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 NOVEMBER 30, 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.)
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 November 30, 1999. On a fully diluted basis, assuming all
outstanding stock options and warrants to purchase common are exercised, the
Company would have 24,099,537 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
November 30, 1999 and May 31, 1999..................................F-1
Consolidated Statement of Operations for the three months
ended November 30, 1999 and November 30, 1998 (Restated) and for
the six months ended November 30, 1999 and November 30, 1998........F-2
Consolidated Statement of Cash Flows for the six
months ended November 30, 1999 and November 30, 1998................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.................................................5
Item 3. Defaults Upon Senior Securities.......................................5
Item 4. Submission of Matters to a Vote of Security Holders...................5
Item 5. Other Information.....................................................5
Item 6. Exhibits and Reports on Form 8-K......................................6
ii
<PAGE>
PART I
Page
No.
Item 1. Financial Information (Unaudited)
Consolidated Balance Sheet as of
November 30, 1999 and May 31, 1999..................................F-1
Consolidated Statement of Operations - for the three months
ended November 30, 1999 (Restated) and November 30, 1998 and for
the six months ended November 30, 1999 and November 30, 1998........F-2
Consolidated Statement of Cash Flows - for the six
months ended November 30, 1999 and November 30, 1998................F-3
Notes to Financial Statements ......................................F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
November 30, May 31,
1999 1999
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 27,979 $ 1,788
Accounts receivable, net 516,406 20,690
Inventories 495,015 221,707
Prepaid expenses and other current assets 42,734 8,600
----------- -----------
Total Current Assets 1,082,134 252,785
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 1,477,138 80,914
GOODWILL, net of accumulated amortization 875,949 316,300
OTHER ASSETS -- 6,059
----------- -----------
$ 3,435,221 $ 656,058
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 209,757 $ 393,548
Due to factor 53,000 56,700
Note payable 1,294,973 --
Bank line of credit 434,741 --
Accounts payable 546,384 241,424
Loans payable - shareholder 30,378 --
Accrued expenses and other current liabilities 203,691 115,190
----------- -----------
Total Current Liabilities 2,772,924 806,862
----------- -----------
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
Additional paid-in capital 5,710,516 4,408,753
Accumulated deficit (5,889,758) (5,347,390)
----------- -----------
Total shareholders' deficiency (157,255) (923,386)
----------- -----------
$ 3,435,221 $ 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 Six months ended
November 30, November 30,
---------------------------- ----------------------------
1999 1998 1999 1998
(Restated)
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 570,187 $ 118,599 $ 851,474 $ 128,276
COST OF GOOD SOLD 382,897 26,418 556,127 30,573
------------ ------------ ------------ ------------
GROSS PROFIT 187,290 92,181 295,347 97,703
SELLING, GENERAL AND ADMINISTRATIVE 317,029 310,344 672,787 587,838
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (129,739) (218,163) (377,440) (490,135)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income -- 330 -- 330
Interest expense (63,871) (29,913) (113,072) (45,177)
Amortization of debt discount -- (43,455) (28,870) (69,529)
Foreign currency gain (loss) (16,625) (22,823) (22,986) (35,505)
------------ ------------ ------------ ------------
OTHER EXPENSES, net (80,496) (95,861) (164,928) (149,881)
------------ ------------ ------------ ------------
NET LOSS $ (210,235) $ (314,024) $ (542,368) $ (640,016)
============ ============ ============ ============
NET LOSS PER COMMON SHARE, basic and diluted $ (0.01) $ (0.03) $ (0.03) $ (0.05)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, basic and diluted 21,987,738 12,471,506 20,233,440 12,310,302
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
November 30,
--------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (542,368) $ (640,016)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 51,902 15,713
Common stock and options issued for payment
of services and compensation 7,500 44,400
Common stock issued for payment of interest expense -- 15,175
Amortization of debt discount 28,870 69,529
Changes in assets and liabilities, net of the effect from acquisitions:
Accounts receivables (495,716) (68,259)
Inventories (273,308) (113,154)
Other receivables -- 15,122
Prepaid expenses and other current assets (34,134) (13,530)
Other assets 6,059 (1,840)
Accounts payable and accrued expenses 393,461 38,538
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (857,734) (638,322)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired (800,000) (290,640)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (800,000) (290,640)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor (3,700) --
Proceeds from (repayment of)
loans payable - shareholder 30,378 (37,000)
Proceeds from issuance of notes payable -- 85,000
Proceeds from bridge financing -- 800,000
Proceeds from bank line of credit 434,741 --
Proceeds from debt financing 1,222,506 --
Proceeds from the sale of common stock
and exercise of options -- 98,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,683,925 946,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 26,191 17,038
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,788 49,108
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,979 $ 66,146
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 91,999 $ 45,177
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash financing and investing activities:
Conversion of debt to equity $ 1,033,499 $ --
=========== ===========
Common stock issued for assets acquired $ 260,000 $ --
=========== ===========
Notes 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
SIX MONTHS ENDED NOVEMBER 30, 1999
(unaudited)
1. BASIS OF PRESENTATION AND RESTATEMENT
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 six month periods ended November 30, 1999 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.
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 the ending inventory from $476,125 to $414,532 and
a $61,593 increase in net loss from $270,540 to $332,133 for the three
months ended August 31, 1999. The increase in net loss did not have a
material effect on net loss per share.
As a result of the above, for the three months ended November 30, 1999, the
net loss before the correction of the error of $271,828 decreased by
$61,593 to a net loss of $210,235. The decrease in the net loss did not
have a material effect on net loss per share.
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 six
months ended November 30, 1999 and November 30, 1998 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 consist of the following:
November 30,
1999
------------
(Unaudited)
Raw Material $269,216
Work in Progress --
Finished Goods 225,799
--------
$495,015
========
F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 1999
(unaudited)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
November 30,
1999
-----------
(Unaudited)
Land $ 400,000
Building 447,374
Property and equipment 807,327
Leasehold Improvements 17,330
-----------
1,672,031
Less: Accumulated
depreciation and
amortization (194,893)
-----------
$ 1,477,138
===========
5. NOTES PAYABLE
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 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 $1,359,722 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-5
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 1999
(unaudited)
6. LONG TERM DEBT
Long-term debt consists of the following:
November 30,
1999
----------
(Unaudited)
Debenture payable $ 125,000
Dime note (a) 869,600
Dime put warrants(a) 20,400
Other 14,309
----------
1,029,309
Less: Current Portion 209,757
----------
$ 819,552
==========
(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 November 30, 1999. 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
SIX MONTHS ENDED NOVEMBER 30, 1999
(unaudited)
7. SHAREHOLDERS' DEFICIT
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 months ended, November 30, 1999, 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
SIX MONTHS ENDED NOVEMBER 30, 1999
(unaudited)
<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 Expense 82,067 -- -- 31,005 -- 113,072
Depreciation and Amortization 25,260 -- -- 26,642 -- 51,902
Segment Loss 397,755 -- -- 144,613 -- 542,368
Segment Assets 2,846,832 -- -- 588,389 -- 3,435,221
Long Lived Asset Expenditures 1,433,615 -- -- -- -- 1,433,615
Six Months Ended November 30,
1998 (Unaudited)
Sales to unaffiliated customers $ -- $51,460 $ -- $ 76,816 $ -- $ 128,276
Interest Income -- -- -- -- 330 330
Interest Expense -- -- -- 30,750 14,427 45,177
Depreciation and Amortization -- -- -- 14,290 1,423 15,713
Segment Loss -- -- -- 467,920 172,096 640,016
Segment Assets -- -- -- 730,468 61,698 792,166
Long Lived Asset Expenditures -- -- -- 290,640 -- 290,640
Three Months Ended November 30,
1999 (Unaudited)
Sales to unaffiliated customers $ 406,195 $ -- $ -- $163,992 $ -- $ 570,187
Interest Expense 46,357 -- -- 17,514 -- 63,871
Depreciation and Amortization 15,818 -- -- 16,684 -- 32,502
Segment Loss 153,740 -- -- 56,495 -- 210,235
Long Lived Asset Expenditures -- -- -- -- -- --
Three Months Ended November 30,
1998 (Unaudited)
Sales to unaffiliated customers $ -- $51,460 $ -- $ 67,139 $ -- $ 118,599
Interest Income -- -- -- -- 330 330
Interest Expense -- -- -- 20,360 9,553 29,913
Depreciation and Amortization -- -- -- 9,204 916 10,120
Segment Loss -- -- -- 229,587 84,437 314,024
Long Lived Asset Expenditures -- -- -- 285,654 -- 285,654
</TABLE>
(1) This column represents the amount of non-segment information necessary to
reconcile reportable segment information with consolidated totals.
F-8
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 1999
(unaudited)
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 November 30, 1999, 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.
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.
F-9
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 1999
(unaudited)
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
===========
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.
Six Months Six Months
Ended Ended
November 30, November 30,
1999 1998
------------ ------------
Net Sales $ 1,117,452 $ 855,207
Cost of Sales 798,119 645,412
------------ ------------
Gross profit 319,333 209,795
Operating expenses 677,660 690,293
------------ ------------
Loss from operations (358,327) (480,498)
Net other expenses (201,787) (238,106)
------------ ------------
Net loss $ (560,114) $ (718,604)
============ ============
Net loss per share $ (0.03) $ (0.05)
============ ============
Shares used in calculation 20,233,440 13,310,302
============ ============
F-10
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 1999
(unaudited)
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-11
<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 Form 10-Q. The Financial
Statements for the six month period ended November 30, 1999, included in this
Form 10-Q 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
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 period 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.
Three months ending November 30, 1999 vs. November 30, 1998.
In the three month periods ending November 30, 1999 and November 30, 1998,
net sales were $570,187 and $118,559, respectively. In the three month period
ending November 30, 1999, the Company generated a loss from operation of
$129,739.
In the second quarter of fiscal year May 31, 2000, Novex experienced a
decrease in its gross margin for the three months ending November 30, 1999 to
33% versus 35% for the six months ended November 30, 1999. When Novex prepared
its financial statements for the second quarter ending November 30, 1999, it
conducted a physical inventory in order to implement a perpetual inventory
system. When doing this it realized that the estimated value it placed on
inventory in the first quarter was too high (see Note 1-Basis of Presentation
and Restatement). As of November 30, 1999, we adjusted our inventory level based
on actual inventory counts and, in this amendment, have restated the statement
of income for the three months ended November 30, 1999 accordingly.
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."
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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
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
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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 $819,552 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 Form 10-Q. 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 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.
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To improve Novex's profitability, management intends to undertake a number
of initiatives to increase sales and reduce expenses. For example, Novex intends
to issue a new price list and freight policy to improve Novex's margins on sales
of its Por-Rok products and to institute a new freight policy which will pass
all outgoing freight charges to the customers. The current freight policy
generally requires Novex to absorb outgoing freight charges for all orders in
excess of 500 lbs. Novex will also begin to market some of its former Novacrete
products under the Por-Rok brandname to existing Por-Rok customers. In addition,
management is aggressively pursuing sales of the Por-Rok products to large home
center stores and major cooperative retailers of building materials.
If these efforts do not generate additional sales to enable Novex to meet
all of its operating and financing expense requirements, it would then seek
additional financing from third-party sources. Although the Novex's assets are
fully secured by loans outstanding to Dime Commercial Corp., Sherwin-Williams
and Montcap Financial Corp., Novex would seek to raise additional capital
through the sales of unsecured debt securities, unsecured debt combined with
equity securities or preferred and common stock. It is likely, however, that any
unsecured debt financing would carry a higher interest rate than secured
financing or that any equity financing might be on terms which are not favorable
to Novex and which are dilutive to existing shareholders.
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.
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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 alleging that he caused the company to issue to himself and others
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. Plaintiff claims that he received
stock as compensation for services rendered. When Novex investigated the matter
it found virtually no records of any tangible service. These actions and
omissions caused the U.S. Securities and Exchange Commission in or about 1997 to
commence an investigation of the company, then known as Stratford Acquisition
Corp. It is Novex's understanding that the investigation is still pending and
the Company has no information as to what action, if any, the SEC may take
pursuant to the investigation. Mel Greenspoon vs. Stratford Acquisition
Corporation, et. al., Ontario Court (General Division), Index No. 97-CV-126814.
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.
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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, Stratford Acquisition Corporation 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: /s/ Daniel W. Dowe
---------------------
Daniel W. Dowe
President
Date: July 5, 2000
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