudulent activities were being undertaken which caused the company's stock
price to be overinflated. All three individuals are claiming that they received
stock as compensation for services rendered. When Novex investigated the matter
it found virtually no records of any tangible service. Their actions and
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omissions caused the U.S. Securities and Exchange Commission in or about 1997 to
commence an investigation of the company, then known as Stratford Acquisition
Corp. It is Novex's understanding that the investigation is still pending and
the Company has no information as to what action, if any, the SEC may take
pursuant to the investigation. Mel Greenspoon vs. Stratford Acquisition
Corporation, et. al., Ontario Court (General Division), Index No. 97-CV-126814.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
None.
Reports on Form 8-K
None.
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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, Inc. 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
Date: July 5, 2000
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