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 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.)
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 21,898,264 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
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC.
Index
Page No.
--------
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
August 31, 1999 (Restated) and May 31, 1999........................F-1
Consolidated Statement of Operations for the
three months ended August 31, 1999 (Restated) and
August 31, 1998....................................................F-2
Consolidated Statement of Cash Flows for the
three months ended August 31, 1999 (Restated) and
August 31, 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....................................................3
Item 2. Changes in Securities................................................3
Item 3. Defaults Upon Senior Securities......................................4
Item 4. Submission of Matters to a Vote of Security Holders..................4
Item 5. Other Information....................................................4
Item 6. Exhibits and Reports on Form 8-K.....................................4
ii
<PAGE>
PART I
Page No.
--------
Item 1. Financial Information (Unaudited)
Consolidated Balance Sheet as of
August 31, 1999 (Restated) and May 31, 1999........................F-1
Consolidated Statement of Operations for the
three months ended August 31, 1999 (Restated) and
August 31, 1998....................................................F-2
Consolidated Statement of Cash Flows for the
three months ended August 31, 1999 (Restated) and
August 31, 1998....................................................F-3
Notes to Financial Statements .....................................F-4
iii
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, May 31,
1999 1999
(Restated)
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,961 $ 1,788
Accounts receivable, net 466,226 20,690
Inventories 414,532 221,707
Prepaid expenses and other current assets 10,064 8,600
----------- -----------
Total Current Assets 906,783 252,785
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
----------- -----------
$ 3,184,640 $ 656,058
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 401,772 $ 393,548
Due to factor 73,204 56,700
Note payable 1,294,973 --
Bank line of credit 192,577 --
Accounts payable 269,397 241,424
Loans payable - shareholder 43,884 --
Accrued expenses and other current liabilities 130,077 115,190
----------- -----------
Total Current Liabilities 2,405,884 806,862
----------- -----------
COMMITMENTS AND CONTINGENCIES
LONG TERM DEBT, net of current portion 743,278 772,582
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 21,897 15,251
Additional paid-in capital 5,670,738 4,408,753
Accumulated deficit (5,657,157) (5,347,390)
----------- -----------
Total shareholders' deficiency 35,478 (923,386)
----------- -----------
$ 3,184,640 $ 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
August 31,
-------------------------------
1999 1998
(Restated)
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 281,287 $ 9,677
COST OF GOOD SOLD 173,230 4,155
------------ ------------
GROSS PROFIT 108,057 5,522
SELLING, GENERAL AND ADMINISTRATIVE 355,758 277,494
------------ ------------
LOSS FROM OPERATIONS (247,701) (271,972)
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (49,201) (15,264)
Amortization of debt discount (28,870) (26,074)
Foreign currency gain (loss) (6,361) (12,682)
------------ ------------
OTHER EXPENSES, net (84,432) (54,020)
------------ ------------
NET LOSS $ (332,133) $ (325,992)
============ ============
NET LOSS PER COMMON SHARE, basic and diluted $ (0.02) $ (0.03)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, basic and diluted 15,534,657 12,150,849
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
August 31,
-----------------------------
1999 1998
(Restated)
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (332,133) $ (325,992)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,400 5,593
Common stock and options issued for payment
of services and 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 assets and liabilities, net of the
effect from acquisitions:
Accounts receivables (445,536) (777)
Inventories (192,825) (22,642)
Other receivables -- 12,490
Prepaid expenses and other current assets (1,464) (15,249)
Refundable deposits -- --
Other assets (32) (1,526)
Accounts payable and accrued expenses 42,860 74,913
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 410,137 (209,649)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- 4,986
Acquisition of business, net of cash acquired (800,000) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (800,000) 4,986
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash deficit -- 9,555
Due to factor 16,504 --
Proceeds from (repayment of)
loans payable - shareholder 43,884 (37,000)
Proceeds from issuance of debentures -- 85,000
Proceeds from bank line of credit 192,577 --
Proceeds from debt financing 151,171 --
Proceeds from the sale of common stock
and exercise of options -- 98,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 404,136 155,555
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 14,273 (49,108)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,788 49,108
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,061 $ 0
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 16,757 $ --
=========== -----------
Income taxes $ 0 $ 0
=========== ===========
Non-cash financing and investing activities:
Conversion of debt to equity $ 1,033,499 $ 0
=========== ===========
Common stock issued for assets acquired $ 260,000 $ 0
=========== ===========
Notes payable issued for assets acquired $ 1,294,973 $ 0
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 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 month period ended August 31, 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.
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
three months ended August 31, 1999 and August 31, 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 was estimated based on the gross profit method.
F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED AUGUST 31, 1999
(unaudited)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
August 31,
1999
------------
(Unaudited)
Land $ 400,000
Building 415,000
Property and equipment 797,455
Leasehold Improvements 17,330
-----------
1,629,785
Less: Accumulated
depreciation and
amortization (176,991)
-----------
$ 1,452,794
===========
5. NOTES PAYABLE
Notes payable at August 31, 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 August 31, 1999, the Bank Line of
Credit was $192,577 inclusive of accrued interest of $586. 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
THREE MONTHS ENDED AUGUST 31, 1999
(unaudited)
6. LONG TERM DEBT
Long-term debt consists of the following:
August 31,
1999
----------
(Unaudited)
Debenture payable $ 250,000
Dime note (a) 869,600
Dime put warrants(a) 20,400
Other 5,050
----------
1,145,050
Less: Current Portion 401,772
----------
$ 743,278
==========
(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 August 31, 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
THREE MONTHS ENDED AUGUST 31, 1999
(unaudited)
7. SHAREHOLDERS' DEFICIT
During the three months ended, August 31, 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 three months ended, August 31, 1999, Novex issued 30,000 shares
as compensation for services rendered.
During the three months ended, August 31, 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
THREE MONTHS ENDED AUGUST 31, 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>
Three Months Ended August 31,
1999 (Unaudited)
Sales to unaffiliated customers $ 131,740 $ -- $ -- $ 149,547 $ -- $ 281,287
Interest Expense 35,710 -- -- 13,491 -- 49,201
Depreciation and Amortization 9,442 -- -- 9,958 -- 19,400
Segment Loss 244,015 -- -- 88,118 -- 332,133
Segment Assets 2,639,170 -- -- 545,470 -- 3,184,640
Long Lived Asset Expenditures 1,433,615 -- -- -- -- 1,433,615
Three Months Ended August 31,
1998 (Unaudited)
Sales to unaffiliated customers $ -- $ -- $ -- $ 9,677 $ -- $ 9,677
Interest Expense -- -- -- 10,390 4,874 15,264
Depreciation and Amortization -- -- -- 5,086 507 5,593
Segment Loss -- -- -- 238,333 87,659 325,992
Segment Assets -- -- -- 264,238 22,319 286,557
Long Lived Asset Expenditures -- -- -- 4,986 -- 4,986
</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 August 31, 1999, the outstanding balance on
the debenture is $250,000 (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
THREE MONTHS ENDED AUGUST 31, 1999
(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
THREE MONTHS ENDED AUGUST 31, 1999
(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.
Three months Three months
Ended Ended
August 31, August 31,
1999 1998
------------ ------------
.
Net Sales $ 414,276 $ 388,796
Cost of Sales 232,633 324,814
------------ ------------
Gross profit 181,643 63,982
Operating expenses 358,195 291,154
------------ ------------
Loss from operations (176,552) (227,172)
Net other expenses (102,862) (65,783)
------------ ------------
Net loss $ (279,413) $ (292,955)
============ ============
Net loss per share $ (0.02) $ (0.02)
============ ============
Shares used in calculation 15,534,657 13,150,849
============ ============
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 Form 10-Q. The Financial
Statements for the three month period ended August 31, 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
Three months ending August 31, 1999 vs. August 31, 1998
On August 13, 1999, Novex acquired the Allied Composition/Por-Rok business
unit from The Sherwin-Williams Company ("Por-Rok"). Por-Rok manufactures a
well-known line of grouting and concrete patching products that are distributed
nationally. The purchase price for the Por-Rok acquisition was $2.1 million and
was paid for in part from the funds derived from a secured term loan from Dime
Commercial Corp. in the amount of $890,000. In exchange for the line of credit
from Dime, Novex was required to issue to Dime a warrant to purchase 233,365
shares of Novex's common stock. The warrants have an exercise price of $.25 per
share and an exercise period commencing upon issuance and terminating on August
13, 2002. The balance of the purchase price was provided by The Sherwin-Williams
Company in exchange for which Novex issued a 10% secured promissory note in the
amount of $1.3 million and 1 million shares of Novex's common stock. 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 the three month period ended August 31, 1999, the Company had net sales
of $281,287 versus $9,677 in the corresponding three month period in 1998. Cost
of goods sold in this period was $173,230 which was approximately 62% 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.
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.
<PAGE>
On August 31, 1999, the Company had $906,783 in current assets which
consisted primarily of inventory of $414,532 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.
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 filed this amendment restating
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.
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."
Liquidity and Financial Resources at August 31, 1999
As of 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 and notes payable. 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
"Dime 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. As of August 31, 1999, Novex had $192,577 outstanding on its secured
revolving line of credit with Dime Commercial Corp.
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.
As of August 31, 1999, Novex had accounts payable of $269,397 and accrued
expense of $130,077. 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.
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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.
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 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
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 Allied/Por-Rok business.
These shares were valued at market prices of $.26
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per share. In addition, the Company granted to Dime Commercial Corp. a class B
warrant to purchase 233,365 shares of the Company's restricted common stock at
an exercise price of $.25 per share as part of Dime's financing of the Por-Rok
transaction. The class B warrants expire September 1, 2002.
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
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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: /s/ Daniel W. Dowe
------------------------------
Daniel W. Dowe
President and Chief Executive
Officer
Date: July 5, 2000
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