FORM 10-K
UNITED STATE
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED May 31, 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 File Number) (IRS Employer ID 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock $.001 par value OTC Electronic Bulletin Board
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 ___
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ].
Based on the closing sale price of $.15 on May 31, 2000, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$1,561,844. The number of shares outstanding of the registrant's common stock,
$.001 par value was 22,143,988 on May 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
----------------------- ---------------------
Part IV, Item 14 Form 8-K/A filed on
July 14, 2000
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NOVEX SYSTEMS INTERNATIONAL, INC.
Table of Contents
Page No.
Part I
Item 1. Business and Risk Factors 1
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security 30
Holders
Part II
Item 5. Market for Registrant's Common Equity and Related 30
Stockholder Matters
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis of Financial Condition 32
and Results of Operations
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on 38
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and 41
Management
Item 13. Certain Relationships and Related Transactions 43
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 45
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PART I
Item 1. Business and Risk Factors
Novex will be subject to numerous and substantial economic, operational and
other risks which should be carefully evaluated. For a more detailed discussion
of the risk factors involved in the investment being offered in this offering,
see the following Risk Factors.
RISK FACTORS
Novex evolved from the development stage in mid-1998 and any evaluation of the
Company and its business should only be made after having given careful
consideration to the following risk factors, in addition to those appearing
elsewhere in this Form 10-K.
Our limited operating history makes it difficult for investors to evaluate our
business based on past performance - Novex has only had manufacturing operations
and related revenues since April 1998 and we have only owned the Por-Rok
business since August, 1999. As a result, it may be difficult for investors to
evaluate our business and its prospects based on prior performance.
Novex has had losses and may not be able to achieve profitability. Novex has
recorded net losses for each year of operation (1994-2000). In addition, a
significant portion of our assets are attributable to goodwill. In September
1998, Novex purchased Arm Pro, Inc., which resulted in goodwill of $347,095. In
August 1999, Novex purchased all the assets of Por-Rok, which resulted in
goodwill of $571,245 and is being amortized on a straight-line method over 10
years. As of May 31, 2000, goodwill net of accumulated amortization amounted to
$826,465. Amortization expense charged to operations for the fiscal year 2000
was approximately $61,000. Management will periodically review the
recoverability of goodwill to determine if it has been impaired. Events that may
cause an impairment would be the inability to successfully integrate the
operations of Sta-Dri (See Subsequent Events Note 19(a) of Consolidated
Financial Statements) with Novex, Novex's future intentions with regard to the
operations, and the operations forecasted undiscounted cash flows. Any reduction
in the value of goodwill would be to the extent that the present value of the
expected future cash flows are less than the carrying amount of goodwill. This
analysis may result in a complete or partial write-off or acceleration of the
amortization period. A write-down of part or all of this would hurt our results
of operations and make it even more difficult to achieve profitability in the
future. Going forward, we anticipate incurring significant expenses, including
product and service development expenses, sales and marketing costs and
administrative expenses, as well as other problems, expenses, delays and other
uncertainties inherent in a business with a relatively short history of
operations which is seeking to expand its operations. Accordingly, these factors
will also make it more difficult to achieve profitability in the near future.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and "Consolidated Financial Statements and Notes."
If Novex cannot expand its limited product line, its ability to increase
revenues and become profitable will be hampered. In the construction products
industry, end-users would prefer to use one manufacturer's products in any given
construction project and distributors generally prefer to stock an expanded
rather than a limited product line. We currently market only a limited number of
products and need to acquire companies with complementary products and/or
develop new products. Because of the uncertainties associated with obtaining
acquisition financing and with closing these transactions, we may not achieve
our objective to expand our product line this year. Furthermore, we do not
currently know when new products under development will be ready for
manufacturing, generate revenues, or whether they can be successfully
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marketed. If we are unable to acquire new products or develop new products,
our ability to achieve profitability through increased sales from an expanded
product line would be delayed. See "Business-The Company's Future Operations"
and"-Description of Products."
If Novex cannot acquire other companies, its ability to increase revenues and
become profitable will be hampered. Much of Novex' success depends upon its
ability to acquire companies having products which complement Novex' existing
product line. As of the date of this Form 10-K, Novex has reached no agreement
with any potential target, however on July 31, 2000 Novex reached and agreement
and acquired the assets of The Sta-Dri Company (See Subsequent Events). If Novex
cannot expand its product lines and revenues by acquiring companies and must
rely instead upon its own development of complementary products, it will take
even longer for Novex to achieve increased sales and profitability. See
"Business-The Company's Future Operations".
If Novex cannot obtain additional financing, it could default on its debt
obligations, lose the Por-Rok facility and suffer a decrease in revenues. For
the year ended May 31, 2000, Por-Rok represented $1,713,756 or approximately 92%
of net sales. On a pro forma basis, Por-Rok sales represents approximately 95%
for the year ended May 31, 2000. Novex is required to make monthly payments on
the $890,000 Secured Term Loan Promissory Note in favor of Dime Commercial Corp.
Our ability to pay off the debt owed to Dime Commercial Corp. will be dependent
to a large extent upon the success of our new marketing strategy, our
acquisition of additional brand products, the successful implementation of our
distribution strategy and our marketing and sales efforts. If the revenues
generated by our sales and marketing efforts are not sufficient to pay off the
debt owed to Dime Commercial Corp., we will need to obtain financing from an
outside source. If Novex shall need additional financing for working capital it
does not have any assets to pledge, therefore any future financing would have to
be in the form of unsecured debt financing that would be subordinated to current
secured loans, or equity financing such as the sale of preferred or common
stock. If Novex had to raise capital through unsecured debt the interest rate
would be much higher than secured financing and could be as high as 15%-20%. It
may also require the issuance of common stock or a warrant to purchase common
stock at favorable prices. On the other hand, if Novex had to raise financing
through the sale of preferred stock the dividend rate on the stock would likely
be in the 10%-15% range. A potential investor could also require that the
preferred stock be convertible into common stock at a future date on terms that
are not favorable to current common shareholders. Lastly, Novex could offer to
sell common stock to a prospective investor, however since the company has yet
to become profitable it is likely that this form of financing would be very
dilutive to current shareholders. If Novex is unable to obtain additional
financing, it could default on the loans made by Dime. Failure to make any of
the payments to Dime Commercial Corp. could result in a re-transfer of the
Por-Rok facility to Dime Commercial Corp. Any such re-transfer would reduce
Novex's operations substantially, adversely effect its financial condition and
results of operation and make it even more difficult to achieve profitability in
the future. See "Business", "Management's Discussion and Analysis of Condition
and Results of Operations" and "Financial Statements and Notes."
Because Novex has no patent protection for its product formulae, its
competitors could copy its products and market them under another name which
could decrease Novex's revenues and hamper its ability to achieve profitability.
Since the formulae would become public knowledge if Novex were to obtain patent
protection, Novex has chosen not to obtain patents on any of its proprietary
technology. Therefore, the absence of patent protection represents a risk in
that Novex will not be able to prevent other persons from developing competitive
products. If Novex's competitors were to learn of the secret formulae for making
its products, they could easily duplicate the products and offer them to Novex's
customers without any suggestion of patent infringement. As a result, Novex's
revenues would decline and its ability to achieve
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profitability would be hampered.
Novex has only one executive officer who is performing multiple functions and
may not be able to handle all financial and executive responsibilities required.
Novex relies considerably on the services of Mr. Daniel W. Dowe, its President
and Chief Executive Officer. At present, Mr. Dowe is the company's only
executive officer, in that the company's chief financial officer recently left
the company. Mr. Dowe is now handling all financial and executive
responsibilities. To the extent that the services of Mr. Dowe become
unavailable,it would be very difficult to attract or retain personnel who would
be able to adequately perform the functions previously performed by Mr. Dowe and
the company's ability to continue its operations until a replacement is hired
would be substantially hampered. See "Management".
Because our stock is presently considered to be a "penny stock", the
applicability of "Penny Stock Rules" could make it difficult for investors to
sell their shares in the future in the secondary trading market. Federal
regulations under the Exchange Act regulate the trading of so-called "penny
stocks" (the "Penny Stock Rules"), which are generally defined as any security
not listed on a national securities exchange or NASDAQ, priced at less than
$5.00 per share, and offered by an issuer with limited net tangible assets and
revenues. In addition, equity securities listed on NASDAQ that are priced at
less than $5.00 per share are deemed penny stocks for the limited purpose of
Section 15(b)(6) of the Exchange Act. Therefore, during the time which the
common stock is quoted on the NASDAQ OTC Bulletin Board at a price below $5.00
per share, trading of the common stock will be subject to the full range of the
Penny Stock Rules. Under these rules, broker dealers must take certain steps
prior to selling a "penny stock," which steps include: (i) obtaining financial
and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor; and
(iii) providing the investor a written identification of the shares being
offered and in what quantity. If the Penny Stock Rules are not followed by the
broker-dealer, the investor has no obligation to purchase the shares.
Accordingly, the application of the comprehensive Penny Stock Rules may be more
difficult for broker- dealers to sell the common stock, and purchasers of the
shares of common stock offered hereby may have difficulty in selling their
shares in the future in the secondary trading market.
If a trading market is not maintained, holders of the common stock may
experience difficulty in reselling such Common Shares or may be unable to resell
them at all. The Common Shares of the Company are presently quoted on the NASDAQ
Over-The-Counter (OTC) Bulletin Board, a regulated quotation service that
captures and displays real-time quotes and indications of interest in securities
not listed on The NASDAQ Stock Market, or any U.S. securities exchange. The
current trading ticker symbol for the Common Shares is "HARD". The Company may,
but has not, entered into any agreements with market makers to make a market in
the Company's Common Stock. In addition, any such market making activity would
be subject to the limits imposed by the Securities Act, and the Securities
Exchange Act of 1934, as amended, ("Exchange Act") and it is possible that the
market in the common stock can be discontinued at any time. Accordingly, if
there is no active market available for the common shares, no liquidity or if
the market is discontinued, holders of the common stock may have difficulty or
may be unable to sell the shares which he or she may hold.
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Certain information included in this Form 10-K contain statements that are
forward-looking, such as statements relating to future anticipated direction of
Novex, plans for expansion, corporate acquisitions, anticipated sales growth and
capital funding sources. Such forward-looking information involves risks and
uncertainties that could significantly affect anticipated results in the future,
and accordingly, such results may even materially differ from those expressed in
any forward-looking statements made by or on behalf of Novex.
BUSINESS
a. General Business Development
Novex Systems International, Inc. ("Novex") is a corporation formed under
the laws of New York and has its principal place of business and executive
offices located at 16 Cherry Street, Clifton, New Jersey 07014, telephone
973-777-2307. Until May 11, 1999, Novex was known as Stratford Acquisition Corp.
and had been a corporation organized under the laws of Minnesota. Effective May
11, 1999, Stratford merged into its wholly-owned subsidiary, Novex Systems
International, Inc., a newly- formed New York corporation, which was the
surviving corporation. The purpose of the merger was to "redomesticate" the
company from the state of Minnesota where it had virtually no business activity,
to the State of New York where the company had its corporate headquarters.
Furthermore, it was management's belief that New York has a more developed body
of laws governing public companies than does Minnesota. For this reason, the new
entity, Novex, was incorporated in the State of New York, and the Minnesota
company, Stratford, was merged into Novex. As a result, the Minnesota company
essentially dissolved into and became a part of the surviving entity, Novex.
Novex also has a wholly-owned operating subsidiary, Novex Systems
International, Ltd. (formerly known as Novacrete Technology (Canada) Inc.),
which is a company registered under the laws of the Province of Ontario, Canada
and is located at 2525 Tedlo Street, Unit B, Mississauga, Ontario L5A 4A8,
telephone 905-566-0716 ("Novex Canada").
Before August 15, 1995, Stratford was a dormant corporation. On August 15,
1995, it acquired from the inventor, the exclusive right to manufacture and
market a proprietary admixture for the enhancement of cementitious products now
known as "Adment". Novex granted the inventor 500,000 shares of common stock and
a royalty of 2% of the gross sales of Adment up to a maximum royalty amount of
$500,000. The inventor is deceased and is now represented by his wife and
daughter who are not affiliated with Novex, other than through the royalty
agreement.
Adment is a blend of various materials which when mixed with portland
cement and water causes a chemical reaction that creates a calcium silicate
hydrate (CSH) paste binder that has a very dense microscopic pore structure.
This change in the molecular matrix of the cementitious product increases the
bonding between the CSH paste and the aggregates that are mixed into the formula
to create a mortar or concrete product. By having a denser pore structure, the
end product becomes more durable and resistant to chemicals and water
penetration. For this reason, Adment causes cement to chemically react in a
manner that ultimately:
1. produces higher compressive, bonding, flexural and tensile strengths,
2. reduces shrinkage,
3. increases workability and, most importantly,
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4. increases resistance to penetration of water and chloride ions from
de-icing salts.
Upon acquiring the technology in 1995, Novex's initial plan was to conduct
further research and development of Adment with the intention of marketing
Adment and a line of pre-packaged concrete repair products using Adment. In the
two and one-half year period from August 15, 1995 through November, 1997 Novex
underwent a series of management changes, generated no revenues, incurred an
accumulated deficit of approximately $3,000,000 and was still in the early
development stage.
On November 17, 1997, Novex made a major change in its business plan which
has resulted in significant advancements in all aspects of Novex's operations.
With the implementation of a 60 Day Business Development Plan that was announced
in December, 1997, Novex's new management increased the number and caliber of
its board of directors and senior management by appointing as chairman of the
board Mr. William K. Lavin who has substantial senior level management
experience with the Woolworth Corporation and Mr. Edward J. Malloy who, as
President of Building and Construction Labor Union in the Greater New York area
brings substantial experience in construction practices and contacts to Novex.
Novex then installed industrial level manufacturing and packaging equipment and
warehousing equipment for raw materials and finished goods. It refurbished its
executive offices at its Canadian operating plant and constructed an internal
testing laboratory. It also opened its first U.S. sales office in New Jersey and
closed on a working capital financing of $550,000. As a result of the 60-day
plan, Novex began to manufacture and package its Novacrete products, and to
execute a sales and marketing program in Canada and the East Coast of the United
States which lead Novex to book in April 1998 its first sale of pre-packaged
Novacrete repair products. Since that time, Novex has developed and marketed a
line of eight concrete repair products that it markets under the Novacrete name.
In September 1998, Novex's wholly-owned subsidiary, Novex Canada purchased
all of the issued and outstanding common stock of ARM PRO Inc. ("ARM PRO"),
located in Ontario, Canada. The funds used to purchase ARM PRO were derived from
Novex's sale of a 9% $800,000 (U.S.) debenture due to mature on September 4,
2000 and which included a warrant to purchase 1,500,000 shares of Novex's common
stock at an exercise price of $.45 per share. The warrant expires on September
4, 2000. Since 1986, ARM PRO has manufactured and marketed the trademarked
FIBERFORCE line of polypropylene fibers. Polypropylene fibers are blended into
cementitious products to provide secondary reinforcement and reduce cracking.
Novex's overall plan was to consolidate the operations of the acquired company
with its existing operations, to realize greater operating efficiencies, and to
achieve its targeted gross margin of 50% of net sales. Accordingly, in December
1998 Novex closed ARM PRO's Teeswater, Ontario plant and merged the ARM PRO
operations into Novex's Mississauga, Ontario operating facility.
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.
Novex believes that the Por-Rok product line is a natural extension of
Novex's line of concrete
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repair and flooring products that it markets under the Novacrete name. It is
management's opinion, based on an emerging trend in the industry, that end-users
would prefer to use one manufacturer's products in any given construction
project. Quite often, one project requires the use of various products. Under
these circumstances, the customer prefers to use products that are compatible
and are backed by the warranty of one manufacturer. By offering several products
as a complete repair system under one warranty, Novex believes it will increase
sales of all products to the end-user.
Additionally, Novex believes that distributors would rather stock one
manufacturer's product line to reduce the number of vendors with which they have
to do business, meaning less shipments to their warehouses and less accounting
for only a few large vendors versus multiple smaller ones. Furthermore, with
larger orders, distributors are able to demand better pricing on all products.
Accordingly, Novex believes that by diversifying the array of products that
Novex can offer to distributors of building materials, it will become more
favorable to distributors as well.
While having a smaller product line does not mean that Novex would be
unable to market its products, the company believes that as its product line
grows, it will become more favorable to end-users and distributor, resulting in
increased sales to both of these types of customers. For this reason, Novex is
proactively pursuing opportunities to acquire entire companies or selected
product lines from companies to further expand its line of speciality building
materials. Although there are no agreements or letters of intent to acquire any
companies as of the filing of this Prospectus, Novex has engaged in discussions
with several targets with the goal of closing at least two more transactions in
the next twelve months to expand the array of products that Novex offers and to
increase its market share in the United States and in Canada. To date, there
have been no discussions on price. In fact, the decision as to which companies
would be suitable acquisition candidates does not rest solely on price but also
upon other factors such as the breadth of its product line, its management, its
distribution channels and how easily its operations could be integrated with
Novex's existing facilities in Clifton, New Jersey or Mississauga, Ontario.
Although we have identified acquisition targets, there can be no assurances that
Novex will be able to reach agreements with any of the targets or that it can
close these transactions. Management anticipates that it will finance future
acquisitions in part with debt and equity. All assets acquired in an acquisition
will be used to raise secured debt financing which will be paid to the selling
entity. Management anticipates that it will continue to increase its debt
financing through Dime Commercial Corp. Therefore, any loans currently
outstanding with Dime should not be an impediment to future financings. If
additional financing is required to purchase a business this financing will need
to be in the form of unsecured loans or equity. In addition, management has
planned that as part of any future financing, it would seek to raise sufficient
capital to pay off the $1.3 million note owed to The Sherwin-Williams Company.
Assuming this
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type of financing arrangement could be achieved, Novex would not be hindered
from financing future acquisitions on account of its current financial
obligations.
Increasing Novex's product line and hiring additional staff to help
management the business will be very challenging, but not impossible. To expand
the product line apart from acquisitions, Novex would be required to undertake
internal research and development by using the resources of its staff cement
chemist. The cost to develop new products is minimal given the cost of the
materials required for the desired products and the fact that we have an
in-house chemist. Although Novex currently has the financial capability to
develop these new products, the real "cost" in developing these products is the
time needed to ensure that a new product will perform satisfactorily under field
conditions and whether the product will gain market acceptance once it is
completed. One advantage Novex has is that the brand name "Por-Rok" is well
known and any new products that are marketed under the brand name Por-Rok should
be easier to market than a "no-name" product. Nevertheless, until the new
product is offered for sale, no one can actually gauge how successfully the
product will sell. For this reason, management prefers to purchase products that
are already accepted and have a loyal customer base rather than rely upon the
development of new products. If Novex acquires a company having just a few
products, it can then offer its own Por-Rok products to customers that purchase
products offered by the newly acquired company. This is called "cross-marketing"
which management believes is the most suitable approach to growing its product
line.
At present, the company has sufficient cash flow to hire one to two
additional plant workers (although there is no present need to do so) and one
salesman which the company is in the process of recruiting. Even if we were to
acquire additional products, whether through acquisition or internal
development, our existing manufacturing staff plus one or two more plant workers
would be capable of manufacturing the new products until additional shifts were
needed to meet increased demand. Furthermore, since the new products would be
sold primarily to our existing customers, we would continue to use the
manufacturers' representatives who presently market our products.
A benefit of making acquisitions is that quality personnel that have
considerable experience often can be attracted to stay with the acquiring
company. For example, when Novex acquired ARM PRO and Por-Rok it retained all
the key employees that now contribute greatly to Novex's daily operations.
However, if Novex does not make any acquisitions this year, which is possible,
it will have to compete with other companies for talented management personnel.
When this happens, especially in a "tight" job market which we are currently
experiencing, key personnel can be very costly to attract and Novex may not have
the resources to compete with large companies that can offer more attractive
compensation packages. On the other hand, one benefit we can offer individuals
with an entrepreneurial bent is the opportunity to become key personnel and part
of senior-level management group which is building a company. Nonetheless,
finding high-quality people that can get the job done and help grow a small
company like ours is always difficult. Since the future success of Novex will be
dependent, in part, upon its ability to attract and retain qualified personnel,
our inability to do so could have a material adverse effect upon our business.
In addition, Novex's success depends, to a large extent, on certain
economic factors that are beyond its control. Unfavorable changes in factors
such as general economic conditions, levels of unemployment, interest rates, tax
rates at all levels of government, competition and other factors beyond Novex's
control may have an adverse effect on its ability to sell its products and to
collect its receivables.
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b. Financial Information About Industry Segments
All assets, revenues and operating expenses are dedicated to one business
segment -- the manufacturing and marketing of construction products.
Accordingly, Novex accounts for its business operations within one industry,
i.e. the building materials industry. The company has two operating segments
within the building materials industry, namely the fiber business and the Allied
Por-Rok business. For information relating to these two operating segments, see
Note 15 to Novex's Consolidated Financial Statements.
Based upon its current operations and its operating activity for the past
three fiscal years, Novex believes that its financial information is adequately
presented in its audited financial statements and is cross-referenced in this
Form 10-K to Novex's consolidated balance sheet and consolidated statement of
operations appearing on pages F-3 and F-4, respectively.
Additionally, the financial information accounts only for sales derived
from the Por-Rok transaction since the date of the acquisition on August 13,
1999 and the not the entire fiscal year of 2000. As such, the financial
statements exclude the sales of the Por-Rok products in June, July and one-half
of August of 1999, which historically have been strong months for sales of these
products.
c. Subsequent Events
On August 1, 2000, Novex acquired substantially all of the assets of the
The Sta-Dri Company located in Odenton, Maryland ("Sta-Dri"). Sta-Dri
manufactures a well-known line of waterproofing and building material products.
The purchase price for the Por-Rok acquisition was 1,000,000 shares of Novex'
common stock that was valued at $137,000 based on the average trading price
three days before and after the date the acquisition was agreed to and
announced, which was August 1, 2000. In addition Novex' President issued a check
in the amount of $72,000 to the Sta-Dri shareholders that is collateralized by
350,000 shares of common stock owned by the President that is to be payable in
October. The company's president and the company have entered into a agreement
whereby the company will pay the president the full amount of the $72,000 paid
to the Sta-Dri shareholders on behalf of the company. As part of the terms to
the acquisition, the Company has provided the Selling Shareholders with certain
piggyback registration rights. Therefore, in the event that the Company shall
register any shares of its common stock with one year from August 1, 2000, the
Company will register any of the unregistered and non-freely tradeable shares of
common sock issued to the Sta-Dri shareholders. Additionally, the company has
provided the Sta-Dri shareholders with the right to purchase any shares of the
Novex common stock offered for sale or securities convertible into its common
stock from August 1, 2000 until August 12, 2002. As of August 1, 2001 and until
August 1, 2002, Novex will have to pay an additional $6,000 each month in the
aggregate to the Sta-Dri shareholders in the event that the common stock of the
Company has not traded above $1.00 per share for twenty consecutive trading days
prior to August 1, 2001. If and when Novex common stock shall trade in excess of
$1.00 per share for twenty consecutive trading days the $6,000 monthly
obligation shall terminate. Regardless of the stock price, Novex's obligation to
pay $6,000 to the Sta-Dri shareholders shall cease on August 1, 2002.
On August 7, 2000, Novex and The Sherwin-Williams Company entered into an
agreement whereby, Sherwin-Williams agreed to convert the entire principal
amount of its outstanding note having a face value of $1,281,351, plus all
accrued and outstanding interest of $109,037 into 1,390,388 shares of Series A
Redeemable Convertible Preferred Stock ("Preferred Stock"). The Series A
Redeemable Preferred Stock pays an annual dividend of 139,038 shares of
Preferred Stock for two consecutive years and if the Preferred Stock is not
redeemed prior to August 7, 2002, an additional 208,558 shares of Preferred
Stock shall be issued to Sherwin-Williams. If on August 7, 2002, any of the
Preferred Stock that
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has not been redeemed shall be converted into common stock at a rate equal to
85% of the Novex' average closing trading price for Novex' $.001 par value
common stock for twenty consecutive trading days prior to August 7, 2002.
On September 1, 2000, Dime Commercial Corp. issued a formal default notice
to the company and demanded full payment of its two notes. No final date of
repayment was set in the letter and the company has continued amicable
discussions with representatives of Dime Commercial about: (i) the prospects of
bringing in new equity capital which would likely result in a retraction of the
default notice, (ii)completing a sale of the company's subsidiary's assets which
the Company has been planning to due prior to its receipt of the notification
letter from Dime the proceeds of which will be used to pay down a portion of its
notes outstanding, (iii) arranging to secure new financing from another bank or
other debt sources to pay-off part or all of the notes outstanding. If Novex is
successful in completing (i) or (ii) above, Dime has expressed its interest in
withdrawing its demand letter and continuing to finance Novex' operations. If
Novex is successful in completing (iii) above it will payoff the entire proceeds
notes owing to Dime Commercial Corp.
d. Novex's Current Business Operation
Novex is engaged in the business of manufacturing and marketing two lines
of premium building product materials. The first is a line of polypropylene
concrete reinforcing fibers that are marketed under the Fiberforce trade name
and a proprietary cement-enhancing admixture that Novex will be marketing under
the trade name Por-Rok. These products are promoted directly to ready-mix and
pre-cast concrete manufacturers. The second is a line of pre-packaged concrete
repair products that are marketed to contractors directly and also to
distributors of building material products. (See Description of Products).
Novex currently has its executive offices at 16 Cherry Street, Clifton, New
Jersey 07014. Novex's manufacturing operations are conducted at its 25,000
square foot facility in Clifton, New Jersey and through its wholly-owned
subsidiary, Novex Canada, in a leased 12,500 square foot facility located at
Mississauga, Ontario (20 minutes west of Toronto).
The Clifton operating facility is a fully-integrated manufacturing plant
with the capacity to manufacture approximately 30 million lbs. of product per
annum on a single shift basis, which translates into roughly $10-12 million per
annum in sales. Although Novex has the capacity to produce this quantity of
product, it does not currently sell all that the company can produce. This
operating plant currently runs at approximately 20% of its capacity on a single
shift level. At present, the Clifton facility manufacturers 7.5 million lbs. of
product (including the Sta-Dri product line), or approximately $2.5 million in
revenues per annum.
Novex plans to expand its product line significantly over the next five
years by acquiring companies that manufacture and market compatible premium
building material products that have already gained an acceptable level of
market penetration. The building material industry is large and encompasses a
wide variety of products, services and equipment. In particular, it is
interested in acquiring manufacturers of premium flooring and concrete repair
products and related accessory products as well as cement enhancing admixtures
for concrete. These types of products usually achieve higher margins since they
are not commodity products and are principally sold based on the product's added
value. Because these products are usually made and packaged in either a
fully-integrated or, in some instances, a semi-integrated manufacturing
facility, large volumes of product can be produced in short time periods with
minimal labor.
Our consolidation strategy is aimed at reaping the cost reductions afforded
by eliminating excess
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facilities and overhead while building a full service specialty product line
thereby offering one-stop shopping to professional contractors who prefer
to choose from one line of products for convenience, product compatibility and
warranty and liability reasons.
e. How Novex Manufactures and Distributes Its Products
Novex manufactures and distributes all of its products from its New Jersey
and Canadian operating facilities. The Clifton facility is a fully-integrated
blending and packaging facility having the capacity to produce over 30,000,000
lbs. on a single shift basis, although the company's current level of sales does
not match its production abilities. The facility consists of three buildings
located on a 1.6 acre tract of commercially-zoned land. The majority of raw
materials used at this facility are stored in silos affixed to the roof of one
of the buildings. Through an automated raw material batching system that is
controlled by a plant supervisor, the raw materials are fed through the silo
system and into mixing blenders. When the raw materials have been blended into a
finished product, the finished batch is forced from the blender by compressed
air into an automated packaging system that packages the products into 50lb.
bags. The bags are then manually stacked onto wood pallets and are prepared for
shipping. In addition, certain quantities of the blended finished product are
transported in large metal bins by a forklift to another packaging system that
packages the blended product into 1lb., 5lb., 7lb. and 50lb. pails. Most of the
smaller quantity pails are then repacked into cardboard boxes in quantities of
4-8 pails per carton for distribution to hardware and retail outlets.
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This facility currently packages products for distribution through building
supply yards and retail outlets in packages ranging from 1 and 5lb. plastic
containers to 50lb. bags and pails. To eliminate excessive shipping costs
associated with delivering small quantities of product, Novex sells larger
quantities of products (full truckload orders) to distributors that ultimately
resell the product into local markets. Before the acquisition of Por-Rok, Novex
used a public warehouse in New Jersey to warehouse and ship product on its
behalf for a per diem handling charge. The Clifton facility now serves as
Novex's distribution center for eastern United States. Novex will continue to
use public warehouses in areas where the sales volume justifies the need to have
product readily available in a local market, but where there is not an
established distributor that stocks Novex's products.
The Canadian facility has the annual capacity on a single shift basis to
produce approximately 750,000 lbs. of Fiberforce product, although the company's
current sales does not meet the level of its production. All Fiberforce products
are made from polypropylene strands that are cut into various lengths and
shapes. Novex currently manufacturers three types of fibers which are
categorized as multifilament, fibrillated and Fiberforce #1. All fiber products
are packaged in 1.0, 1.5 and 2.0 lb. bags and are promoted to the ready-mix
concrete industry.
f. How Novex Markets Its Products
Novex currently has one full-time salesperson located in Mississauga,
Ontario, and 14 manufacturers' representatives, giving Novex coverage in most
eastern states and in certain areas of Canada and the United States. These
individuals are presently covering the following areas of the United States and
Canada:
New England Region
Maine Massachusetts
New Hampshire Connecticut
Vermont Rhode Island
New York/Philadelphia Region
New York Delaware
New Jersey Maryland
Pennsylvania Washington, D.C.
Southeast Region
Missouri North Carolina
Arkansas South Carolina
Mississippi Tennessee
Louisiana Alabama
West Virginia Georgia
Virginia Florida
Kentucky
Canada Distribution
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Eastern Canada
Ontario
Quebec
Novex is in the process of hiring another full-time salesperson in Canada
to specialize in sales of its Por-Rok and Sta-Dri products, since the other
salesperson is principally focused on sales of Fiberforce fibers.
g. How Novex's Products Are Graded By Industry Standards
Building material products are classified in accordance with standardized
performance criteria established by the American Society of Testing Materials
(ASTM). The basic performance characteristics that are considered when
classifying the types of building products that Novex sells are:
(1) Compressive strength
(2) Flexural strength (flexibility)
(3) Tensile strength (splitting)
(4) Bonding strength (adherence)
(5) Shrinkage
(6) Resistance to water penetration
(7) Durability in freeze/thaw cycles
Novex has a research laboratory located in its Novex Canada facility, and a
full-time cement chemist that oversees the development of new products and
performs the technical analysis on products that Novex acquires.
Novex follows a standard format for developing new building material
products. The initial step in the development of a building product entails an
analysis of the market for a product and the cost to manufacture the product. If
the market for a product and the cost to manufacture it are acceptable, Novex's
laboratory personnel develop a trial formulation for the product. Once a trial
formulation has been developed, a sample of the product is given to a qualified
independent testing laboratory, and the above 7 properties, among others, are
tested pursuant to established ASTM guidelines.
Standard testing generally requires the recording of the above properties
at 1,3,7, and 28 day intervals from the beginning of the test. Early test
results are monitored to determine certain performance criteria, such as a
product's compressive strength within 24 to 72 hours after it has been
installed. This result is particularly important to end-users that need products
that will be used to repair areas with little down time, such as hospitals, gas
stations, parking garages and other 24 hour operations. Higher strengths over
time are important where load bearing floor areas are involved, or in areas that
are exposed to aggressive industrial environments, like waste hauling stations.
If the 1-3-7-28 day results are acceptable, a full batch of the product is
made and samples of the product are generally given to contractors to use on
small job sites to observe the product's performance under non-laboratory
conditions. If the 1-3-7-28 day results are unacceptable or the field trials
fail, the trial formulation is reworked and resubmitted for further laboratory
testing. In instances where only a slight modification to the product's
formulation is required, the need for additional laboratory testing may be
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unnecessary. If the field trials are acceptable, technical data sheets, package
design and marketing materials are finalized and the product is then ready for
market.
The ASTM laboratory test results are an important validation of a product's
performance capabilities. However, until a product has performed satisfactorily
in a number of projects, end-users are reluctant to use a product. The cost to
correct a project if a product were to fail and the resultant damage to the
reputation of the professional contractor or the specifying architect or
engineer are the underlying reasons for this resistance. While our Novacrete
products have successfully passed these laboratory tests and marketing of the
products has commenced, we believe that selling these new products in
conjunction with Por Rok's well-established product lines will help us to
overcome this resistance.
For this reason, Novex intends to market the Novacrete products in the
future under the name of either Por-Rok or one of the other trade names acquired
in the Por-Rok transaction.
h. A Brief History On Novex's Admixture Product
The admixture and concrete repair product businesses are well-established
throughout the world. There are various types of admixture products that are
used in construction products and the applications for these admixtures are
extensive. The Novacrete Admixture is a non-metallic, powder-based admixture
that consists of various raw materials that when combined together and mixed
with cement and water provides a chemical reaction which gives the final product
increased compressive and flexural strength, reduced shrinkage, greater density
and therefore better resistance to water and deicing salt penetration, greater
flow and workability and improves the bonding characteristics and setting time
for the product to fully-cure.
Adment has the physical characteristics of a greyish-white powder.
Admixtures can be in powder form or liquid and can be used for multiple or
limited purposes such as slowing or increasing the setting time for a product.
Because of the reactive effect of the raw materials in Adment, it should only be
incorporated into cement-based products where the other materials in the product
are known and generally, only after a sample test has been conducted to
determine the appropriate level (dosage rate) of Adment that should be used in
the final product. This approach substantially reduces the risk of improperly
mixing the Adment with chemically adverse substances that could cause product
failure.
Novex's Novacrete products resulted from its search for a way to strengthen
cement-based products without the addition of polymers. The cement chemist that
invented Novex's admixture formula intended to develop a purely cementitious
product that would equal the performance characteristics of polymer-based
products, but which would be significantly less expensive to manufacture.
Over the past four years, Novex has expended considerable resources to
develop its proprietary cement-enhancing admixture into a commercially viable
product. During this period, Novex employed the services of two of Canada's
largest independent testing laboratories and has worked with a well- known New
Jersey-based laboratory to conduct field trials using the admixture in concrete.
To date, Novex has successfully developed a version of its admixture
technology that can be used in formulations for concrete repair products to
enhance the compressive, bond and flexural strengths of the product and increase
the density of the product so that it resists penetration by erosive elements
like water and deicing salts. It is manufactured at Novex's wholly-owned
operating subsidiary, Novacrete Canada, and is directly marketed by Novex's
sales personnel in 22lb. bags or in bulk quantities to end-users, which
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range from manufacturers of cementitious products such as ready-mix concrete,
pre-cast concrete, brick, paver, cinder block and other manufacturers of
cement-based pre- packaged products.
Novex is still developing a final formulation of its admixture technology
that can be used in new concrete. It intends to manufacture and distribute its
final admixture product for concrete in various sizes ranging from 25lb. bags to
bulk packages weighing 2,000 lbs. Novex has conducted extensive field trials
with a large ready-mix concrete producer and has achieved very promising results
in the admixture's ability to increase the strength of
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concrete. Additional laboratory work and field trials will be required to make
the admixture product acceptable to the industry and cost effective for
ready-mix producers.
We estimate the cost to complete the final admixture's development to be
$10,000-$20,000 in laboratory work to monitor field trials. The real "cost"
involved in finalizing its development is the time required to work with
end-users to convince them of the benefits of using the admixture. Since
concrete is structural in nature, concrete producers generally approach new
products with a great degree of caution before they accept the liability of
selling concrete that contains the new product. If a foundation to a home fails,
the cost to correct the problem could be exorbitant. For this reason, the
end-user of the admixture exercises considerable caution to ensure that the
product performs as proclaimed. For this reason, we are working with local
ready-mix concrete producers that are familiar with our company and our testing
laboratory and that are slightly less reluctant to try our new product. As the
product is used locally and performs well it will likely gain market acceptance
and we can then branch out to a wider region until the products have achieved a
general level of credibility in the industry. At this time, we cannot gauge the
amount of time that will be required before we gain customer acceptance and the
demand for the product increases.
i. Market Trends for Performance Enhancing Admixtures
and Building Materials
The demand for high performance concrete and concrete repair products is
growing at a dramatic pace. The catalyst for the increased use of admixtures and
the need for higher performance products stems from the increasingly rigorous
specifications for new construction and concrete rehabilitation work. Federal
and state departments of transportation are increasing the performance standards
that need to be met in new construction and for the repair and rehabilitation of
roads and bridges to expand the life of the structures and to reduce future
maintenance.
Infrastructure in both developed and developing countries is aging, and
governments with stringent fiscal constraints are looking for effective and
durable alternatives to costly demolition and rebuilding. Repairs relating to
natural disasters are also adding to this demand. Other special applications,
including the storage of nuclear and hazardous waste, the shielding of workers
in nuclear medicine and radiology, and the disposal of chemical and other
hazardous wastes, are creating demand for high performance products.
The growth will be based in part on expected increases in infrastructure
and major construction spending. But it will also be driven by the increased use
of admixtures in all types of cement, and concrete and "the growing popularity
of value-added proprietary admixture products in place of lower- cost
generics."(1)
Markets for new concrete reflect a similar trend toward high performance
concerns. High performance is also required in various specialty niches, such as
fast-setting products for road repairs and other commercial applications where
the cost of shutdown can be very high, and impermeable products for hazardous
waste disposal and radiation shielding for nuclear applications, to name a
couple of examples. With increasing environmental awareness, communities are now
demanding products that are safe to use and non-toxic.
The market for concrete and masonry products has been increasing
substantially in the United
--------
(1) Freedonia Group Study reported in Construction Marketing Today, April,
1997.
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States. With the federally-funded Transportation Equity Act of the 21st Century
(TEA 21) having been signed into law in 1997 an estimated $216 billion will be
spent over the six year period 1998-2003 where up to $173 billion has been
provided for highways and an additional $41 billion for transit projects. This
bill increased the level of highway funding by over 30% when compared to the
previous Federal highway bill, the Intermodal Surface Transportation Efficiency
Act (ISTEA). Approximately $19.5 billion was programmed for federal highway
spending under ISTEA. ISTEA was augmented by the 1995 National Highway System
Act that provided for an additional $5.2 billion in funding. In addition, TEA 21
provides that the revenues generated from the 4.3 cents per gallon gas tax now
be deposited into the Highway Trust Fund to be spent for the construction and
rehabilitation of highways and bridges.
The United States and Canada are not the only geographic areas engaged in
significant infrastructure spending. Concrete structures -- buildings, bridges,
highways, dams -- all over the world are in need of repair. Stringent government
capital budgets inhibit replacement of all structures. Municipalities are
continually searching for ways to extend the useful life of these structures
through patching, refinishing, and protecting the existing work. The world-wide
market for cement-based products to repair concrete structures is projected to
be as high as $100 billion per year. The additive component of this market is
conservatively estimated at more than 2% or $2 billion.(2)
In the Spring 2000, Novex will seek to implement a marketing strategy to
penetrate the market for high-performance concrete (HPC). HPC can be defined as
concrete that has high compressive and flexural strengths and high resistance to
chloride and water penetration. Use of HPC is increasing as federal and state
agencies demand greater product life and ultimate product strength for high-end
uses such as roads, bridges, dams, ports and other concrete applications that
have exceptionally high load bearing requirements like building foundations,
parking garages and bridge decks.
j. A Description of Novex's Products
As of the filing of this registration statement, the following is a list of
the Por-Rok and Fiberforce products marketed by Novex:
POR-ROK PRODUCTS (A Line of Grouts and Patching Products)
POR-ROK Anchoring Cement - non-shrink expansion cement that requires only water
at the job site to create a pourable, yet durable, anchoring, patching or
grouting compound.
SUPER POR-ROK Exterior Anchoring Cement - non-shrink expansion cement for
exterior applications that requires only water at the jobsite to create
exceptionally high early strengths in the first three days from installation.
POR-ROK Halco Grout - contains expansive agents and flow enhancers to provide
high strengths yet exceptional flowability for ease of application.
POR-ROK Aqua Plug - durable water resistant hydraulic cement which sets in 3-5
minutes. Designed to stop leaks or running water, patch cracks and fill holes in
masonry surfaces. Can be used in interior and exterior surfaces and sets under
water.
--------
(2) Based on Statistics Canada Report.
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POR-ROK Concrete Patch - requires only mixing of water at jobsite, will level or
smooth most concrete or masonry surfaces and can be used to repair and patch
spalled concrete, cracks in masonry, broken steps and porches. Sets in 40-80
minutes and is stronger than ordinary concrete. Can be used in interior and
exterior surfaces.
POR-ROK Dash Patch - powder-based product that when mixed with water bonds well
to concrete, wood or plaster that is used to smooth surfaces before the
placement of tile, carpeting or wood. Fills cracks, ruts and score lines, strong
bond adhesion and no shrinkage.
POR-ROK Lev-L-Astic - used as an underlayment over concrete, wood, quarry tile,
terrazzo, before installing asphalt or vinyl asbestos, tile, linoleum, and other
types of floor surfaces. Eliminates the need for felt paper over wood surfaces,
eliminates high spots on floor, improves bonding base to new tile and linoleum.
POR-ROK All Purpose Underlayment - used as an underlayment over concrete, wood,
quarry tile, terrazzo, before installing asphalt or vinyl asbestos, tile,
linoleum, and other types of floor surfaces. Eliminates the need for felt paper
over wood surfaces, eliminates high spots on floor, improves bonding base to new
tile and linoleum.
POR-ROK Adment - a proprietary, powder-based admixture that enhances the
physical characteristics of cement-based products.
POR-ROK Levelon - single component, fast-cure, non-shrink, high bond repair
mortar capable of achieving 3,480 psi in four hours. FC can be walked upon in a
little less than one hour from installation and driven over within two hours of
installation.
STA-DRI PRODUCTS (Products were acquired on August 1, 2000)
STA-DRI Waterproofing Paint (Powder form) - this product is a cement-based
product that is mixed with water and can be applied to all types of interior and
exterior masonry surfaces with a brush or roller to provide a waterproof
surface.
STA-DRI Heavy-Duty Waterproofing Paint - this product is an oil-based redi-mixed
product that can be applied with a brush or roller and required no addition of
water. It can be used on interior and exterior masonry surfaces and can be
tinted with different color additives.
STA-DRI Latex Waterproofing Paint - this product is a latex-based redi-mixed
product that can be applied with a brush or roller and required no addition of
water. It can be used on interior and exterior masonry surfaces and can be
tinted with different color additives.
Sta-Dri All Purpose Sealer - Clear, colorless sealer for all masonry and wood
surfaces. Can be used as a primer for most paint systems, and as a curing
membrane for new concrete. The product is designed to protect surfaces against
deterioration and weathering.
LINK Superbonding Agrent - Liquid bonding agent that enhances the bond of most
surface applied products to masonry. Can be used as a primer for hard-to-paint
surfaces and when mixed with STA-DRI Waterproofing Paint (Powder form) it
enhances the adhesion of this product, al it would for most paints and coatings.
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STA-DRI Concrete Patch - acrylic resin fortified material that is mixed with
water and used to patch all types of concrete surfaces: sidewalks, patios,
driveways and walls.
STA-DRI Waterstop - quick-setting cement product that is mixed with water and
can be used to plug holes in concrete surfaces even if and will water may be
trickling through. The product hardens in 3-5 minutes and can be applied under
water.
STA-DRI Anchoring Cement - fast-setting expanding cement that is mixed with
water and used to anchor posts, railings, mailboxes, bolts, hooks and other
devises that require a strong, permanent attachment to a wall or floor surface.
FIBERFORCE PRODUCTS - All Fiberforce products are made from polypropylene and
are cut into various lengths and shapes. Novex currently manufacturers three
types of fibers which are categorized as monofilament, fibrillated and
Fiberforce #1 each designed to reduce cracking and provide secondary
reinforcement. The fiber products are packaged in 1.0, 1.5 and 2.0 lb. bags.
k. Novex's Competitors
The principal methods of competition in our industry are price, service and
the reliability of the product as demonstrated by performance. Except for the
admixture product, each of the products which Novex currently offers has been on
the market for at least 10 years and in some cases over 25 years. Because the
products have been used for so long, they have achieved a level of market
acceptance. It is very unlikely that someone would claim that our Por-Rok or
Fiberforce products don't work inasmuch as customers have been using them for
years. Our prices are competitive with other like products. We do not aim to be
the lowest nor the highest price on the market, but to be competitive. When it
comes to competing with major manufacturers, we cannot offer the full range of
products that they can. Consequently we cannot offer volume price discounts to
the extent our larger competitors can. Until we expand our product line, we
cannot offer the complete repair kits which some of our larger competitors can.
To remain competitive in the interim, we aim to provide customers with
exceptional service and very favorable pricing and payment terms with respect to
the product currently in our line.
The industry for building material products is highly fragmented and has
various classes of competitors. Competition ranges from large multi-national
companies to local manufacturers. Because the transportation of heavy products
like building materials involves sizeable shipping costs, hundreds of
manufacturers of building products have been able to sustain market share in
local markets, thus resulting in a fragmented industry. Novex would like to
capitalize on this situation by acquiring selected companies in various regions
of North America for the purpose of:
o acquiring additional premium building products,
o increasing market share, and
o improving operating margins by consolidating operating facilities to
eliminate excess overhead which is prevalent in the industry.
As of the filing of this registration statement, Novex competes with
several other companies nationwide that manufacture and distribute construction
products that are substantially similar to those manufactured and distributed by
Novex. Until Novex can effect its business strategy, which will eliminate
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some competition, at least in certain markets, Novex believes the following
companies will be its primary competitors.
Brand Major Competitors
----- -----------------
Por-Rok Conspec
Anchoring Cement Tamms
Master Builders
Quikcrete
Sonneborn
Sternson
W.R. Meadows
ChemMasters
Rockite
UGL
THORO
Super Por-Rok (Same as above)
Exterior Anchoring
Cement &
Sta-Dri Anchoring Cement
Por-Rok (Same as above)
Aqua Plug & Bondex
Sta-Dri Waterstop Thoro
Por-Rok (Same as above)
Concrete Patch &
Sta-Dri Concrete Patch
Por-Rok Mapei
Halco Grout Tamms
Por-Rok Mascrete
Lev-L-Astic Tamms
Dependable
Mapei
Dap
Por-Rok Dependable
Dash Patch Mascrete
Tamms
CGM Underlayment
Taylor Vitrex
Umasco
Por-Rok Floorcap Masterbuilders
Mapei
Dayton-Richmond
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Sta-Dri Waterproofing Paint (Powder) Thoro
UGL
Quikcrete
Sta-Dri Waterproofing Paint (Latex) Thoro
UGL
Quikcrete
Sta-Dri Waterproofing Paint (Oil) Thoro
UGL
Quikcrete
Sta-Dri Sealer Thompson
Link All Purpose Sealer Thoro
Quikcrete
All Fiberforce Products PRO Mesh
Fibermesh
Forta
Dura-Fiber
Euclid
W. R. Grace
Adment W. R. Grace
Masterbuilders
Norchem
Some of Novex's competitors may be better capitalized, better financed,
more established and more experienced than Novex and may offer products at lower
prices or with greater concessions than Novex. Should Novex be unable to compete
effectively, Novex's results of operations and financial position would be
materially and adversely affected.
l. Seasonality
As part of the construction business, Novex is currently subject to
seasonal cycles which historically results in a significant slow down in its
operations during the months of December through February. March begins the
increase in business activity which continues through November, with the peak
sales months being April through September. This seasonal cycle is attributable
to the slowdown in outdoor construction activity in Canada and the northeastern
portion of the United States during the winter months. With the addition of the
Por-Rok line of products, Novex anticipates that the substantial majority of its
sales will be derived from products used for residential, commercial and
industrial repair of deteriorating concrete structures and floors and sold into
commercial and building product outlets like home centers and independent
hardware stores. Although Novex may still be subject to the seasonal effects of
the winter months, it has already begun to recruit agents to sell its products
in the southeastern portion of the U.S. and will engage in a very active
recruiting program to enroll agents in this territory in addition to the other
25 representatives currently employed throughout the United States.
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m. Customer Dependence
Novex is not dependent upon any one customer nor does it anticipate
becoming dependent upon one customer in the future. Its marketing strategy is to
diversify its sales through major distributors that are located in various
geographical areas and to a large number of construction professionals, such as
engineers, architects, contractors, construction managers and end-users all of
whom are involved in separate construction projects. In addition the Fiberforce
and Por-Rok products are sold to various distributors and retailers none of
which account for more than 5% of the respective line of product sales. Novex
does not anticipate that any one customer will account for ten percent or more
of its annual sales in the coming fiscal year.
n. Raw Materials
An important aspect of Novex's business is having an adequate supply of raw
materials. The raw materials used in manufacturing the Por-Rok products are
readily available in the United States and Canada. Novex currently purchases
most of its raw materials from ten principal suppliers located in Canada and the
United States and has access to numerous suppliers in the United States. The raw
materials are purchased on an as needed basis and at market prices at the time
of purchase. Novex does not anticipate that the prices and supplies of the raw
materials will fluctuate substantially since the majority of the raw materials
are commodity items such as sands and cement. Nor does Novex anticipate
difficulty in obtaining these products if its relationship with one or more of
its suppliers were to end. Novex further believes that the loss of any one
supplier will not adversely affect Novex's business. Novex currently owns a
substantial supply of the main component of its Adment product that it
warehouses in its Mississauga facility and in a public commercial warehouse.
o. Intellectual Property Rights
Novex received a certificate of registration for the use of the trademark
"Novacrete" from the Canadian Intellectual Property Office on June 15, 1997. The
Certificate remains in effect until June 5, 2012 and can be renewed by Novex. On
March 3, 1998, Novex received a Certificate of Trademark Registration No.
2,140,062 to use the trademark "Novacrete" in the United States. The term of the
U.S. trademark registration is for ten years. With Novex's acquisition of
Por-Rok in August 1999, Novex acquired the registered trade names for all
Por-Rok products currently being produced.
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Novex has not filed an application for a patent on its proprietary
technology. The core technology that is used in each of Novex's products is not
easily replicated. However, if patented the technology would ultimately become
public information. Novex has developed internal controls to protect the
confidentiality of its technology and does not believe that the lack of legal
patent protection will impair its ability to effectively compete with other
manufacturers of like products or cause Novex to incur unnecessary risk of loss
of the technology. Even if Novex had patent protection over its technology, it
still assumes the risk that a competitor may misappropriate the technology and
then its only recourse would be to commence costly and time consuming
litigation. The existence or absence of a patent poses no commercial
disadvantage to marketing Novex's products.
On an internal basis, any proprietary technology is maintained by the
manager of research and development and Novex's senior management on a
"need-to-know" basis in order to perform their jobs. By keeping all laboratory
developments in close confidence Novex seeks to limit misappropriation of
company secrets by employees or third parties. Previously, Novex had required
that employees at the Mississauga facility dealing with the Novacrete Admixture
sign confidentiality agreements. Although Novex had initially thought to require
its Por-Rok employees to sign similar agreements relating to the Por-Rok
products, upon reconsideration, the company has determined it will not require
them to sign confidentiality agreements since these products have been
manufactured for up to 40 years under previous management without
confidentiality agreements in place.
Novex has learned that other companies have been issued a trademark for the
name "Novex". We do not believe that our company will be injured by these uses
of the name Novex nor do we consider our use of the name Novex to be an
infringement upon any of these trademarks since these trademarks relate to
companies, goods and services which are entirely distinguishable and unrelated
to the construction products industry. Even if Novex were required to change its
corporate name, this would not diminish our sales since our products are
marketed under the brand names "Por-Rok" and "Fiberforce". These product names
are protected by registered trademarks in the United States, Canada and the
United Kingdom.
As part of its acquisition of certain assets owed by the Sta-Dri company,
Novex acquire full legal right to the Sta-Dri tradename and trademarks and all
the product tradenames that were registered under the name of the previous owner
of Sta-Dri.
p. Novex's Working Capital Requirements To Operate Its Business
Novex has historically experienced cash flow fluctuations that track the
seasonal fluctuations in its business due to the construction slowdown in the
winter months. In the fiscal years 1998 and 1999 Novex experienced negative cash
flow and required financing from outside sources to sustain its business
operation. From March to October Novex will experience its highest level of
working capital requirements to sustain higher levels of inventory to meet the
anticipated demand for finished products during these months. With the slowdown
of construction in the winter months Novex anticipates it will generally require
less than two-thirds of the amount of working capital, since sales will likely
decrease to this level of average monthly sales in the peak months. For the
period ending May 31, 1999 Novex experienced a fluctuation in its working
capital requirements since it was just emerging from the development stage and
only owned the Fiberforce product line for two months before the winter slowdown
period. However, for the fiscal year ending May 31, 2000, Novex expects to
experience less fluctuations in its working capital requirements to finance its
operations due to the less seasonal nature of the Por-Rok products as well as
the $750,000 revolving line of credit that Novex now has with Dime Commercial
Corp.
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<PAGE>
To cover its working capital requirements in 1999, Novex sold a 10%
Debenture in February 1998 of $550,000. Had Novex been unable to sell the
debenture and notes to generate working capital, it would have had a substantial
negative cash flow and would likely have had to formally reorganize or cease its
operations. In the fiscal year 1999 the net cash used in Novex's operations
including investing activities was approximately $1.4 million. This amount was
needed to fund Novex's expansion of its operating facility and for operating
expenses for such as rent, payroll, new operating equipment, raw materials,
research and development, professional fees and trade debts.
On September 4, 1998 Novex sold a 9% $800,000 Debenture that matures on
September 4, 2000 and a warrant to purchase 1,500,000 shares of common stock at
$.45 per share for a period expiring on September 4, 2000. From these proceeds
Novex used $610,000 to purchase ARM PRO and reserved the remaining $190,000 for
working capital and transaction expenses. Upon closing the ARM PRO transaction,
pursuant to the definitive purchase agreement, ARM PRO was required to have
approximately $175,000 of cash, $100,000 in account receivable, $100,000 in
inventory and total liabilities not to exceed $50,000.
To further offset its working capital demands in 1999, Novex also secured a
$250,000 bridge loan from a shareholder to cover the cash shortfall and entered
into a factoring agreement with Montcap Financial Corporation which also
provided Novex with $70,000 note that is secured by equipment located at its
Mississauga facility.
Although Novex's general credit policy is to invoice customers on a thirty
day payment basis, to encourage customers to take larger volume orders Novex
may, in limited circumstances, allow for payment of an invoice in sixty days. In
addition, although invoices are stated as being due in thirty days, it is fairly
common practice in the construction products industry for contractor customers
to pay over a 45-day period. This delay results from the contractor having to
submit invoices for work completed which includes the cost of materials used on
the project. Although Novex will be very aggressive in allowing extending
payment terms to customers where it will result in additional sales of Novex's
products, extended payment terms will generally be discouraged.
q. No Backlog Orders
As of May 31, 2000, the company did not have any backlog orders.
r. Government Contracts
Novex does not have any material contracts with the Government or any
government agency and therefore does not have any exposure to these types of
agreements.
s. Financial Information About Foreign and Domestic Operations and
Export Sales.
Although Novex manufactures some of its products through a wholly-owned
operating subsidiary located in Canada it does not believe that it will be
subject to any material risks attendant with it being a foreign operation. The
Canadian government is stable and democratic and Novex does not foresee any
changing conditions that would adversely impact Novex. (See Note 16 Segment
Information of Consolidated Financial Statements).
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<PAGE>
t. Novex's Research and Development Activities
In each of the past three fiscal years Novex has incurred expenses relating
to the research and development of its Adment product and Concrete Repair
Products that were formerly marketed as Novacrete and which are now being
marketed under the Por-Rok tradename. In fiscal year 1999, Novex spent
approximately $30,000 on fees payable to outside independent testing
laboratories that were engaged to conduct various testing procedures to improve
the Novacrete products. We further incurred approximately $60,000 in expenses
for personnel and laboratory equipment. In fiscal year 1998 Novex spent
approximately $40,000 on fees payable to outside testing laboratories to advance
testing of its Novacrete products. Other than for a brief period in 1997 in
which Novex employed the services of a cement technology consultant for
approximately three months, Novex did not have any technical personnel on staff
from January, 1997 through February, 1998 to conduct research and development on
new products. In 1996, Novex spent less than $20,000 on fees payable to outside
testing laboratories to advance testing of its Novacrete products and an old
formulation for a Novacrete Fast-Set product that Novex has since abandoned and
replaced with a new formulation to be marketed under the name Por- Rok.
u. Environmental Compliance
Novex does not manufacture products or use raw materials in its products
that are deemed to be subject to rules or regulations relating to the discharge
of certain materials into the environment. Although Novex has installed a
compressed-air dust control system in its facilities to maintain a higher
quality of air in its operating plant this system is not mandatory. The system
installed in Novex Canada cost Novex approximately $20,000 and operates during
the processing of certain products that contain raw materials having a very low
density and have the physical characteristics of dust-like particles.
As part of the Por-Rok acquisition, a Phase I Environmental Compliance
Review was conducted at the Clifton, New Jersey plant. No material findings were
reported. The Clifton plant also has a dust collection system.
With each shipment of product, Novex issues a material safety and data
sheet (MSDS) which describes the product and its components and precautionary
measures when using the product. Since Novex's products are environmentally
safe, unless new regulations are adopted by the governments of Canada or the
United States, we expect to expend a nominal percentage of its operating budget
on environmental compliance for the next fiscal year and for the foreseeable
future.
v. Novex's Future Operations
Although an integral component of Novex's business plan and future growth
will be the acquisition of targeted companies and product lines in the building
materials industry, Novex's operating strategy will also include the following
initiatives:
o Consolidation of Manufacturing Operations
With the closing of the Por-Rok transaction, Novex transferred
the manufacturing of its Novacrete products from its Novex Canada
operating facility to Por-Rok's 25,000 square foot
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facility located in Clifton, New Jersey. Por-Rok's fully-integrated
manufacturing plant has the capacity to manufacture approximately 30
million lbs. of product per month on a single shift, which translates
into roughly $10-12 million per annum in sales. The Mississauga
facility is capable of producing 750,000 lbs. of Fiberforce products.
Although, Novex has the capacity to produce this quantity of product,
this does not mean that it will sell all that the company can produce.
It only means that Novex would not have to make a major capital
investment until it achieves approximately $16 million in sales of its
Por-Rok products and about $1.5 million is sales of its Fiberforce
product. Currently Por-Rok manufacturers 5.5 million lbs. of product
annually, or $1.8 million in revenues per annum and Fiberforce
manufactures approximately 325,000 lbs. of product annually, or
approximately $485,000 in revenues per annum.
By shifting the Novacrete product manufacturing to the Por-Rok
facility, Novex will have adequate space in its Novex Canada facility
to inventory Por-Rok and Fiberforce products for distribution
throughout eastern Canada. The Por-Rok facility will also be used to
warehouse Fiberforce fiber inventory that will be distributed in the
United States. This arrangement will enable both facilities to serve
as distribution centers for all Novex products and will allow for each
facility and its personnel to specialize in the manufacturing of
select products.
In addition, during the month of August, 2000 Novex merged into
the Por-Rok facility the Sta-Dri manufacturing operation. Novex
purchased limited manufacturing equipment and already had the capacity
to manufacture Sta-Dri products at its Por-Rok facility. All Sta-Dri
products are now manufactured, shipped and invoiced from its Por-Rok
facility.
o Novex's Plan to Increase Sales
Novex will seek to expand its sales and its customer base through
a number of initiatives each of which is discussed in detail in this
section.
Systems Approach to Selling Building Materials
In 1998, Novex conducted extensive "hands-on" market
research which has become the underlying basis for Novex's
"systems approach" to marketing building materials. This research
revealed that the usual concrete repair project, such as the
repair of a worn floor of a large industrial plant, could require
the use of several products including a surface bonding agent, a
durable concrete repair product, a floor hardener or smoother
topping product, and possibly a cure or sealing product to
further protect the installation from damage from water and
chemicals. Through its research, Novex learned that end-users
prefer to use products that are compatible with one another and
that are backed by the warranty of one manufacturer. As a result,
they look to purchase complete repair "kits" from one
manufacturer rather than to purchase isolated products from
various manufacturers. To accommodate end-users who desire to
purchase products in this manner, distributors of building
materials prefer to stock the products of manufacturers that
produce a full line of products that can be used together.
Several of our competitors already offer complete "kits" to
repair damaged concrete, a floor or a wall. Therefore, responding
to market preferences and competitive
25
<PAGE>
forces, Novex's foremost goal this year will be to grow and
diversify its product line. By offering all the products as a
complete repair system under one warranty, Novex believes it will
increase sales to end-users of all products as well as attract
stocking distributors that prefer to handle complete product
lines. Growing through acquisitions (versus solely by research
and development) will shorten the time period needed to achieve
this goal, and will provide Novex with the advantage of marketing
compatible products together with those that have already gained
commercial acceptance.
One Label, One Store
"One Label, One Store" essentially means that Novex will be
offering a diversified line of products that can be used together
under one warranty and all of Novex's products will be available
in most locations. The program will be offered to the 300+
outlets that currently distribute Por-Rok products and to new
distributors and retail outlets that Novex will be pursuing. One
stop shopping will benefit the customer and the distributor alike
by eliminating the customer's need to source products at various
locations. By purchasing a wider array of products from one
manufacturer, distributors will satisfy their customers' demands,
eliminate the logistics of stocking multiple vendors and obtain
volume discounts.
Novex first introduced the One Label, One Store program to
The Home Depot and has received approval to begin marketing its
Fiberforce line of products in five Home Depot stores in Ontario,
Canada as soon as Novex can complete a packaging design for
retail distribution. Novex currently packages its Fiberforce
products in bags of 1lb. or larger for distribution to ready-mix
producers.
To encourage early participation in the One Label, One Store
program Novex will:
o offer early entry price discounts for distributors that
purchase additional products from Novex;
o arrange pre-scheduled store visits to demonstrate to
the distributors' customers and employees the benefits
of the new products;
o provide point-of-purchase (POP) displays and other
marketing materials to assist the distributors' sale of
the new products; and
o coordinate mailings of marketing pieces on the One
Label, One Store program to the distributors's
customers.
The existing line of Por-Rok products is sufficient to
implement the One Label, One Store program since most retail
customers, i.e. the "do-it-yourself" customers, do not typically
have the need, experience or skill to work with the more
sophisticated construction products required by professional
contractors. The Por-Rok product line currently consists of six
products, including a relatively new product called Levelon, that
can be used for most home repairs and maintenance including
indoor floor and wall repair as well as for outside uses such as
repair of concrete sidewalks, driveways, patios and to install
poles and railings.
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<PAGE>
Before the One Store, One Label program can be offered to
distributors of building materials, however, the product line
will need to include a line of curing and sealing products,
epoxy-based products, cement-based and latex waterproofing
products and some additional flooring products. It is Novex's
intention to add these products to its line by way of
acquisition. Assuming an acquisition could be completed before
the end of its fiscal year, this program could be implemented on
the distribution side by the end of this calendar year. If we are
unable to add the desired products to our line by way of
acquisition, our ability to implement the one store, one label
program could be delayed for a period of up to two years.
Both retail and distributor programs will require additional
marketing material such as direct mailers and promotional
materials that can be delivered with the products or by sales
representatives. The costs associated with producing these
materials is estimated to be $25,000-$30,000. We are unable to
quantify the cost of acquiring companies with complementary
products since this would depend upon a multitude of factors
including the types of products they offer, their revenues,
market share and distribution channels, and the size of their
facilities, to name a few. For the immediate future, we would
expect to finance any such transaction through outside financing
rather than working capital. At present we do not have any
financing in place nor would we seek any financing until an
agreement had been reached with a potential target.
Improve Por-Rok's Sales Organization
Por-Rok currently markets its products by using the services
of 25 manufacturing representatives. There are no full-time sales
personnel to coordinate the sales and marketing function. Novex
plans to dedicate one full-time salesperson to work with the 25
manufacturer's representatives to adequately train them on the
Fiberforce and Por-Rok product lines, along with other products
that Novex plans to acquire and develop internally. This
salesperson will also make personal calls to each Por-Rok
customer to promote the One Label, One Store program. In
addition, the local manufacturer's representative will be
responsible for obtaining new accounts in his territory,
increasing sales of products to existing accounts in his
territory and monitoring the sales activity of the Por-Rok and
Fiberforce distribution outlets in his territory.
In addition, Novex plans to hire a full-time salesperson in
Canada and engage the services of one or two more manufacturing
representatives to cover Eastern Canada. Novex currently uses a
manufacturers' representative located in the Province of Alberta
to cover principally the Alberta area as well as other locations
in the western provinces of Canada.
Performance Based Compensation
Novex has increased the performance-based compensation of
the 25 manufacturers' representative organizations that it
acquired with Por-Rok. By increasing the actual percentage of
sales that will be paid to sales personnel as commissions and by
offering them the opportunity to participate in other
performance-based compensation,
27
<PAGE>
Novex believes it will be offering the incentives needed to
motivate its sales force and reduce attrition by developing
long-term relationships with these individuals.
Architect and Engineering Representative
Novex plans to hire a technical salesperson to coordinate
the introduction of Novex's products to architects, engineers and
contractors that write specifications for construction projects.
Having its products "specified" into a job will create product
demand in that the contractor that is awarded the project is
required to use the specified product. In addition, as Novex's
products begin to appear in construction project specifications,
distributors will become more interested in stocking Novex's
products as the demand for the products increases.
New Retail Channels
As part of Novex's efforts to expand sales of products in
all possible distribution channels, Novex will work aggressively
to expand Por-Rok's existing retail base by offering promotional
discounts to other regional hardware outlets and purchasing
cooperatives along with "big-box" stores like The Home Depot and
Lowe's.
Advertising
Novex intends to present to the construction industry and
the consumer an ongoing marketing campaign. To achieve this,
Novex will establish and maintain an advertising and marketing
budget. The budget will be used primarily to participate in trade
shows and trade journal advertising. Where possible, Novex will
participate in cooperative advertising. Novex is also creating
promotional materials and has formulated marketing plans to
increase sales by Novex and other representatives throughout the
U.S. and Canada.
Future Acquisitions
Novex is currently considering the acquisition of companies
that would expand its product line into specialized flooring and
concrete repair products, cures and seals, moisture protection
products, specialized industrial grouts, bonding agents, and
other accessory products.
w. Number of Employees
As of May 31, 2000, Novex, on a consolidated basis, employed fifteen (15)
full-time employees. Of the 15 employees, eleven are located in Novex's
principal executive offices and manufacturing facility in Clifton, New Jersey,
and four are located at Novex's operating subsidiary, Novex Canada. Of the 15
employees, five persons are in management positions, nine persons are in plant
operations and two persons occupies an administrative assistant position. With
the Por-Rok acquisition, Novex now has a collective bargaining agreement with
the plant personnel in Clifton. Novex has not experienced any work stoppages as
a result of labor disputes and considers its employee relations to be good.
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Item 2. Properties.
In November, 1999 Novex's principal executive offices were moved from 67
Wall Street, Suite 2001, New York, New York 10005, 212-825-9292 to 16 Cherry
Street, Clifton, New Jersey 07014 973- 777-2307, which is the location of the
offices and manufacturing operation that Novex acquired from The
Sherwin-Williams Company in August 1999. Upon closing that transaction, Novex
became the owner of all the real property, buildings and personal property
located at 16 Cherry Street, Clifton, New Jersey. The real property consists of
a 1.58 acre tract of commercially-zoned land with three separate buildings. The
main building is 15,000 square feet, of which 3,000 square feet is dedicated to
office space and a reception area and the remaining 12,000 square feet is
allocated to the manufacturing of Por- Rok products and the warehousing of
certain raw materials. The other two buildings at the Por-Rok facility are
approximately 5,000 square feet each and are used for warehousing supplies, raw
materials and finished goods. In addition, there is another 10,000 square feet
of undeveloped land that could be used to expand the manufacturing and
warehousing capacity of this facility. This operating plant currently runs at
approximately 25% of its capacity on a two shift level.
The subletting agreement that Novex had entered into with Dowe, Capetanakis
& Preite which is the primary tenant of Novex's former office on Wall Street,
will end in February, 2000. Janet L. Dowe, the spouse of Daniel W. Dowe is a
partner of the law firm Dowe, Capetanakis & Preite. Mr. Dowe has no affiliation
with the firm. Total monthly payments under the lease agreement are
approximately $3,500 subject to adjustment for office supplies and services.
Management of Novex believes that the rent paid by it under this lease agreement
is less than the fair market value of similar office space in the surrounding
area.
Novex's subsidiary, Novex Canada operates from a facility housing its
executive offices and a 12,500 square foot manufacturing facility located at
2525 Tedlo Street, Unit B, Mississauga, Ontario, Canada L5A 4A8, 905-566-0716.
This facility is divided into the three areas: 2,500 square feet is allocated to
offices and a research laboratory; 4,000 square feet is dedicated to the
manufacturing of Novex's Novacrete line of cementitious concrete repair products
and the remaining 6,000 square feet is used to manufacture the Fiberforce line
of polypropylene fibers and for inventorying finished goods. The Canadian
facility is subject to a five year lease commencing on May 1, 1997 and expiring
on April 30, 2002. There is no option to renew the lease. The annual lease
payments are $62,500 (CAN). Management of Novex believes that the rent paid by
it under this lease agreement is less than the fair market value of similar
space in the surrounding area. This operating plant currently runs at
approximately 30% of its capacity on a two shift level.
Management believes that the facilities used by it in the operation of its
business are adequately covered by insurance and are suitable and adequate for
their respective purposes.
Item 3. 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
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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 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 4. Submission of Matters to a Vote of Security Holders
During the fiscal year ended May 31, 2000, there were no proposals
submitted to a vote of the shareholders. The company intends to call a
shareholders meeting at the beginning of the calendar year.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Novex's common stock, $.001 par value, is traded on the Over-the-Counter
("OTC") Bulletin Board operated by the National Association of Securities
Dealers under the ticker symbol "HARD". The table below presents the high and
low closing bid prices for each of the first two quarters of the fiscal year
ending May 31, 2000 the four quarters in the fiscal year ending May 31, 1999 and
May 31, 1998, respectively. The quotations reflect interdealer prices without
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions. Novex's common stock became actively traded in July, 1995.
On January 28, 2000, the closing bid price was $.18. Novex has paid no cash
dividends in the fiscal year ended May 31, 1999 and does not expect to change
its dividend policy in the foreseeable future.
Quarterly Common Stock Bid Price Ranges
Quarter High Low Last Day of Quarter
------- ---- --- -------------------
1st $.32 $.31 August 31, 1999
2nd $.19 $.17 November 30, 1999
3rd $.25 $.15 February 28, 2000
4th $.28 $.14 May 31, 2000
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Quarter High Low Last Day of Quarter
------- ---- --- -------------------
1st $.50 $.27 August 31, 1998
2nd $.36 $.19 November 30, 1998
3rd $.20 $.13 February 28, 1999
4th $.38 $.13 May 31, 1999
Novex may, but has not, entered into any agreements with market makers to
make a market in Novex's common stock. In addition, any market making activity
would be subject to the limits imposed by the Securities Act, and the Securities
Exchange Act of 1934, as amended. For example, federal regulations under the
Exchange Act regulate the trading of so-called "penny stocks" (the "Penny Stock
Rules"), which are generally defined as any security not listed on a national
securities exchange or NASDAQ, priced at less than $5.00 per share, and offered
by an issuer with limited net tangible assets and revenues. In addition, equity
securities listed on NASDAQ that are priced at less than $5.00 per share are
deemed penny stocks for the limited purpose of Section 15(b)(6) of the Exchange
Act. Therefore, during the time which the common stock is quoted on the NASDAQ
OTC Bulletin Board at a price below $5.00 per share, trading of the common stock
will be subject to the full range of the Penny Stock Rules. Under these rules,
broker dealers must take certain steps before selling a "penny stock," which
steps include: (i) obtaining financial and investment information from the
investor; (ii) obtaining a written suitability questionnaire and purchase
agreement signed by the investor; and (iii) providing the investor a written
identification of the shares being offered and in what quantity. If the Penny
Stock Rules are not followed by the broker-dealer, the investor has no
obligation to purchase the shares. Given the application of the comprehensive
Penny Stock Rules it may be more difficult for broker-dealers to sell the common
stock.
Accordingly, no assurance can be given that an active market will always be
available for the Common stock, or as to the liquidity of the trading market for
the Common stock. If a trading market is not maintained, holders of the Common
stock may experience difficulty in reselling them or may be unable to resell
them at all. In addition, there is no assurance that the price of the Common
stock in the market will be equal to or greater than the offering price when a
particular offer of securities is made by or on behalf of a Selling
Securityholder, whether or not Novex employs market makers to make a market in
Novex's stock.
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Item 6. Selected Financial Data
The following selected historical consolidated statement of operations for
the three years ended May 31, 2000, 1999 and 1998 and balance sheet as of May
31, 2000 and 1999 have been derived from the consolidated financial statements
of Novex that are included elsewhere in this Form 10-K and that have been
audited by Feldman Sherb & Co., P.C. whose reports with respect to the
consolidated financial statements are also included elsewhere in this
Prospectus. This information should be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements
appearing elsewhere in this Form 10-K and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Years Ended May 31
-----------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales ...................................... $ 9,073 $ 321,311 $ 1,862,083
Gross Profit ................................... 5,444 208,006 708,923
Net Loss ....................................... (1,112,594) (1,392,340) (1,217,656)
Net Loss Per Common Share ..................... $ (.10) $ (.10) $ (.06)
BALANCE SHEET DATA:
Working Capital Deficiency ..................... $ (518,925) $ (554,077) $(2,972,578)
Goodwill, net .................................. -0- 316,300 826,465
Total Assets ................................... 318,540 656,058 $ 3,188,424
Long Term Debt ................................. -0- 772,582 --
Stockholders' Deficiency ....................... (401,045) (923,386) (735,327)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Year ended May 31, 2000 (Fiscal 2000) as compared to May 31, 1999 (Fiscal 1999)
While net sales for the year ending May 31, 2000 was $1,862,083 net sales
for the same period ended May 31, 1999, were $321,311. 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.
Novex only achieved a gross margin of 38% for the year ending May 31, 2000.
The decrease in gross margin during this period was attributable to two factors.
The first factor being that for the year ended May 31 1999, the Novex's revenues
were primarily derived from the sale of its Fiberforce products which have
considerably higher gross margins whereas for the year ended May 31, 2000, Novex
generated a much higher volume of sales of its Por-Rok product line which has a
lower gross margin than the Fiberforce products. Secondly, Novex made a
substantial sale of its Fiberforce product at wholesale prices to a reseller of
fiber. This also contributed to the lower margin. Management does not expect any
further
32
<PAGE>
decline in the gross margin. Rather it expects the gross margin to reach a
higher level with sales volume increases which will reduce the percentage of
fixed factory overhead as a percentage of total net sales. . Any further change
in the gross margin will result directly from changes in product sales mix and
sales volume.
For the year ending May 31, 2000, the Company generated a loss from
operations of $895,839. The Company also incurred approximately $270,000 in
outgoing freight expenses which the Company will pass on to its customers
through a new pricing and shipping policy that became 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
$163,760 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 . In addition, as part of its acquisition of the Por-Rok
business, Novex was required to register the stock issued to Sherwin-Williams
which cost approximately $100,000 in auditing, legal internal accounting charges
to complete the work. 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 $342,079 before expenses for interest which for
the year totaled $261,480 and foreign currency loss of $41,487 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 year ended May 31, 2000, the Company's overall operating 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
nine and one-half months of the Por-Rok operation which was acquired on August
13, 1999.
As of May 31, 2000, the Company had $951,173 in current assets, which
consisted principally of accounts receivable of $553,270 and inventory of
$389,578. The Company's net property, plant and equipment totaled $1,399,341 and
goodwill of $826,465 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.
Year ended May 31, 1999 (Fiscal 1999) as compared to May 31, 1998 (Fiscal 1998)
The fiscal year ending May 31, 1999 was the first year in which Novex was
not in the development stage for the entire year. In this period, Novex made its
first acquisition by purchasing, ARM PRO, Inc. on September 16, 1998, and it
signed another contract to purchase Por-Rok. That transaction closed on August
13, 1999, after Novex's fiscal year ending May 31, 2000. In fiscal 1999, Novex
generated $321,311 in net sales, which excludes sales of Novex's line of
Fiberforce concrete reinforcing fibers that it acquired from ARM PRO, for the
period from June 1, 1998 to September 16, 1998, which is the strongest period
for fiber sales. Novex generated a loss from operations of $1,181,253 of which
$122,315 was attributable to non-cash imputed stock compensation.
As the operating analysis indicates Novex has formally emerged from the
development stage, but was still required to rely on funds from external sources
to cover a cash shortfall from its operations.
33
<PAGE>
When we acquired ARM PRO, we acquired its bank accounts which had a balance of
$158,000 at closing. This cash, along with the $190,000 balance from the
$800,000 note that was sold by Novex to purchase ARM PRO, Inc. was used to fund
Novex's operations. To cut costs four administrative and sales positions were
eliminated and Novex relocated ARM PRO's operations by merging it into its
facility in Mississauga, Ontario. The increase in general and administrative
costs of approximately $400,000 is primarily due to the ARM PRO acquisition.
In the 1999 fiscal period, other than for approximately $75,000 derived
from sales of Novacrete products, sales were generated from Novex's Fiberforce
line of products.
On May 31, 1999 Novex had $252,785 in current assets and $80,914 of net
property and equipment and goodwill of $316,300. The increase in goodwill was
attributable to the excess of the purchase price for ARM PRO, Inc. over the net
assets acquired in the transaction.
As of May 31, 1999, Novex had $221,707 in inventory. Of this amount,
$113,288 consisted of raw materials, $3,217 consisted of work in progress and
$105,202 consisted of finished goods. A substantial amount of the raw material
inventory consists of the 600,000 lbs. of one raw material that is used in the
Adment product. The finished goods inventory consists of 55lb. bags of Novacrete
Repair Products that are stacked on wood pallets with each pallet containing 56
bags and bags of Fiberforce products that are packed in cardboard boxes. The
increase in inventory was primarily attributable to new inventory of Fiberforce
products and a build up of Novacrete products.
Novex had $1,579,444 in total liabilities at the end of the fiscal year
which was an increase of 119% over the prior year. The majority of the increase
in liabilities resulted from Novex's sale of an $800,000 note to acquire ARM
PRO, Inc. and a note for $250,000 that was sold to the holders of the $800,000
note to provide additional working capital to Novex.
As part of the Por-Rok transaction, the holder of the $800,000 note agreed
to convert the principal amount of the note into common stock at $.17 per share.
The $250,000 working capital note was to be satisfied in full from the proceeds
of the $750,000 line of credit that Novex secured on August 13, 1999.
The increase in accounts payable and accrued expenses was directly
attributable to Novex's expansion of its operations in the current fiscal year.
As part of the Por-Rok transaction, the current portion of long-term debt
of $393,548 net of the $250,000 working capital note will be converted into
common stock.
Liquidity and Financial Resources
As of May 31, 2000, the Company had $3,923,751 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"). On August 7, 2000, the Sherwin-Williams Note,
including all outstanding interest, was converted into 1,390,388 share of
preferred stock. The Company also had $701,310 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 $615,965, accrued expenses
included interest totalling $155,933 and a cash overdraft of $40,297. The
shareholder's loan of $71,488, net of a debt discount of $3,750, includes
$35,925 that 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
34
<PAGE>
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.
The current portion of the long-term debt consists of a three year term
loan and put warrant totalling $864,223 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
$68,184 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. Since all the assets at the Por-Rok operation are secured by the Dime
Note, there are no other assets that can be used to secure new financing if it
were needed.
As of May 31, 2000, the Company was not in compliance with several of the
financial covenants. On September 1, 2000, the commercial bank notified the
company that the company is in default on its financing arrangement and demanded
payment of the line of credit and the Dime note payable. While such notification
was given under the company's agreement with the bank, management views it as
technical in nature. The bank continues to work with the company to continue
financing its operations and has given the company some additional flexibility
with respect to the line of credit. Since September 1, 2000, the company has
cured a number of the defaults by becoming current in its reporting obligations
under its agreement with the bank and, following the filing of this Form 10-K,
the company intends to bring in equity financing to meet its final obligation
under the default notice. Once the equity condition is met, the company fully
anticipates that the default notice will be retracted and that the company will
continue to work with the bank.
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. (See Notes 7 and 12(a) and (c) to
Consolidated Financial Statements)
For the year ended May 31, 2000, Novex has been able to increase sales
volume while selling, general and administrative expenses have remained
relatively constant when compared to year ended May 31, 1999. The increase in
sales has resulted in higher levels of accounts receivable and inventory as well
as accounts payable and accrued expenses. In addition, the acquisition of
Por-Rok has increased the amount of debt, which has resulted in higher amounts
of interest payments that Novex needs to fund from operations. Therefore, while
there has been a decline in negative cash flows from operations from $974,220
for the year ended May 31, 1999 to $752,930 for the year ended May 31, 2000,
Novex still has generated negative cash flows from operations. Thus, while
future operating cash inflows should continue to increase, unless Novex's sales
volume increases, the company will not have sufficient cash flow to cover its
operating, investing and debt payment requirements. Therefore, Novex has
developed plans to improve profitability and cash flows and to raising capital,
if necessary.
35
<PAGE>
To improve Novex's profitability, management is undertaking a number of
initiatives to increase sales and reduce expenses. For example, Novex has issued
a new price list and freight policy that became effective June 1, 2000. The new
price list will improve Novex's margins on sales of its Por-Rok products and the
new freight policy will pass all outgoing freight charges to the customers.
Novex will also begin marketing 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.
To improve cash flow, Novex has been able to procure more favorable payment
terms from vendors by extending the payment due date for raw materials and
supplies used in manufacturing. These vendors had initially been willing to
extend only limited credit to Novex soon after its acquisition of the Por-Rok
product line from The Sherwin-Williams, due to the company's small size. At the
time, the limited credit terms increased our need to use cash for operations.
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. 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.
36
<PAGE>
Item 8. Financial Statements and Supplementary Data
Page
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of May 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended
May 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Changes in Shareholders'
Deficiency for the years ended May 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for years ended May 31,
2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7-27
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts F-28
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
37
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2000, 1999 AND 1998
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets
as of May 31, 2000 and 1999 F-3
Consolidated Statements of Operations
for the years ended May 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Changes in Shareholders' Deficiency
for the years ended May 31, 2000, 1999, and 1998 F-5
Consolidated Statements of Cash Flows
for the years ended May 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7-27
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts F-28
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Novex Systems International, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Novex Systems
International, Inc. and Subsidiary (Formerly Stratford Acquisition Corp. and
Subsidiary) as of May 31, 2000 and 1999 and the related consolidated statements
of operations, changes in shareholders' deficiency and cash flows for the years
ended May 31, 2000, 1999, and 1998. We have also audited the financial statement
schedule on page F-28. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Novex
Systems International, Inc. and Subsidiary (Formerly Stratford Acquisition Corp.
and Subsidiary) as of May 31, 2000 and 1999 and the consolidated results of its
operations, changes in shareholders' deficiency and cash flows for the years
ended May 31, 2000, 1999 and 1998 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2(a) to
the consolidated financial statements, the Company has incurred a net loss of
$1,217,656 during the year ended May 31, 2000, and, as of that date had a
working capital deficiency of $2,201,021 and a shareholders' deficiency of
$735,327. As more fully described in Notes 11 and 12 (d) to the consolidated
financial statements, the Company is not in compliance with several of the
financial covenants with a bank, and is in arrears on accounts with certain
vendor creditors. The Company's business plan for year ended May 31, 2001, which
is described in Note 2 (a) to the financial statements, contemplates obtaining
additional working capital, and the refinancing or restructuring of its debt.
The Company's ability to achieve the foregoing elements of its business plan,
which may be necessary to permit the realization of assets and satisfaction of
liabilities in the ordinary course of business, is uncertain. Those conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Feldman Sherb & Co., P.C.
Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
September 26, 2000
F-2
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
May 31,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 285 $ 1,788
Accounts receivable, net of allowance for doubtful
accounts of $14,660 in 2000 and $890 in 1999 553,270 20,690
Inventories 389,578 221,707
Prepaid expenses and other current assets 8,040 8,600
----------- -----------
Total Current Assets 951,173 252,785
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 1,399,341 80,914
GOODWILL, net of accumulated amortization 826,465 316,300
OTHER ASSETS 11,445 6,059
----------- -----------
$ 3,188,424 $ 656,058
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Cash overdraft $ 40,297 $ --
Current portion of long term debt 989,223 393,548
Due to factor 68,184 56,700
Note payable 1,281,351 --
Bank line of credit 701,310 --
Accounts payable 615,965 241,424
Loans payable - shareholder 71,488 --
Accrued interest 105,155 63,729
Accrued expenses and other current liabilities 50,778 51,461
----------- -----------
Total Current Liabilities 3,923,751 806,862
----------- -----------
COMMITMENTS AND CONTINGENCIES
LONG TERM DEBT, net of current portion -- 772,582
SHAREHOLDERS' DEFICIENCY:
Common stock - $0.001 par value
50,000,000 shares authorized,
22,143,988 and 15,250,771 shares
issued and outstanding, respectively 22,144 15,251
Additional paid-in capital 5,807,575 4,408,753
Accumulated deficit (6,565,046) (5,347,390)
----------- -----------
Total shareholders' deficiency (735,327) (923,386)
----------- -----------
$ 3,188,424 $ 656,058
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 1,862,083 $ 321,311 $ 9,073
COST OF GOOD SOLD 1,153,160 113,305 5,444
------------ ------------ ------------
GROSS PROFIT 708,923 208,006 3,629
SELLING, GENERAL AND ADMINISTRATIVE 1,604,762 1,389,259 999,282
------------ ------------ ------------
LOSS FROM OPERATIONS (895,839) (1,181,253) (995,653)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income -- 335 409
Interest expense (261,480) (97,905) (17,548)
Amortization of debt discount (34,583) (146,674) (84,535)
Gain on change in valuation of warrant 15,733 -- --
Foreign currency gain (loss) (41,487) 33,157 (15,267)
------------ ------------ ------------
OTHER EXPENSES, net (321,817) (211,087) (116,941)
------------ ------------ ------------
NET LOSS $ (1,217,656) $ (1,392,340) $ (1,112,594)
============ ============ ============
NET LOSS PER COMMON SHARE, basic and diluted $ (0.06) $ (0.10) $ (0.10)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 19,516,019 13,720,171 11,472,508
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, May 31, 1997 10,113,381 10,114 2,623,657 (2,842,456) (208,685)
Sale of common stock 720,750 721 258,521 -- 259,242
Issuance of common stock
for services 295,000 295 47,505 -- 47,800
Issuance of common stock
for debt 988,824 989 325,533 -- 326,522
Issuance of common stock
for compensation 331,441 331 98,119 -- 98,450
Redemption of common stock (483,750) (484) 484 -- --
Value of warrants issued with debt -- -- 154,065 -- 154,065
Value of warrants and options issued
for services -- -- 34,155 -- 34,155
Net loss -- -- -- (1,112,594) (1,112,594)
----------- ----------- ----------- ----------- -----------
BALANCE, May 31, 1998 11,965,646 11,966 3,542,039 (3,955,050) (401,045)
Sale of common stock 300,000 300 97,700 -- 98,000
Issuance of common stock
for services 179,164 179 48,437 -- 48,616
Issuance of common stock
for debt 2,730,737 2,731 562,444 -- 565,175
Issuance of common stock
for compensation 195,224 195 66,555 -- 66,750
Redemption of common stock (120,000) (120) 120 -- --
Value of options issued for services -- -- 6,949 -- 6,949
Value of warrants issued with debt -- -- 106,014 -- 106,014
Cancellation of options issued for services -- -- (21,505) -- (21,505)
Net loss -- -- -- (1,392,340) (1,392,340)
----------- ----------- ----------- ----------- -----------
BALANCE, May 31, 1999 15,250,771 $ 15,251 $ 4,408,753 $(5,347,390) $ (923,386)
Issuance of common stock
in connection with acquisition 1,000,000 1,000 259,000 -- 260,000
Issuance of common stock
for services 150,000 150 23,280 23,430
Issuance of common stock
for debt 5,647,493 5,648 1,028,102 -- 1,033,750
Issuance of common stock for cash 40,000 40 9,960 10,000
Issuance of common stock
for compensation 99,474 99 22,401 -- 22,500
Redemption of common stock (43,750) (44) 44 -- --
Value of options issued for services -- -- 56,035 56,035
Net loss -- -- -- (1,217,656) (1,217,656)
----------- ----------- ----------- ----------- -----------
BALANCE, May 31, 2000 22,143,988 $ 22,144 $ 5,807,575 $(6,565,046) $ (735,327)
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,217,656) $(1,392,340) $(1,112,594)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 134,577 55,184 13,805
Common stock and options issued for payment
of services and compensation 45,930 122,315 146,250
Common stock issued for payment of interest expense 15,175 11,522
Options issued as payment for services 56,035 -- 34,155
Cancellation of options for services -- (21,505) --
Amortization of debt discount 34,583 146,674 84,535
Changes in assets and liabilities, net of the effect from acquisition:
Accounts receivables (338,566) (11,440) (9,250)
Inventory 57,790 (99,573) 21,179
Other receivables -- 17,367 23,212
Prepaid and other current assets 560 (5,799) (2,801)
Other assets (5,386) 5,223 (1,147)
Accounts payable 374,541 156,456 26,404
Accrued interest 105,345 46,214 5,868
Accrued expenses and other current liabilities (683) (8,171) 16,625
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (752,930) (974,220) (742,237)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (20,412) (15,564) (118,246)
Sale (purchase) of marketable securities -- -- 13,250
Acquisition of business, net of cash acquired (800,000) (330,236) --
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (820,412) (345,800) (104,996)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 40,297 -- --
Due to factor 11,484 56,700 --
Advance from shareholders 74,925 (37,000) 37,000
Proceeds from bank line of credit 701,310 -- --
Proceeds from debt financing -- 1,155,000 480,470
Repayment of note payable (125,000) -- --
Proceeds from issuance of debt with warrants 858,823 -- 69,530
Proceeds from issuance of debt without warrants -- -- 40,000
Proceeds from the sale of common stock
and exercise of options 10,000 98,000 259,243
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,571,839 1,272,700 886,243
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,503) (47,320) 39,010
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,788 49,108 10,098
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 285 $ 1,788 $ 49,108
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 71,324 $ 36,513 $ 691
=========== =========== ===========
Income taxes $ -- $ 689 $ 689
=========== =========== ===========
Non-cash financing and investing activities:
Conversion of debt to equity $ 1,033,750 $ 565,175 $ 326,522
=========== =========== ===========
Common stock issued for assets acquired $ 260,000 $ -- $ --
=========== =========== ===========
Note payable issued for assets acquired $ 1,281,351 $ -- $ --
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2000, 1999 AND 1998
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Novex Systems International , Inc. ("Novex") (formerly known as "Stratford
Acquisition Corp.") and, through its wholly-owned Subsidiary, Novex Systems
International, Ltd. ("Novex Canada")(collectively the "Company"), is
engaged in the business of manufacturing and marketing a diversified line
of construction products including a proprietary admixture for enhancing
cement based products ("Novacrete products"), polypropylene fibers used in
concrete products, and pre-packaged concrete repair, grouting and patching
products ("Por-Rok products").
In fiscal 1999, Novacrete Technology (Canada) Inc. was renamed Novex
Systems International, Ltd. Effective May 11, 1999, Stratford Acquisition
Corp. merged into its newly-formed wholly-owned subsidiary, Novex Systems
International, Inc., for the purpose of re-domesticating the Company from
the State of Minnesota to the State of New York. Accordingly, all
historical financial information presented is that of Stratford Acquisition
Corporation. On May 11, 1999, Novex Systems International, Inc. had no
assets or operations.
In January, 1997, Novex, which was then operating as Stratford Acquisition
Company, acquired 100% of the outstanding stock of Novex Canada, a
newly-created company established to manufacture and distribute the
Company's Novacrete product line. The acquisition was accounted for as a
purchase whereby the Company, in exchange for having incorporated Novex
Canada, received 100% of its common stock. The cost of incorporation of
$636 represents the Company's investment in Novex Canada, and accordingly
has been eliminated in consolidation. No goodwill arose from this
acquisition because the cost of the purchase was equal to the net asset
acquired.
In September 1998, Novex Canada acquired all the issued and outstanding
common stock of Arm Pro Inc., located in Teeswater, Ontario. Arm Pro
manufactured and marketed polypropylene fibers, which are blended into
cementitious products to provide secondary reinforcement and to reduce
cracking.
In December 1998, Arm Pro was merged into Novex Canada, the surviving
corporation. During fiscal 1998, the Company was a development stage
enterprise, in fiscal 1999 Novex and Novex Canada emerged from the
development stage.
F-7
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2000, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation - The accompanying consolidated financial
statements have been prepared assuming that the Company will continue
as a going concern. The Company has incurred net losses of $1,217,656,
$1,392,340 and $1,112,594 for the years ended May 31, 2000, 1999, and
1998, respectively. Additionally, the Company had approximately a net
working capital deficiency of $2,972,578, an accumulated deficit of
$6,565,046 at May 31, 2000 and negative cash flow from operations for
the years ended December 31, 2000, 1999, and 1998, of approximately
$753,000, $974,000 and $742,000, respectively. Those conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management expects to incur additional losses for the
foreseeable future and recognizes the need to raise capital to achieve
their business plans. In August 2000, the Company converted $1,281,351
of notes payable into cumulative 10% series A convertible redeemable
preferred stock (see Note 19(b)). The Company plans to raise
additional capital through various methods including the private
placements of securities, and the issuance of debt. Further, the
Company plans to enhance its existing product line and is developing
new marketing strategies. In addition, the Company will search for
potential strategic acquisitions that will complement the Company's
existing products and that are synergistic with its future growth
prospects. The accompanying consolidated financial statements do not
include any adjustments that might be necessary should the Company be
unable to continue as a going concern.
b. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its Subsidiary (hereinafter
referred to as the "Companies"). All material intercompany
transactions and balances have been eliminated.
c. Cash and Cash Equivalents - The Companies maintain funds in both US
and Canadian financial institutions. The Company considers highly
liquid investments with maturities of three months or less to be cash
and cash equivalents.
d. Income Taxes - The Companies utilizes the asset and liability method
of accounting for income taxes as set forth in FASB Statement No.109,
"Accounting for Income Taxes". Under the asset and liability method,
deferred taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse.
F-8
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
e. Property and Equipment - Property and equipment are recorded at cost.
Depreciation is provided on the straight-line method based upon the
estimated useful lives of the respective assets. Property and
equipment are being depreciated over a period of five years.
Maintenance, repairs and minor renewals are charged to operations as
incurred, whereas the cost of significant betterments is capitalized.
Upon the sale or retirement of property and equipment, the related
costs and accumulated depreciation are eliminated from the accounts
and gains or losses are reflected in operations.
f. Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
g. Fair Value of Financial Instruments - The carrying value of cash and
cash equivalents, accounts receivable, other receivables, due to
factor, accounts payable and accrued expenses approximate their fair
values based on the short-term maturity of these instruments. The
carrying amounts of long-term debt were also estimated to approximate
fair value.
h. 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 years ended May 31, 2000, 1999 and 1998,
diluted loss per share is the same as basic loss per share since the
inclusion of stock options and warrants would be antidilutive.
i. Foreign Currency Translation - The Subsidiary functional currency is
the US dollar and therefore translates the nonmonetary assets and
liabilities at the historical exchange rates, while monetary assets
and liabilities are translated at the current exchange rates in effect
at the balance sheet date. Sales and expenses are translated at the
weighted average exchange for the year. Accordingly, all gains and
losses arising from foreign currency translation have been recorded in
the accompanying consolidated statements of operations.
j. Stock Options -The Company accounts for all transactions under which
employees, officers and directors receive shares of stock in the
Company in accordance with the provisions of Accounting Principles
Board Opinion No. 25. "Accounting for Stock Issued to Employees." In
accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," the Company
adopted the pro forma disclosure requirements of SFAS 123.
Accordingly, no compensation has been recognized in the results of
operations for the employees, officers and directors stock option plan
other than for options issued to non-employees for consulting
services.
F-9
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
k. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
l. Reclassification - Certain reclassifications have been made to the
1998 consolidated financial statements in order to conform with the
1999 presentation.
m. Impairment of Long-Lived Assets - The Company reviews long-lived
assets, certain identifiable assets and goodwill related to those
assets on a quarterly basis for impairment whenever circumstances and
situations change such that there is an indication that the carrying
amounts may not be recovered. At May 31, 1999, the Company does not
believe that any impairment has occurred.
n. Revenue Recognition - Revenue is recognized when the product is
shipped to the customer. Allowances for estimated bad debts, sales
returns and allowances are provided when sales are recorded.
o. Advertising Costs - All advertising costs, excluding cooperative
advertising programs, are expensed as incurred or the first time the
advertisement takes place. Novex establishes an allowance for
cooperative advertising costs at the time the related sale is
recognized. Advertising expense charge to operations for the years
ended May 31, 2000, 1999 and 1998 amounted to approximately $ 8,500,
$12,700 and $1,100, respectively.
3. CONCENTRATION OF CREDIT RISK
a. Cash
The Companies maintain cash balances at several commercial banks.
Accounts at these financial institutions are insured by the Federal
Deposit Insurance Corporation up to $100,000.
b. Accounts Receivable
The concentration of credit risk in the Company's accounts receivable
is mitigated by the Company's credit evaluation process, credit
limits, monitoring procedures and reasonably short collection terms.
Credit losses have been within management's expectations and the
Companies do not require collateral to support accounts receivable.
F-10
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
4. INVENTORIES
At May 31, inventories consists of the following:
2000 1999
----------- -----------
Raw Material $ 83,142 $ 113,288
Work in Progress 88,174 3,217
Finished Goods 218,261 105,202
----------- -----------
$ 389,577 $ 221,707
=========== ===========
5. PROPERTY AND EQUIPMENT
At May 31, property and equipment consists of the following:
2000 1999
----------- -----------
Land $ 400,000 $ --
Building 415,000 --
Property and equipment 784,711 231,095
Leasehold Improvements 50,486 17,330
----------- -----------
1,650,196 248,425
Less: accumulated depreciation and
amortization (250,855) (167,511)
----------- -----------
$ 1,399,341 $ 80,914
=========== ===========
6. GOODWILL
Goodwill arose in connection with the acquisitions of Arm Pro in September
1998, and with the acquisition of Allied / Por-Rok lines in August 1999
(see Note 17). Goodwill is being amortized on the straight-line method over
10 years for Arm Pro and over 15 years for Allied / Por-Rok. As of May 31,
2000, goodwill, net of accumulated amortization of $91,874, is $826,465
(see Note 17). Amortization expense charged to operations for fiscal year
2000 and 1999 was approximately $61,000 and $31,000, respectively. There
was no amortization expense for fiscal years 1998.
F-11
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
7. DUE TO FACTOR
During February, 1999, the Subsidiary entered into a commercial factoring
arrangement, with a Canadian financial institution, where they sold certain
accounts receivable to the commercial factor, with recourse as to
nonpayment of customer's receivable at maturity. In addition, this
arrangement provides for advances based on working capital requirements.
Advances bear interest at the commercial factor's prime rate plus one
thousand four hundred and twenty five basis points (22.25 % at May 31,
2000).
At May 31, 1999, receivables assigned to the factor were offset against
factor advances of approximately $70,000.
Advance availability is limited to the lesser of 75% of eligible inventory,
not to exceed $25,000 (Canadian dollars), or 25% of the lower of cost or
market value of the eligible inventory, not to exceed $25,000 (Canadian
dollar), plus 25% of the appraised value of the Subsidiary's equipment.
The arrangement is collateralized by substantially all assets of the
Subsidiary and is guaranteed by the Company. The arrangement also requires
that the benefits of the Subsidiary's business insurance be assigned to the
commercial factor.
During Fiscal 2000 the Company terminated their factoring arrangement with
this financial institution, and no longer factors their receivables.
However, advances by the factor of $68,975, accrued interest of $1,920 and
fees of $5,885 remain outstanding at May 31,2000. On May 10, 2000, the
Company entered into a forbearance agreement, to halt foreclosure
proceedings, and agreed to a repayment schedule for the advances, accrued
interest and fees totaling $76,780. The repayment schedule requires six
payments, whereby the balance will be repaid by October 31, 2000. As of
September 26, 2000, the Company has repaid $38,500.
8. LOANS PAYABLE - SHAREHOLDERS
During fiscal 1999, the Company was advanced $74,925 from shareholders to
provide working capital for operations. The total of $54,925 of these loans
payable are non-interest bearing, have no specific due date for repayment
and are uncollateralized. The remaining $20,000 of these loans were
advanced in May 2000 and bear interest at 10% per annum. These interest
bearing advances have no specific due date for repayment and are
uncollateralized. In connection with these interest bearing advances, the
Company was required to issue 20,000 shares of common stock. At May 31,
2000, the balance of $71,488 has been recorded net of a debt discount of
$3,750 in connection with the issuance of common stock, which is being
amortized over a period of one year. The amortization of debt discount
charged to operations for fiscal 2000 was approximately $300.
F-12
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
9. INCOME TAXES
At May 31, 2000, the Company had federal, state and city net operating loss
carryforwards of approximately $4,350,000 resulting from accumulated
operating losses through fiscal 2000. At May 31, 2000 and 1999, the Company
has net deferred tax assets of approximately $1,630,000 and $1,260,000,
respectively. The Company has established a valuation allowance for the
full amount of such net deferred tax assets at May 31, 2000 and 1999, as
management of the Company has not been able to determine that it is more
likely than not that the deferred tax assets will be realized.
The Company's wholly owned subsidiary has not had to pay Canadian income
taxes as they have generated operating losses since its inception.
May 31,
--------------------------
2000 1999
----------- -----------
Deferred tax asset:
Net operating loss carryforward $ 1,479,000 $ 1,260,000
Valuation allowance (1,479,000) (1,260,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
10. NOTES PAYABLE
Notes payable at May 31, 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 17). 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. 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. On August 7, 2000, the Company issued Series A
preferred stock for the notes payable plus accrued interest (see Note
19(b)).
11. BANK LINE OF CREDIT
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
F-13
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
50% of eligible inventory. As of May 31, 2000, the Bank Line of Credit was
$708,323 inclusive of accrued interest of $7,013. Interest is computed on
the average monthly balance under the line based on 2% over the prime rate
(currently 11.50%).
As of May 31, 2000, the Company was not in compliance with several of the
financial covenants. On September 1, 2000, the commercial bank notified the
Company that the Company is in default on its financing arrangement and,
therefore, demanded payment of the line of credit and the Dime Note Payable
(see Note 12(d)).
12. LONG TERM DEBT
Long-term debt consists of:
May 31,
-----------------------
2000 1999
---------- ----------
Notes payable (a) $ -- $ 145,000
Debentures payable (b) -- 800,000
Debenture payable (c) 125,000 250,000
Dime note payable (d) 859,556 --
Dime put warrant (d) 4,667 --
---------- ----------
989,223 1,195,000
Less: Unamortized discount on debentures -- 28,870
---------- ----------
989,223 1,166,130
Less: Current portion 217,666 393,548
---------- ----------
$ 771,557 $ 772,582
========== ==========
(a) In May 1998, and at various dates during fiscal 1999, the Company
issued notes payable for a total of $145,000, to parties associated
with a director of the Company, that bear interest at 10% per annum.
The principal of the notes and all outstanding interest are due 90
days from the date of issuance. Interest on the notes, are payable
with the Company's common stock at the rate of $0.40 per share.
Furthermore, if the notes are not fully satisfied at the maturity
date, the Company is obligated to grant half of a warrant to purchase
one share of its common stock for each dollar of the outstanding
principal. In September 1999, these notes, plus accrued interest of
approximately $14,750, were converted into 585,924 shares of the
Company's common stock (see Notes 13(c) and 17).
F-14
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
(b) Included in long-term debt are debentures owing to various stockholder
of the Company, in the amount of $800,000. These debentures from
September 4, 1998, bear interest at 9% per annum and mature on
September 4, 2000. There are 1,500,000 stock warrants attached,
exercisable at $0.45, with an expiration date of two years from the
date of the notes' issuance. A total of $104,241 was allocated to the
warrant portion of the debt, which has been expensed. In September
1999, these notes, plus accrued interest of approximately $71,250,
were converted into 5,041,569 shares of the Company's common stock. As
part of the debt conversion into common stock all 1,500,000 warrants
were surrendered and cancelled (see Notes 13(c) and 17).
(c) Included in long-term debt are debentures owing to a stockholder of
the company, Quilcap, Corp., in the amount of $250,000. This debenture
from February 25, 1999, bears interest at 15% per annum and mature on
May 31, 1999. There are 150,000 stock warrants attached, exercisable
at $0.45, with an expiration date of two years from the date of the
notes' issuance. A total of $1,773 was allocated to the warrant
portion of the debt, which has been expensed. In October 1999, the
Company repaid $125,000 of these debentures, plus accrued interest.
The remaining balance of $125,000 is outstanding as of May 31, 2000.
(d) The Company is obligated to Dime Commercial Corp. for $874,556 under a
term loan. The term loan has been recorded net of a discount of
$15,000 as a result of the put warrant. Amortization of discount
charged to operations for fiscal year 2000 was $5,400. The loan
provides for monthly interest payments based on the prime rate plus
two percent (currently 11.50%). Installments due under the loan begin
on March 13, 2000 in the amount of $7,722 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 $4,667, to the put warrant and recorded the
amount as part of long-term debt as of May 31, 2000. As a result of
the change in valuation from $20,400 on August 13, 1999 to $4,667 as
of May 31, 2000 the Company recognized $15,733 in other income.
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 17). On September 1, 2000, the commercial bank
notified the Company that the Company is in default on its financing
arrangement and, therefore, demanded payment of the Dime Note Payable
and line of credit (see Note 11).
13. SHAREHOLDERS' DEFICIENCY
a. During fiscal 1996, former management of the Company issued 1,800,000
shares for an amount that present management is unable to determine.
The Company has been contacting the registered shareholders to
determine if appropriate consideration was
F-15
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
received for these shares. The shares have been recorded as
outstanding with no consideration received for their issuance. During
the years ended May 31, 1999 and 1998, a total of 120,000 and 483,750
shares of common stock, respectively, were returned by the registered
shareholders and have been canceled by the Company. The Company
intends to continue to pursue litigation against the remaining
shareholders that it alleges have received securities without paying
fair consideration to the Company.
b. During fiscal 1999, the Company issued 96,474 shares of its common
stock as compensation to three board members for their services. These
shares were valued at prices ranging between $.25 to $.40 per share.
The Company issued 98,750 shares of its common stock to various
employees as a work incentives during fiscal 1999. These shares were
valued at prices ranging from $ .30 to $ .44 per share.
The Company issued 179,164 shares of its common stock for consulting
services during fiscal 1999. These shares were valued at prices
ranging from $.25 to $.33 per share.
During fiscal 1999, the Company issued 2,730,737 shares of its common
stock for debentures payable at May 31, 1998 for $565,175, including
accrued interest of $15,175.
During fiscal 1999, the Company sold 300,000 shares of its common
stock to various shareholders, at market prices ranging from $.29 to
$.37 per share to raise working capital.
c. In August 2000, the Company 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 year ended May 31, 2000 the Company issued 150,000 shares
of its common stock in connection with investor services. These shares
were valued at market prices of approximately $.16 per share.
In September 1999, the Company converted approximately $1,031,000 of
various notes and debentures debt including accrued interest into
5,627,493 shares of its common stock. These shares were valued at
market prices ranging from $.18 to $.27 per share (See Notes 12 (a)
and (b)).
F-16
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
During the year ended May 31, 2000, the Company issued 99,474 shares
of its common stock as compensation to three board members for their
services. These shares were valued at prices ranging between $.19 to
$.25 per share.
During the year ended May 31, 2000, the Company renegotiated the terms
of prior employment and consulting agreements. As a result of these
discussions with various employees and consultants, they voluntarily
agreed to surrender 43,750 shares of common stock issued for past
services. These shares were recorded as a reduction to additional paid
in capital.
14. STOCK OPTIONS
The following table summarizes the activity with regard to options and
warrants for the years ended May 31, 2000, 1999, and 1998 (See page F-18
for chart references).
<TABLE>
<CAPTION>
Stock Options Warrants
---------------------------------------------- -------------------------------------------
Shares Exercise Price Exercisable Shares Exercise Price Exercisable
---------- -------------- ----------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
June 1, 1997 -- -- -- 91,504 0.50 91,504
Granted(1) 1,727,772 0.50 1,727,772(2) 308,000 0.35 308,000
Granted(3) 40,000 0.25 40,000(3) 60,000 0.50 60,000
Granted(1) 300,000 0.40 300,000(2) 1,100,000 0.30 308,000
Granted(1) 25,000 0.30 25,000 -- -- --
Granted(3) 20,000 0.25 20,000 -- -- --
Granted(1) 65,000 0.35 65,000 -- -- --
Granted(3) 25,000 0.31 25,000 -- -- --
---------- ------------ ---------- ---------- ------------ ----------
May 31, 1998 2,202,772 0.25 - 0.50 2,202,772 1,559,504 0.30 - 0.50 1,559,504
Granted(1) 195,000 0.40 195,000(2) 1,650,000 0.45 1,650,000
Granted(1) 100,000 0.45 100,000(2) 5,000 0.20 5,000
Granted(1) 12,500 0.30 12,500 -- -- --
Granted(1) 27,500 0.50 27,500 -- -- --
Canceled(3) (60,000) (0.25) (60,000) -- -- --
Canceled(3) (25,000) (0.31) (25,000) -- -- --
---------- ------------ ---------- ---------- ------------ ----------
F-17
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
May 31, 1999 2,452,772 $0.25 - 0.50 2,452,772 3,214,504 $0.20 - 0.50 3,214,504
Granted(1) 72,500 (0.30-.35) 72,500(2) 233,365 0.25 233,365
Granted (3) 32,000 0.25 32,000
Granted (3) 305,000 0.50 305,000
Cancelled(1) (1,151,848) (0.35) (1,151,848)(2) (2,650,000) (0.30-.45) (2,650,000)
Expired (4) (308,000) (0.35-0.50) (308,000)
Cancelled (2) (91,504) (0.35) (91,504)
---------- ------------ ---------- ---------- ------------ ----------
May 31, 2000 1,373,424 $0.25 - 0.50 2,452,772 735,365 $0.20 - 0.50 735,365
========== ============ ========== ========== ============ ==========
</TABLE>
(1) issued for employee services, including directors fees
(2) issued with debt
(3) issued for consulting services
(4) expired warrants issued to employees and issued with debt
a. During fiscal 1997, stock options were granted and exercised by
certain individuals and organizations. These options were granted at
an exercise price of $.50 and expire five years from the date of
grant. Novex has recorded $22,366 in consulting expenses in the
accompanying consolidated statement of operations. According to
current management, the individuals and organizations that received
the grants have not earned them. Therefore, Novex is currently seeking
to have all shares issued to these parties returned and canceled.
b. On April 1, 1998, the Company's board of directors approved a
resolution to adopt a Non-Qualified Stock Option Plan, which shall be
subject to shareholder approval to become effective. During fiscal
1999, the Company's board of directors and management decided not to
establish a Non-Qualified Stock Option Plan and therefore no formal
shareholder approval will be required.
The Company granted 135,000 options and warrants to various
consultants for services rendered during the year ended May 31, 1998.
The options and warrants expire five years from the date of grant and
have an exercise price ranging from $0.25 to $0.50 per share. The
Company has recorded $34,155 in consulting expenses in the
accompanying consolidated statement of operations.
F-18
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
c. During fiscal 1999, the Company granted 100,000 options for services.
The Company has recorded $6,949 in consulting expenses in the
accompanying consolidated statement of operations.
d. During fiscal 2000 the Company issued 337,000 warrants to various
consultants for services rendered during the year ended May 31, 2000.
The warrants expire three years from the various dates of grant and
have an exercise price ranging from $0.25 to $0.50 per share. The
Company has recorded $56,035 in consulting expenses in the
accompanying consolidated statement of operations.
e. The Company in the year ended May 31, 2000 cancelled 575,924 options,
issued to a director of the Company.
f. The Company in the year ended May 31, 2000, resolved outstanding
financial and legal matters with the Company's former president. The
Company agreed to pay $10,000 to the former president, and to release
all restricted common stock registered in the former president name.
In addition, the former president agreed to surrender and have
cancelled 575,924 options and 91,504 warrants that were previously
issued.
15. STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under APB No. 25,
"Accounting for Sock Issued to Employees," ("APB 25"), under which no
compensation cost is recognized. In fiscal 1997, the Company adopted SFAS
no. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") for
disclosure purposes; accordingly, no compensation has been recognized in
the results of operations for its stock option plan as required by APB 25,
other than for options and warrants issued for services or with debt. The
valuation for options and warrants issued for services during the years
ended May 31, 2000, 1999, and 1998 was $56,035, $6,949and $34,155
respectively. The valuation for options and warrants issued with debt
during the years ended May 31, 2000, 1999, and 1998 was $0, $106,014 and
$154,065, respectively.
For disclosure purposes, the fair value of options is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for stock options granted during fiscal
year ended May 31, 2000, 1999 and 1998 respectively: annual dividends of
$0; expected volatility of 195%, 50% and 50% for the years ended May31,
2000, 1999 and 1998, respectively; risk free interest rate of 6%; and
expected lives ranging from 2.5 to 5. The weighted average fair values of
stock options granted during the years ended May 31, 2000, 1999, and 1998,
was $0.32, $0.17and $0.20, respectively.
F-19
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
Year ended May 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Net loss to shareholders:
As reported $(1,217,656) $(1,392,340) $(1,112,954)
Pro forma $(1,237,931) $(1,432,076) $(1,562,387)
Net loss per share:
As reported $ (0.06) $ (0.10) $ (0.10)
Pro forma $ (0.06) $ (0.10) $ (0.14)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. The Companies employee stock options have
characteristics significantly different from those of traded options, and
since changes in subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options and warrants.
16. 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 one segment.
F-20
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
Key financial information for the one segment by country is as follows:
<TABLE>
<CAPTION>
United Adjustments
States Canada (1) Consolidated
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Year Ended May 31, 2000:
Sales to unaffiliated customers $1,713,756 $ 148,326 $ -- $1,862,082
Interest expense 223,752 37,728 -- 261,480
Deprecation and amortization 88,752 45,825 -- 134,577
Segment loss 868,049 349,607 -- 1,217,656
Segment assets 2,718,059 470,365 -- 3,188,424
Long lived asset expenditures 818,957 1,455 -- 820,412
Year Ended May 31, 1999:
Sales to unaffiliated customers $ 128,909 $ 192,402 $ -- $ 321,311
Interest income -- -- 335 335
Interest expense -- 66,640 31,265 97,905
Deprecation and amortization -- 50,182 5,002 55,184
Segment loss -- 1,017,944 374,396 1,392,340
Segment assets -- 604,961 51,097 656,058
Long lived asset expenditures -- 345,800 -- 345,800
Year Ended May 31, 1998:
Sales to unaffiliated customers $ -- $ 9,703 $ -- $ 9,703
Interest income -- -- 409 409
Interest expense -- 15,666 1,882 17,548
Deprecation and amortization -- 13,805 -- 13,805
Segment loss -- 368,637 743,957 1,112,594
Segment assets -- 311,777 6,763 318,540
Long lived asset expenditures -- 118,246 -- 118,246
</TABLE>
(1) This column represents the amount of non-segment information necessary
to reconcile reportable segment information with consolidated totals.
F-21
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
17. ACQUISITIONS
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, valued at $260,000, to
Sherwin with the requirement to register the common stock with the
Securities and Exchange Commission and (iii) issued a note payable for
$1,281,351, 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 May 31, 2000, the
outstanding balance on the debenture is $125,000 (see Note 12 (c)).
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 (see Note 12(d)). This financing arrangement also provided for a
$750,000 revolving note payable to fund future working capital requirements
(see Note 11). 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 12 (d)). 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-22
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
Goodwill of $571,245 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 2,341,351
----------
422,347
Acquisition costs 148,898
----------
Goodwill $ 571,245
==========
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.
Years ended May 31,
------------------------------
2000 1999
------------ ------------
Net Sales $ 2,231,742 $ 1,960,388
Cost of sales 1,418,809 1,499,638
------------ ------------
Gross profit 812,933 460,750
Operating expenses 1,665,736 1,672,142
------------ ------------
Loss from operations (852,803) (1,211,392)
Net other expenses (383,553) (452,239)
------------ ------------
Net loss $ (1,236,356) $ (1,663,627)
------------ ------------
Net loss per share $ (0.06) $ (0.11)
------------ ------------
Shares used in calculation 19,716,019 14,720,171
============ ============
F-23
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
On September 16, 1999 the Companies purchased all the issued and
outstanding common stock of Arm Pro. The purchase price was $592,000
($891,000 Canadian dollars) and the funds used to purchase Arm Pro were
raised from the sale of debentures for $800,000 (see Note 12 (b)). The
acquisition is accounted for as a purchase business combination.
The following table summarizes the acquisition:
Purchase price $ 592,400
Acquisition costs 10,638
---------
603,038
---------
Assets acquired 403,313
Liabilities assumed (147,370)
---------
255,943
---------
Goodwill $ 347,095
---------
The following schedule combines the unaudited pro-forma results of
operations of the Company and Arm Pro, as if the acquisition occurred on
June 1, 1996 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, 1996.
Years ended May 31,
------------------------------
1999 1998
------------ ------------
Net Sales $ 421,305 $ 327,554
Cost of sales 212,059 133,988
------------ ------------
Gross profit 209,246 193,566
Operating expenses 1,406,026 1,189,113
------------ ------------
Loss from operations (1,196,780) (995,547)
Net other expenses 180,254 138,269
------------ ------------
Net loss $ (1,377,034) $ (1,133,816)
------------ ------------
Net loss per share $ (0.10) $ (0.10)
------------ ------------
Shares used in calculation 13,720,171 11,472,508
============ ============
F-24
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
18. COMMITMENTS AND CONTINGENCIES
a. The Company had a verbal month to month sublease arrangement for its
headquarters in New York City in fiscal 1999. In fiscal 2000, the
Company moved their headquarters to the Clifton, New Jersey
manufacturing facility. The Subsidiary has a lease arrangement for
office and production facilities that commenced May 1, 1997 and
expires on April 30, 2002. This lease requires monthly rental payments
of approximately $2,300 in the first two years of the lease and $2,400
in the last three years of the lease.
The Company leases telecommunication, reproduction and computer
equipment and office furnishings under long-term operating lease
agreements. These lease agreements require cumulative monthly payments
of approximately $1,656 per month for the terms of the respective
leases expiring between October 1998 and January 2001.
Future noncancellable lease payments are as follows:
Year ending
May 31, Amount
----------- ------
2001 $ 36,977
2002 30,726
2003 2,400
--------
$ 70,103
========
Total rental expenses for the years ended May 31, 2000, 1999, and 1998
was approximately $48,000, $57,000 and $61,000, respectively.
b. The Companies have a licensing agreement for certain concrete related
products, including an admixture that is capable of enhancing the
basic characteristic of cementitious products. The Companies are
obligated to pay royalties based on a percentage of sales, subject to
an annual guaranteed minimum royalty. Currently, the Company has not
had to pay royalties as the licensed products are still in the
development stage and therefore have not been ready for sale to
customers. Furthermore, the Company has had several discussions with
the licensor who has agreed to defer the minimum royalty payments
until the Novacrete Admixture product emerges from the research and
development stage.
F-25
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
c. 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 he allegedly owns. In the opinion of management,
this action is without merit and will not have a material adverse
effect on the Companies financial position or results of operations.
d. 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.
19. SUBSEQUENT EVENTS
a. On August 1, 2000, the Company acquired certain assets from The
Sta-Dri Company of Odenton, Maryland. In exchange, the Chief Executive
Officer of the Company paid $72,000 and has given 750,000 shares of
his registered common stock along with the Company's issuance of
250,000 shares of restricted common stock to the majority shareholder
of The Sta-Dri Company ("Selling Shareholder"). In addition, the
Company has issued 750,000 shares of restricted common stock to, and
has entered into an agreement with, the Chief Executive Officer to
repay the $72,000. The total of 1,000,000 shares of the Company's
common stock was valued at $137,000 based on the average trading price
three days before and after the date of the acquisition was agreed to
and announced, which was August 1, 2000.
As part of the terms to the acquisition, the Company has provided the
Selling Shareholder with certain piggyback registration rights.
Therefore, in the event that the Company shall register any shares of
its common stock with in one year from August 1, 2000, the Company
will register the 250,000 shares of restricted common stock issued in
this acquisition along with the other shares in the registration
statement.
Additionally, the Company has provided the Selling Shareholder with
the right to purchase any shares of the Company's common stock offered
for sale or securities convertible into its common stock from August
1, 2000 until August 12, 2000.
As of August 1, 2001 and until August 1, 2002, the Company will have
to pay an additional $6,000 each month to the Selling Shareholder in
the event that common stock of the Company has not traded above $1.00
per share for twenty consecutive
F-26
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
trading days in each month. In the event that the common stock trades
in excess of $1.00 per share for twenty consecutive days the $6,000
monthly obligation shall terminate.
The acquisition will be recorded using the purchase method of
accounting.
b. On August 7, 2000, the Company issued cumulative 10% series A
convertible redeemable preferred stock ("series A preferred stock")
for $1,281,351 in notes payable plus accrued interest of $109,037. The
series A preferred stock has a liquidation preference of $1.00 per
share plus declared and unpaid dividends. The series A preferred stock
can be redeem at the option of the issuer at any time and any number
of shares including unpaid dividends until August 7, 2002. The series
A preferred stock shall accrue dividends at a rate of 10% per year and
on each anniversary date of the issuance of these shares the Company
will issue one additional share of series A preferred stock for each
one-dollar amount of unpaid dividends payable.
After August 7, 2002, if any shares of the series A preferred stock
are outstanding, including unpaid dividends, the Company will be
required to declare a "special dividend" equal to 15% of the value of
the series A preferred stock and therefore issues additional shares of
series A preferred stock. Further, the series A preferred stock will
automatically convert to common stock at a rate equal to 85% percent
of the average trading price for the twenty consecutive days prior to
August 7, 2002.
Furthermore, the Company has provided the holder with the right to
purchase any shares of the Company's common stock offered for sale or
securities convertible into its common stock from August 7, 2000 until
August 12, 2002.
Additionally, the Company cannot declare and pay any cash or stock
dividends to any other class of equity securities until the series A
preferred stock has been redeemed or converted to common stock.
F-27
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999 AND 1998
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended May 31, 2000,1999 and 1998
<TABLE>
<CAPTION>
Additions
Balance at charged to
beginning cost and Deductions- Balance at
Description of year expenses describe end of Year
----------- ------- -------- -------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended May 31, 2000 $890 $13,770 $-- $14,660
Year ended May 31, 1999 $-- $890 $-- $890
Year ended May 31, 1998 $-- $-- $-- $--
</TABLE>
F-28
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Novex has engaged the certified public accounting firm of Feldman Sherb &
Co., P.C. as its outside auditors to audit the company's annual financial
statements for the fiscal year ending May 31, 2000 and has had no disagreements
with them.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following provides certain information concerning the directors and
executive officers of Novex and its subsidiaries as of May 31, 2000.
Name Aqe Position
---- --- --------
William K. Lavin 56 Chairman, Secretary
Daniel W. Dowe 38 Director, President
and Chief Executive Officer
D. Friedenberg 48 Director, Treasurer
Edward J. Malloy 64 Director
* At the annual shareholders meeting held on April 29, 1999, Messrs. Friedenberg
and Dowe were elected to serve as directors for a period of three years; Mr.
Lavin for a period of two years and Mr. Malloy for one year.
William K. Lavin. Mr. Lavin became a director in October, 1997 and currently
operates his own consulting business that he formed in 1994. Before forming his
firm, he was Chief Executive Officer of Woolworth Corporation (renamed
"Venator") from 1993 to 1994 and immediately before that position he served as
Woolworth's Chief Administrative and Financial Officer. Mr. Lavin also serves on
the board of directors of the Allegheny Corporation (NYSE:Y) and Chicago Title
Corporation (NYSE:CTZ).
Daniel W. Dowe. Mr. Dowe became a director in March, 1997, Acting President on
November 17, 1997 and President and Chief Executive Officer on April 1, 1998.
Mr. Dowe has agreed to serve in this capacity for a three year period pursuant
to a written employment agreement and will have an option to serve for an
additional three year period. He was the founder of Dowe & Dowe, a New York
City-based law firm that provided legal services to Novex. From 1993 to November
17, 1997, Mr. Dowe practiced corporate and securities law at his firm. From 1990
to 1993, Mr. Dowe was an associate with Donohue & Donohue, a New York City-based
law firm concentrating on international trade matters. Before practicing law, he
was employed by Alliance Capital Management Company, Salomon Brothers (Salomon
Smith Barney, a division of Citigroup, Inc. ) and J.P. Morgan Bank.
Douglas S. Friedenberg. Mr. Friedenberg has been a director of Novex since
November, 1996 and is currently employed as a financial advisor with American
High Growth Co. He has been the President of
38
<PAGE>
Firebird Capital Management, a financial advisory firm, since March, 1993. In
1991, he co-founded and became President of Unicorn Capital Management, an
investment management firm. From 1983 to 1991, he managed private investment
portfolios for Morgan Stanley, Inc., a large New York City-based investment
banking firm. Mr. Friedenberg also serves as a Director of Datametrics
Corporation (AMEX:DC).
Edward J. Malloy. Mr. Malloy became a director of Novex in January, 1998. Since
1993 he has been President of the Building and Construction Council of Greater
New York. Mr. Malloy represents the interests of over 200,000 laborers involved
in the building trades in the Greater New York City area. He is responsible for
developing building projects in both the public and private sectors to ensure an
adequate level of work for his union members. Mr. Malloy brings to Novex an
extensive level of contacts and industry experience.
Committees of the Board of Directors
The Board of Directors does not have a standing audit or nominating
committee or any other committees performing similar functions. Novex does have
a compensation committee consisting of Messrs. Lavin, Friedenberg and Malloy
(the "Compensation Committee") which had one meeting in each of the fiscal years
ending May 31, 1998 and 1999. The Compensation Committee is responsible for
assuring that the officers and key management of Novex are effectively
compensated in terms of salaries, incentive compensation and benefits which are
internally equitable and externally competitive. The Compensation Committee is
responsible for setting the compensation of the executive officers.
Executive Officers
At present, Mr. Dowe is Novex's only executive officer inasmuch as its
chief financial officer has recently left the company. As a result, Mr. Dowe is
now handling all financial matters with certain bookkeeping and administrative
duties being peformed by clerical workers and certain accounting and tax-related
matters being performed by outside professionals.
39
<PAGE>
Item 11. Executive Compensation
The following table shows all remuneration in excess of $100,000 paid by Novex
and its subsidiaries through May 31, 2000, to all directors and officers:
Table 1
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long-Term Compensation
Annual compensation Awards Payouts
------------------- ------ -------
Securi-
ties
Name Other Underly- All
and Annual Restrict- ing Other
Princi- Compen- ed Stock Options LTIP Compen-
pal Salary Bonus sation Awards SARs Payout sation
Position Year ($) ($) ($) ($) (#) (#) ($)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Daniel
Dowe
President 2000 $180,000
(1)(2)(3) 1999 $180,000
1998 $89,850 432,357 575,924
</TABLE>
(1) From November 17, 1997 through March 31, 1998, during which time Mr. Dowe
served as interim president of Novex, he earned $52,500 in cash
compensation. Commencing April 1, 1998, Mr. Dowe became an employee of
Novex at an annual salary of $180,000. In the fiscal year ending May 31,
1999, Mr. Dowe received $150,000 in cash compensation and deferred the
remaining $30,000 until Novex closed the Por-Rok transaction. As of the
filing of this registration statement, Novex has paid to Mr. Dowe the
balance of the deferred compensation. In addition, Mr. Dowe made an
interest-free loan to Novex of $30,378 in the fiscal year 1999 to cover
working capital shortfalls. None of the loan has been repaid as of the date
of this registration statement. Mr. Dowe does not receive any additional
remuneration for serving as a director.
(2) Before becoming an employee of Novex, Mr. Dowe received 64,857 shares of
common stock in payment for $22,700 of legal services rendered to Novex
through November 17, 1997. From November 17, 1997 through March 31, 1998,
during which time Mr. Dowe served as interim president of Novex, he earned
97,500 shares of common stock. When Mr. Dowe became an employee of Novex,
he received 270,000 shares of common stock representing 30,000 shares per
month for the remainder of the calendar year.
(3) On June 25, 1997, Novex issued an aggregate of 1,727,772 stock options to
its directors as an incentive for future performance. Of these options, Mr.
Dowe received 575,924 options. The stock options were exercisable when
issued at the then current market price of $.35 per share and will expire
on June 25, 2002.
(4) On April 1, 1998, Novex entered a three-year employment agreement with Mr.
Dowe providing for an additional three years at his option and a minimum
annual salary of $180,000 which the Compensation Committee reviews
annually. As of the date of this registration statement, the Agreement has
been amended to include a payment from Novex to Mr. Dowe in the amount of
$800,000 if a Change of Control were to occur on or before
40
<PAGE>
November 10, 2000. The term "Change of Control" is defined in the
Agreement as:
(i) termination of Mr. Dowe's employment by Novex for reasons other
than for cause;
(ii) a significant reduction by Novex of his position, duties or
responsibilities;
(iii) the removal and/or replacement or any increase in the number of
directors of Novex which removal, replacement or increase shall
result in a change of 50% or more of the current board of
directors, or
(iv) the accumulation or acquisition by any one shareholder or group
of shareholders acting in concert resulting in that
shareholder(s)' control over or beneficial ownership of 40% or
more of Novex outstanding capital stock.
Item 12. Security Ownership of Certain Beneficial Owners
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the amount of common stock owned as of May 31, 2000 by
each director and officer and affiliates and by all directors and officers as a
group. Each individual has beneficial ownership of the shares which are subject
to unexercised stock options and stock warrants held by him, and each individual
has sole voting power and sole investment power with respect to the number of
shares beneficially owned:
Table 1
Security Ownership of Certain Beneficial Owners and Management
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial owner (1) Ownership(2) Class(2)
----------------------- ----------------- ----------
Douglas Friedenberg, 2,858,077 11.87%
Director, Treasurer(3)
Daniel W. Dowe 3,445,658 14.31%
Director, President,
Chief Executive Officer(4)
William K. Lavin 295,316 1.23%
Chairman, Secretary(5)
Edward J. Malloy
Director(6) 255,316 1.06%
--------- -----
All Directors and Officers
as a group 6,859,367 28.47%
--------- -----
A. The address for Messrs. Friedenberg, Dowe, Lavin and Malloy is 16 Cherry
Street, Clifton, New Jersey 07014.
B. The class includes stock options and stock warrants granted to the
directors and officers before January 10, 2000 which are deemed by Novex to
be acquirable by the beneficial owner within 60
41
<PAGE>
days of the date of this offering memorandum by exercise of the option or
warrant. As of January 10, 2000 there were 21,987,738 shares issued and
outstanding, 24,084,527 on a fully diluted basis. Percentages are stated on
a fully diluted basis.
C. Mr Friedenberg and various entities for which Mr. Friedenberg exercises
sole voting and investment power as investment advisor presently hold an
aggregate of 2,553,077 shares of common stock. Certain of the entities have
the right to acquire beneficial ownership of an aggregate of 305,000
additional shares upon the exercise of 305,000 Class B warrants held by the
entities.
D. Mr. Dowe presently owns 2,869,734 shares of common stock (of which Mr. Dowe
purchased 2,437,377 shares of common stock from Little Wing, L.P. for
$500,000 which is payable by a 10% promissory noted maturing on November 4,
2000) and has the right to acquire beneficial ownership of 575,924
additional shares upon exercise of an equal number of common stock options.
E. Mr. Lavin presently owns 95,316 shares of common stock and has the right to
acquire beneficial ownership of 200,000 additional shares upon exercise of
an equal number of common stock options.
F. Mr. Malloy presently owns 55,316 shares of common stock and has the right
to acquire beneficial ownership of 200,000 additional shares upon exercise
of an equal number of common stock options.
Director Compensation
Except for Mr. Dowe, the three remaining directors receive $2,500 per
quarter for services rendered as directors of Novex which is paid in restricted
common stock based on the average bid and closing price of Novex's common stock
on the last trading day for the months ending March, June, September and
December. In addition, each non-employee director receives an additional $10,000
per annum, payable in equal quarterly installments if the director is a member
of a committee of the board of directors that actually meets during the
quarterly period. During the fiscal year 2000, there were no committee meetings.
Table 2
Security Ownership of Certain Beneficial Owners
(Non-Management)
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial owner Ownership(1) Class(1)
------------------- ----------------- ----------
Parker Quillen 5,041,569 20.93%
c/o Quilcap Corporation
375 Park Avenue
Suite 1404
New York, New York
(1) As of January 10, 2000 there were 21,987,738 shares issued and outstanding,
24,084,527 on a fully diluted basis. Percentage is stated on a fully
diluted basis.
42
<PAGE>
Item 13. Certain Relationships and Related Transactions
On June 25, 1997, Novex issued an aggregate of 1,727,772 common stock
options to its directors as an incentive for future performance. Of these
options, Mr. Roy MacMillan (the former president of Novex), Mr. Dowe and Mr.
Friedenberg each received 575,924 common stock options. The options were
exercisable when issued at then current market price of $.35 per share and will
expire on June 25, 2002. As part of his severance from Novex, Mr. MacMillan
agreed to waive his option to purchase 575,924 shares of common stock. In August
1999, to facilitate the raising of the acquisition financing, Mr. Friedenberg
voluntarily agreed to the cancellation of his 575,924 common stock options.
Before becoming an employee of Novex, Mr. Dowe received 64,857 shares of
common stock in payment for $22,700 of legal services rendered to Novex through
November, 1997. From November 17, 1997 through March 31, 1998, during which time
Mr. Dowe served as interim president of Novex, he earned $52,500 in cash
compensation and received 97,500 shares of common stock. When Mr. Dowe became an
employee of Novex, he received 270,000 shares of common stock representing
30,000 shares per month for the remainder of the calendar year.
As directors of Novex, Messrs. Friedenberg, Lavin and Malloy receive $2500
per quarter for services rendered as directors of Novex which is paid in
restricted common stock based on the average bid and closing price of Novex's
common stock on the last trading day for the months ending March, June,
September and December.
Mr. Friedenberg does not receive a salary, but from time to time is
compensated by Novex for services rendered on various financial projects. In
addition to serving as an unpaid director of Novex, Mr. Lavin, or his consulting
firm WKL, Inc. receive compensation for services rendered to Novex for various
acquisition projects.
In December 1998, Novex entered into a subletting agreement with Dowe,
Capetanakis & Preite for the use of approximately 1,600 square feet of office
space located at 67 Wall Street, Suite 2001, New York, New York. Mr. Dowe's
spouse, Janet L. Dowe was a partner in the law firm Dowe, Capetanakis & Preite.
The subletting agreement ended in February 2000. During the period December 1998
through January 2000, the monthly rent under the lease agreement was
approximately $3,500, after adjustment for office equipment, supplies and
services. Management believes that the rent paid by Novex under this lease
agreement is less than what it would have been required to pay for similar
premises within the area in which Novex's executive offices were located.
In addition, the law firm of Dowe Capetanakis & Preite occasionally
provided legal services to Novex. Any payments to Dowe, Capetanakis and Preite
for services rendered to Novex were approved by the Board of Directors, except
for Mr. Dowe who was not entitled to vote on these matters. Since May 2000, Mrs.
Dowe has rendered administrative as well as legal services to Novex. Any
payments to Mrs. Dowe for legal services rendered to Novex were approved by the
Board of Directors, except for Mr. Dowe who was not entitled to vote on these
matters.
In May 1999, Mr. Daniel Dowe made an interest free loan to Novex in the
amount of $30,378 to provide it with cash flow during the operating deficit that
occurred during the last quarter of fiscal 1999. Novex expects to repay Mr. Dowe
during the third and fourth quarters of fiscal 2000.
With respect to the foregoing transactions, Novex believes that the terms
of these transactions
43
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were as fair to Novex as could be obtained from an unrelated third party. Future
transactions with affiliates including loans will be on terms no less favorable
than could be obtained from unaffiliated parties and will be approved by a
majority of the independent disinterested members of the board of directors.
44
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Page
(A) The following financial statements and
supplementary data are included in
Part II Item 8
Index to Consolidated Financial Statements F-1
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheet as of May 31, 2000 and 1999 F-3
Consolidated Statement of Operations for the years ended
May 31, 2000, 1999 and 1998 F-4
Consolidated Statement of Changes in Shareholders' Deficiency
for the years ended May 31, 2000, 1999 and 1998 F-5
Consolidated Statement of Cash Flows for years ended May 31,
2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7-27
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts F-28
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.
(B) Exhibits to be incorporated herein by reference:
Exhibit
No. Description of Exhibit
------- ----------------------
2.1 Plan of Merger of Stratford Acquisition Corp. and the Registrant into
the Registrant
3.1(i) Articles of Incorporation of Stratford Acquisition Corp.
3.1(ii) Certificate of Incorporation of the Registrant
3.1(iii) New York Certificate of Merger of Stratford Acquisition Corp. into
Registrant
3.1(iv) Minnesota Certificate of Merger of Stratford Acquisition Corp. into
Registrant
3.2 By-Laws
45
<PAGE>
4.1 Specimen Common Stock Certificate
4.2 Form of Class B Warrants
4.3 Form of 10% $550,000 Convertible Debenture and Stock Warrant Agreement
4.4 Form of 9% $800,000 Convertible Debenture and Stock Warrant Agreement
4.5 Form of 15% $250,000 Senior Debenture and Stock Warrant Agreement
4.6 Term Sheets re Director Loans to Company dated July 29, 1998; August
13, 1998; August 20, 1998;
August 27, 1998; September 4, 1998; and May 14, 1999
10.1 Employment Agreement between Registrant and Daniel W. Dowe
10.2 Amendment to Employment Agreement between Registrant and Daniel W. Dowe
10.3 Amended and Restated Purchase Agreement between The Sherwin-Williams
Company and Registrant
10.4 Form of Promissory Note to Dime Commercial Corp.
10.5 Form of Promissory Note to The Sherwin-Williams Company
10.6 Bill of Sale from The Sherwin-Williams Company to Registrant
24.1 Power of Attorney (contained on signature pageof this Prospectus).
99.1 Battista Agreement
99.2 Supercrete N/A Limited Agreement dated December 20, 1996
(B) Exhibits filed herein:
21.1 Subsidiaries of Novex
27.1 Financial Data Sheet
46
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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 thereunto duly authorized:
NOVEX SYSTEMS INTERNATIONAL CORPORATION
By:
-----------------------------------
Daniel W. Dowe, President
By:
-----------------------------------
Douglas Friedenberg, Treasurer
Dated: October 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in capacities and on the dates indicated:
Dated
----------------
Director October 13, 2000
----------------------------------------
Daniel W. Dowe
Director October 13, 2000
----------------------------------------
William K. Lavin
Director October 13, 2000
----------------------------------------
Douglas Friedenberg
Director October 13, 2000
----------------------------------------
Edward J. Malloy
47
