FORM 10-K/A
UNITED STATES
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, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
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NOVEX SYSTEMS INTERNATIONAL, INC.
(Formerly Stratford Acquisition Corporation)
(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.)
67 Wall Street, Suite 2001, New York, New York 10005
(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code 212-825-9292
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
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Common Stock $.001 par value NASD 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 $.20 on May 31, 1999, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$1,161,003. The number of shares outstanding of the registrant's common stock,
$.001 par value was 15,250,771 on May 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
----------------------- ---------------------
Part IV, Item 14 Form 8-K filed on
September 17, 1998
Part IV, Item 14 Form 8-K/A filed on
November 30, 1998
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NOVEX SYSTEMS INTERNATIONAL, INC.
Table of Contents
Page No.
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Part I
Item 1. Business and Risk Factors 1
Item 2. Properties 24
Item 3. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Security 25
Holders
Part II
Item 5. Market for Registrant's Common Equity and 26
Related Stockholder Matters
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of 28
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants 34
on Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the 34
Registrant
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial 36
Owners and Management
Item 13. Certain Relationships and Related Transactions 38
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 39
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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. 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 (1994-1999). 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. As
of May 31, 1999, goodwill amounted to $316,300, net of accumulated amortization
of $30,795, and is being amortized on the straight-line method over 10 years.
Amortization expense charged to operations for the fiscal year 1999 was $30,795.
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 Arm Pro and/or the
recently acquired Por-Rok with Novex (see General Business Development-
Subsequent Events), 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.
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Furthermore, we do not currently know when new products under development will
be ready for manufacturing, generate revenues, or whether they can be
successfully 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."
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 profitability would be
hampered.
Some of Novex's products are seasonal and may cause fluctuations in our
quarterly operating results. Novex's Fiberforce product line is subject to
substantial seasonal fluctuations. Historically, a significant portion of
Novex's net sales and net earnings have been realized from sales of the
Fiberforce line during the months of March through November while net sales and
net earnings have generally been significantly lower during the period December
through February. Accordingly Novex's operating results may vary significantly
from quarter to quarter. If for any reason Novex's sales were to be
substantially below seasonal norms during November through February, Novex's
annual revenues and earnings would be adversely affected. Additionally,
fluctuations caused by variations in quarterly operating results may have a
corresponding effect on the market price of our common stock. See "Financial
Statements and Notes", "Management Discussion and Analysis of Financial
Condition and Results of Operations", and "Business".
If a trading market is not maintained, holders of the common stock may
experience difficulty in reselling their common shares or may be unable to
resell them at all. The common shares of Novex 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". Novex may, but
has not, entered into any agreements with market makers to make a market in its
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, 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.
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
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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 investors may have
difficulty in selling their shares in the future in the secondary trading
market.
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. These forward-looking information involves risks and
uncertainties that could significantly affect anticipated results in the future,
and accordingly, the 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 67 Wall Street, New York, New York 10005, telephone
212-825-9292. 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 Novex 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
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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:
o produces higher compressive, bonding, flexural and tensile strengths,
o reduces shrinkage,
o increases workability and, most importantly,
o 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 March 25, 1999, the company announced that it entered into a definitive
agreement with The Sherwin-Williams Company to purchase the Por-Rok business
unit which is located in Clifton, New Jersey. Por-Rok manufacturers a well-known
line of grouting and concrete patching products that are distributed nationally.
The acquisition was completed on August 13, 1999.
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Novex believes that the Por-Rok product line is a natural extension of
Novex's line of concrete 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.
Novex believes that as its product line grows, it will become more
favorable to end-users and distributors, 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 Form 10-K, 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. 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. Which provided
financing for the Por-Rok acquisition closed on August 13, 1999. 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 type of financing arrangement could be
achieved, Novex would not be hindered from financing future acquisitions on
account of its current financial obligations.
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.
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.
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Additionally, the financial information accounts only for sales derived
from the Arm Pro transaction since the date of the acquisition on September 16,
1999 and the not the entire fiscal year of 1999. As such, the financial
statements exclude the sales of Fiberforce products in June, July and August of
1998, which historically have been the three strongest months for sales of these
products.
c. Subsequent Events
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 .
d. Novex's Current Business Operation
Novex is engaged in the business of manufacturing and marketing premium
building product materials that fit into two categories. The first category
consists of a line of polypropylene concrete reinforcing fibers that are
marketed under the Fiberforce tradename and a proprietary cement-enhancing
admixture that Novex will be marketing under the tradename Novacrete. These
products are promoted directly to ready-mix and pre-cast concrete manufacturers.
The second category of products consists of a line of pre- packaged concrete
repair products that are marketed to contractors directly and also to
distributors of building material products. (See Company Products)
Novex currently has its executive offices at 67 Wall Street, Suite 2001,
New York, New York 10005. Its manufacturing operations are conducted through its
wholly-owned subsidiary, Novex Canada, in a leased 12,500 square foot facility
located at 2525 Tedlo Street, Unit B, Mississauga, Ontario L5A 4A8 (20 minutes
west of Toronto). This operating 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 the company'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.
Upon closing the Por-Rok transaction, additional manufacturing operations
are conducted at a 25,000 square foot facility in Clifton, New Jersey. The
Clifton operating facility is a fully-integrated manufacturing plant with the
capacity to manufacture approximately 2 million lbs. of product per month on a
single shift, which translates into roughly $8 million per annum in sales.
Although Novex has the capacity to produce this quantity of product, it does not
currently sell all that it can produce. This operating plant currently runs at
approximately 25% of its capacity on a two shift level. At present, the Clifton
facility manufacturers 5.5 million lbs. of product, or $1.8 million in revenues
per annum.
Until Novex acquired Por-Rok in August 1999, all manufacturing and
distribution of Novex's products was centralized in its Novex Canada facility.
To eliminate excessive shipping costs associated with delivering small
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quantities of product, Novex sells larger quantities of products (full truckload
orders) to distributors that ultimately resell the product into local markets.
In addition, Novex has employed the use of a public warehouse in New Jersey that
warehouses and ships product on its behalf for a per diem handling charge. Novex
will 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 its products. With the acquisition of
Por-Rok the New Jersey public warehouse will no longer be necessary.
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 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. The Classification of Building Materials
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:
o Compressive strength
o Flexural strength (flexibility)
o Tensile strength (splitting)
o Bonding strength (adherence)
o Shrinkage
o Resistance to water penetration
o 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.
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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
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.
Accordingly, although it has been selling its line of concrete repair
products under the tradename Novacrete, Novex may consider marketing these
products in the future under the name of either Por-Rok or one of the other
tradenames owned by Por-Rok.
f. Marketing Organization
Novex currently has two full-time salepersons who are located in New Jersey
and Mississauga, Ontario, respectively, and five manufacturers' representatives,
four of whom are located in various regions of the eastern part of the United
States and one of whom is located in the Canadian province of Alberta. It is in
the process of hiring another full-time salesperson in Canada to specialize in
sales of the Novacrete and Por-Rok products, since the other salesperson is
principally focused on sales of Fiberforce fibers.
With the acquisition of Por-Rok Novex will acquire eleven more
manufacturer's representatives. Based on the territories that these individuals
are presently covering, Novex would have the personnel to effectively service
the following areas of the United States and Canada:
New England Region
Maine Massachusetts
New Hampshire Connecticut
Vermont Rhode Island
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New York/Philadelphia Region
New York Delaware
New Jersey Maryland
Pennsylvania Washington, D.C.
Midwest Region
Iowa North Dakota
Indiana South Dakota
Michigan Iowa
Illinois Nebraska
Wisconsin Kansas
Minnesota
Southeast Region
Missouri North Carolina
Arkansas South Carolina
Mississippi Tennessee
Louisiana Alabama
West Virginia Georgia
Virginia Florida
Kentucky
Canada Distribution
Western Canada Eastern Canada
Manitoba Ontario
Saskatchewan Quebec
Alberta
British Columbia
g. Manufacturing and Distribution
Novex manufactures and distributes all of its products from its Novex
Canada operating facility. This facility has the annual capacity on a single
shift basis to produce 11,000,000 lbs. of Novacrete product and approximately
600,000 lbs. of Fiberforce product.
With the acquisition of the Por-Rok Division, the manufacturing of
Novacrete products will be transferred to the Por-Rok facility. This fully-
integrated blending and packaging facility is already packaging products for
distribution through building supply yards and retail outlets in packages
ranging from 1 and 5lb. plastic containers to 50lb. bags and pails, and will
have the capacity to produce over 24,000,000 lbs. on a single shift basis,
although Novex's current level of sales does not match its production
capability. This will become a distribution center for eastern United States.
h. A Brief History of the Admixture Technology
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
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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 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 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
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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 in order 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.
A study by the Freedonia group estimates that the market for
performance-enhancing additives for cementitious products will grow 8.2%
annually, and reach $850 million in the U.S. alone by the Year 2000. At that
time the value of world-wide markets for these products will exceed $2
billion.(1)
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."(2)
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 is very high, and impermeable products for hazardous waste
disposal and radiation shielding for nuclear applications, to name a couple.
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 States. With the federally-funded Transportation
Equity Act of the 21st Century (TEA 21) having been signed into law last year
approximately $216 billion will be spent over the next six year period, 1998-
2003, where up to $173 billion is provided for highways and an additional $41
billion for transit projects. This bill increases 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
----------
(1) Freedonia Group Study reported in Construction Marketing Today, April,
1997.
(2) Id.
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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 intended purposes, the construction
and rehabilitation of highways and bridges.
In addition, with low interest rates and low inflation, and increasing
market prices for residential and commercial real estate, the development of new
residential and commercial units and the rehabilitation of existing structures
is expected to continue over the foreseeable future.
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 close to as high as $100 billion per year. The additive component of this
market is conservatively estimated at more than 2% or $2 billion.(3)
j. Competition
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.
----------
(3) Based on Statistics Canada Report.
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As of the filing of this Form 10-K, Novex now 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 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 Custom Builders
Master Builders
Quikcrete
Sonneborn
Sternson
W.R. Meadows
ChemMasters
Rockite
C.G.M.
Super Por-Rok (Same as above)
Exterior Anchoring
Cement
Por-Rok (Same as above)
Aqua Plug
Por-Rok (Same as above)
Concrete Patch
Por-Rok Mapei
Halco Grout
Por-Rok Mascrete
Lev-L-Astic WW Henry
Dependable
Mapei
Dap
Por-Rok Dependable
Dash Patch Mascrete
WW Henry
CGM Underlayment
Taylor Vitrex
Umasco
All Novacrete Products Sika
Masterbuilders
Mapei
Dayton-Richmond
All Fiberforce Products Pro Mesh
Fibermesh
Forta
Dura-Fiber
Euclid
W. R. Grace
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k. Products
As of the filing of this Form 10-K, the following is a list of the Por-Rok,
Novacrete 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.
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 product that when mixed with water bonds well to
concrete, wood or plaster that is used to smooth surfaces prior to 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, prior to 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.
NOVACRETE PRODUCTS
ADMIXTURES
Novacrete Adment 77-A (Novacrete Admixture formulation)
STRUCTURAL MORTARS
Novacrete MP - single component, non-shrink, high performance multi-purpose
concrete and masonry restoration mortar
Novacrete MPR - single component, synthetic fibre-reinforced, non-shrink, high
performance structural repair mortar
Novacrete FC - 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.
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FLOORING SYSTEMS
Novacrete DURATOP - single component, aggregate filled, trowel applied,
heavy-duty floor topping to provide abrasion and chemical resistance in
aggressive service environments.
Novacrete FLOOR UNDERLAYMENT - single component, self-leveling, flooring
underlayment designed for ease of installation and to provide a smooth covering
over a deteriorated floor surface to enable tile, linoleum or carpeting to be
applied to the underlayment for smooth even finish.
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. All fiber products are packaged in 1.0, 1.5 and 2.0 lb. Bags and
are promoted to the ready-mix concrete industry and are designed to reduce
cracking and provide secondary reinforcement.
l. 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.
m. 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.
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
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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, Novex 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.
n. 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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o. Working Capital Requirements
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.
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
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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.
p. 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.
q. No Backlog Orders
Novex does 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. Research and Development
In each of the past three fiscal years Novex has incurred expenses relating
to the research and development of its Novacrete Admixture and Novacrete
Finished Mortar Products. In fiscal year 1999, Novex spent approximately $30,000
on fees payable to outside independent testing laboratories that were engaged to
conduct various test procedures to improve the Novacrete products and 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 the Novacrete MP and Novacrete MPR
products. Other than for a brief period in 1997 in which it employed the
services of a cement technology consultant for approximately three months, Novex
did not have 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 the Novacrete MP and an old formulation for a Novacrete
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Fast-Set product that Novex has since abandoned and replaced with a new
formulation that will be marketed under the name Novacrete FC.
t. 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.
u. Number of Employees
As of May 31, 1999, Novex, on a consolidated basis, employed ten full-time
employees. Of the ten employees, two were located in Novex's principal executive
offices in New York City, one was located at Novex's Cedar Grove, New Jersey
sales office and seven were located at the Company's operating subsidiary, Novex
Canada. Of the nine employees: four persons were in management positions, three
persons were in plant operations and two person occupied administrative
assistant positions. With the Por-Rok acquisition, Novex will gain two
management employees and five plant employees.
v. Financial Information About Foreign and Domestic Operations and Export
Sales.
Although Novex manufactures some 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 Financial
Information about Industry Segments). To the contrary, with the recent reduction
of the Canadian dollar to the U.S. dollar, Novex has benefitted by preferential
exchange rates and lower cost of operations.
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w. 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
Having closed the Por-Rok transaction, Novex intends to transfer the
manufacturing of its Novacrete products from its Novex Canada operating
facility to Por-Rok's 25,000 square foot facility located in Clifton, New
Jersey. Por-Rok's fully-integrated manufacturing plant has the capacity to
manufacture approximately 2 million lbs. of product per month on a single
shift, which translates into roughly $8 million per annum in sales.
Currently Por-Rok manufacturers 5.5 million lbs. of product, or $1.8
million in revenues per annum.
Por-Rok's facility consists of three buildings located on a 1.6 acre
tract of commercially-zoned land. The main building is 15,000 square feet,
of which 3,000 square feet in dedicated to office space and a reception
area and the remaining 12,000 square feet in allocated to the manufacturing
of Por-Rok products and the warehousing of certain raw materials. The
majority of raw materials used at this facility are stored in silos affixed
to the roof of the building. 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 items per
carton for distribution to hardware and retail outlets.
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 the Por-Rok facility.
By shifting the Novacrete product manufacturing to the Por-Rok
facility, Novex will have adequate space in its Novex Canada facility to
inventory Novacrete, 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
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distributed in the United States. This arrangement will enable both
facilities to serve as distribution centers for all Company products and
will allow for each facility and its personnel to specialize in the
manufacturing of select products.
o Novex's Plan to Increase Sales
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, the company's operating strategy will be
to expand sales of all its products. Novex will seek to expand its sales
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 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
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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.
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 this fiscal
year, this program could be implemented on the distribution side by the end
of 2000. 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.
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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 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 11
manufacturing representatives. There are no full-time sales personnel to
coordinate the sales and marketing function. Novex plans to dedicate one
full-time sales person to work with 11 manufacturer's representatives to
adequately train them on the Por-Rok and Novacrete product lines, along
with other products that Novex plans to acquire and develop internally, and
to 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 making periodic follow-up calls to monitor the
sales activity of the Por-Rok distribution outlets in his territory.
In addition, Novex plans to advertise its product line (including
Por-Rok products) in trade journals and at trade shows.
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.
In addition, Novex plans to hire a full-time sales person in Canada
and engage the services of one or two more manufacturing representatives to
cover the territory consisting of Eastern Canada. The company currently
uses a manufacturers' representative located in the Province of Alberta to
cover the Western provinces of Canada, principally Alberta.
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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.
New Retail Channels
As part of its efforts to expand sales of products in all possible
distribution, 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 Home
Depot and Lowe's.
Performance Based Compensation
Novex will increase the performance-based compensation of the 11
manufacturers' representatives that it will acquire 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 management believes it
will be offering the incentives needed to motivate its sales force and
reduce attrition by develop long-term relationships with these individuals.
Item 2. Properties
Novex's principal executive offices are located at 67 Wall Street, Suite
2001, New York, New York 10005, pursuant to a sublease that the company has
entered into with Dowe, Capetanakis and Preite the primary tenant and a law firm
in which Janet L. Dowe, spouse of Daniel W. Dowe is a partner. Mr. Dowe has no
affiliation with the firm or any duties to the firm.
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.
Having closed The Sherwin-Williams transaction, Novex now owns all of the
real property, buildings and personal property being located 16 Cherry Street,
Clifton, New Jersey 07014. The real property consists of a 1.58
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acre tract of land with three separate buildings consisting approximately of
15,000, 6,000 and 5,000 square feet, respectively.
In June, 1998 Novex entered into a lease agreement to lease offices located
at 98 Sand Park Road, Cedar Grove, New Jersey, March, for a monthly sum of $500.
This lease was on a month-to-month basis and expired in August 1999 at which
time Novex acquired the Por-Rok facility in Clifton, New Jersey, and relocated
its Cedar Grove office to Clifton.
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 lawsuit. The Plaintiff
has no other affiliation with Novex other than for being a shareholder. The
plaintiff submitted a motion for summary judgment which the court denied. Novex
has raised several defenses to this action and believes that plaintiff's claims
are without merit. Novex has also asserted multiple counterclaims against the
plaintiff alleging that he caused the company to issue to himself and others
stock for work that was never done and at a time when current management
believes that fraudulent activities were being undertaken which caused the
company's stock price to be overinflated. Plaintiff claims that he received
stock as compensation for services rendered. When Novex investigated the matter
it found virtually no records of any tangible service. These actions and
omissions caused the U.S. Securities and Exchange Commission in or about 1997 to
commence an investigation of the company, then known as Stratford Acquisition
Corp. It is Novex's understanding that the investigation is still pending and
management 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
At the Annual Meeting of Shareholders that was held on April 29, 1999, the
following proposals were submitted to a vote of the shareholders and approved by
the requisite number of votes.
I. THE ELECTION OF DIRECTORS:
Nominees Term
-------- ----
Class 1: Edward J. Malloy 1
Class 2: William K. Lavin 2
Class 3: Daniel W. Dowe 3
Douglas S. Friedenberg 3
II. A proposal to change the name of the company from Stratford Acquisition
Corp. to Novex Systems International, Inc.
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III. Proposals to adopt various amendments to the company's Articles of
Incorporation:
A. authorizing the Board of Directors to issue preferred stock.
B. authorizing the Board of Directors or 75% of the outstanding shares to
amend the By-Laws of the company;
C. authorizing the Chairman of the Board or the Secretary within 10 days
of receipt of a written request from a majority of the Board of
Directors to call a special meeting of shareholders;
D. authorizing the Board of Directors to increase to no more than twelve
or decrease to no less than three the number of directors of the
company and to establish a classified board of directors;
E. permitting 75% of the outstanding shares to remove a director for
cause only and only at an annual or special meeting of shareholders
called for that purpose;
F. authorizing the company to limit the personal liability of directors
to the maximum extent permitted by law;
G. authorizing the company to indemnify the officers, directors,
employees and agents of the company to the maximum extent permitted by
law; and
H. requiring the affirmative vote of 75% of all outstanding shares to
make, amend or repeal any provision in the Articles of Incorporation
relating to any of the foregoing proposed resolutions which are
adopted at the meeting.
IV. A proposal to redomesticate the company from the State of Minnesota to the
State of New York by way of a merger of the company into its wholly-owned
subsidiary, Novex Systems International, Inc.
V. A proposal to approve and ratify the appointment of Feldman Sherb Ehrlich &
Co., P.C. as the company's independent auditors.
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
Bulletin Board ("OTC") operated by the National Association of Securities
Dealers under the ticker symbol HARD. The tables present the high and low
closing bid prices for each of the four quarters in the fiscal year ending May
31, 1999. 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 May 31, 1999, the
closing bid price was $.20. 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.
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Quarterly Common Stock Bid Price Ranges
---------------------------------------
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
Quarter High Low Last Day of Quarter
------- ---- ---
1st $.43 $.24 August 31, 1997
2nd $.52 $.25 November 30, 1997
3rd $.28 $.19 February 28, 1998
4th $.77 $.20 May 31, 1998
The number of shares of common stock issued and outstanding as of May 31,
1999 and May 31, 1998 were 15,250,771 and 11,965,646, respectively. On a fully
diluted basis, the number of shares of common stock issued and outstanding on
May 31, 1999 was 20,918,047. Novex has approximately 1,200 shareholders holding
stock in record and nominee name.
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.
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Item 6. Selected Financial Data
This table should be read in conjunction with the consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations, provided elsewhere in this Form 10-K.
1997 1998 1999
---- ---- ----
STATEMENT OF OPERATIONS
DATA:
Net Sales $ -0- $ 9,073 $ 321,311
Gross Profit -0- 5,444 208,006
Loss from Continuing
Operations (2,326,144) (1,112,594) (1,392,340)
Net Loss from Continuing
Operations Per Common Share $ (.24) $ (.10) $ (.10)
BALANCE SHEET DATA:
Working Capital (Deficit) $ 94,022 $ (518,925) $ (554,077)
Goodwill, net -0- -0- 316,300
Total Assets 219,533 318,540 656,058
Long Term Debt 315,000 -0- 772,582
Stockholders' Equity (Deficit) (208,685) (401,045) (923,386)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
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, 1999. 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. When we acquired ARM PRO, we
acquired its bank accounts which had a collective 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
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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. (See Note 18, Subsequent Event).
Year ended May 31, 1998 (Fiscal 1998) as compared to May 31, 1997 (Fiscal 1997)
After the senior management change in November, 1997, Novex significantly
advanced its plans to move from the development stage to the operating stage. On
March 15, 1997 Novex officially began commercially producing its Novacrete
products and, in April 1998, recorded its first truckload shipment of product
which was to a construction products distributor in Canada. In addition in May,
1998, Novex sold its first truckload of product to a distributor in the United
States. As a result of this activity, which began just two and one-half months
before the close of this fiscal year Novex recorded $9,073 in gross revenues for
the one truckload sales that took place in April. The truckload that was ordered
in
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May was not shipped until early June and appears as revenue in the first quarter
of the 1999 fiscal year. Although this increase in gross revenues represents a
100% increase over the operating results in 1997, the percentage increase should
be qualified since Novex recorded $0 in gross revenue in the previous fiscal
year and had very little capability in the previous year to sell its products,
although it did have inventory for sale.
In 1998, Novex had $122,134 in inventory. Of this amount, $76,276 consisted
of raw materials, $440 consisted of work in process and $45,418 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.
From June 1, 1997 to January, 1998 Novex's operations were funded through
sales of its common stock to affiliated and non-affiliated parties. In December,
1997, Novex announced a 60 Day Plan to advance Novex from the development stage.
In February, 1998, Novex sold a 10% $550,000 Convertible Debenture that matured
on October 31, 1998, to three non-affiliated persons who also received warrants
to purchase 1,100,000 share of common stock at the exercise price of $.30 per
share for a three year period. The proceeds of this debenture were used
principally to purchase the industrial blending and bagging equipment that was
installed in Novex's operating subsidiary in March 1998, to renovate Novex's
offices and for working capital to fund Novex's operations until sales of its
product could materialize.
General and administrative cost (excluding stock compensation, depreciation
and amortization expense) decreased from $927,451 in 1997 to $824,321 in 1998 or
11% from the previous year. The decrease in general and administrative costs was
attributable primarily to fewer employees from November, 1997 to February, 1998,
when Novex began to increase its payroll with new personnel and with better
management of Novex's resources. In addition non-cash costs attributable to the
issuance of stock compensation decreased substantially in 1998 to $180,405 when
compared to the $1,360,580 incurred in 1997. Novex's new management terminated
the stock option plan that was initiated in 1996 and which resulted in the
excessive issuance of common stock to insiders at below market prices. In 1998,
Novex incurred $17,548 of interest expenses versus $12,917 in the previous year
and $15,267 of foreign currency losses versus $3,144 in the previous year. In
addition Novex amortized debt discount of $84,535 in 1998 which resulted from
the issuance of warrants to holders of the debenture that was sold in February,
1998. The net result of the increase in General and Administrative expenses over
revenues resulted in a net loss of $1,112,594.
Liquidity and Financial Resources
Novex ended the 1999 fiscal year with nominal liquidity and a $1,181,253 in
operating losses. However, since it has begun to sell its products in commercial
quantities to large distributors of construction products and to ready-mix
concrete producers, Novex anticipates that it will have sufficient liquidity
from its operations to cover its expenses. In addition, as part of the Por-Rok
acquisition, Novex obtained a $750,000
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secured line of credit from Dime Commercial Corp. With the Por-Rok acquisition
Novex will also be acquiring a mature line of products having a historical level
of sales in the $2 million range, net income of $201,000 and positive cash flow
of $350,000. Based on its targeted gross margin of 60% of net sales, Novex will
need to generate approximately $3,000,000 of gross revenues to break-even before
interest and debt retirement. Although the company substantially under performed
this level of sale in 1999, the Arm Pro, Inc. and Por-Rok acquisitions along
with the additional year of marketing the Novacrete products is expected to
significantly enhance the Company's prospects for sales in 2000.
The Dime Note is secured by all the assets that are located at the Por- Rok
operation at 16 Cherry Street, Clifton, New Jersey. These assets include the
land (1.58 acres), the main manufacturing building and the two warehouses,
including all the equipment in these buildings and all trademarks owned by
Novex. In addition, the revolving line of credit that Novex has with Dime is
secured by the accounts receivable generated at the Por-Rok unit and all
inventory. The Sherwin Williams Note is also secured by the same assets as, and
is subordinated to, the Dime Note. If the value of all the Por-Rok assets would
exceed the balances on the Dime Note and the Revolving Line of credit then the
Sherwin-Williams Note would be partially secured by the value of the assets that
are in excess of the obligations owing to Dime. Since all the assets at the
Por-Rok operation are secured by the Dime Note and then by the Sherwin-Williams
Note, there are no other assets that can be used to secure new financing if it
were needed.
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 11(d) to Consolidated
Financial Statements)
Inflation and Changing Prices
Novex does not foresee any risks associated with inflation or price
increases in the near future. In addition the raw materials that are used in the
manufacturing of its products are available locally through many sources and are
generally commodity items. Because Novex's operations are in Canada, the
devaluation of the Canadian dollar against the U.S. dollar has allowed the
company to manufacture its products less costly for the sales made in the United
States and that any funds raised through the sale of securities are U.S. dollar
denominated and then transferred to the Canadian subsidiary at favorable
exchange rates. As such, while Novex has exposure to inflation, in the very near
future it does not believe that inflation will bear significantly on its
financial position.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries to represent years in the date code field.
Computer systems and products that do not accept four-digit year entries will
need to be upgraded or replaced to accept four-digit entries to distinguish
years beginning with 2000 from prior years. Management is in the process of
becoming compliant with the Year 2000 requirements and believes that its
management information system will be compliant on a timely basis. Novex
currently does not anticipate that it will experience any material disruption to
its operations as a result of the failure of its management information system
to be Year 2000 compliant. There can be no assurance,
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however, that computer systems operated by third parties, including customers,
vendors, credit card transaction processors, and financial institutions, with
which Novex's management information system interfaces will continue to properly
interface with Novex's system and will otherwise be compliant on a timely basis
with Year 2000 requirements. Novex currently is developing a plan to evaluate
the Year 2000 compliance status of third parties with which its system
interfaces. Any failure of its management information system or the systems of
third parties to timely achieve year 2000 compliance could have an material
adverse effect on the Novex's business, financial condition and operating
results. Novex has not yet established a contingency plan in the event that it
is unable to correct the Year 2000 problem.
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Item 8. Financial Statements and Supplementary Data Page
Index to Consolidated Financial Statements F-1
Independent Auditors Report F-2
Financial Statements:
Consolidated Balance Sheet as of May 31, 1999 and 1998 F-3
Consolidated Statement of Operations for the years ended
May 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Changes in Shareholders' Equity
(Deficiency) for the years ended May 31, 1999, 1998 and 1997 F-5
Consolidated Statement of Cash Flows for years ended May 31,
1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7-24
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts F-25
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.
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NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. And Subsidiary)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets
as of May 31, 1999 and 1998 F-3
Consolidated Statements of Operations
for the years ended May 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Changes in Shareholders' Equity (Deficiency)
for the years ended May 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows
for the years ended May 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7-21
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts F-22
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, 1999 and 1998 and the related consolidated statements
of operations, changes in shareholders' equity (deficiency) and cash flows for
the years ended May 31, 1999, 1998 and 1997. We have also audited the financial
statement schedule on page F-26. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 amount 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, 1999 and 1998 and the consolidated results of its
operations, changes in shareholders' equity (deficiency) and cash flows for the
years ended May 31, 1999, 1998 and 1997 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.
/s/ Feldman Sherb Horowitz & Co., P.C.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
September 8, 1999
F-2
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
May 31,
----------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,788 $ 49,108
Accounts receivable, net of allowance for doubtful 20,690 9,250
accounts of $890 in 1999 and $0 in 1998
Inventory 221,707 122,134
Other receivables -- 17,367
Prepaid expenses and other current assets 8,600 2,801
----------- -----------
Total Current Assets 252,785 200,660
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 80,914 106,598
GOODWILL, net of accumulated amortization 316,300 --
OTHER ASSETS 6,059 11,282
----------- -----------
$ 656,058 $ 318,540
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Due to factor $ 56,700 $ --
Current portion of long term debt 393,548 520,470
Accounts payable 241,424 162,115
Advances from shareholder -- 37,000
Accrued interest 63,729 --
Accrued expenses and other current liabilities 51,461 --
----------- -----------
Total Current Liabilities 806,862 719,585
----------- -----------
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
15,250,771 and 11,965,646 shares
issued and outstanding, respectively 15,251 11,966
Additional paid-in capital 4,408,753 3,542,039
Accumulated deficit (5,347,390) (3,955,050)
----------- -----------
Total shareholders' deficiency (923,386) (401,045)
----------- -----------
$ 656,058 $ 318,540
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended May 31,
----------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 321,311 $ 9,073 $ --
COST OF GOOD SOLD 113,305 5,444 --
------------ ------------ ------------
GROSS PROFIT 208,006 3,629 --
------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE 1,389,259 999,282 2,310,397
LOSS FROM OPERATIONS (1,181,253) (995,653) (2,310,397)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 335 409 314
Interest expense (97,905) (17,548) (12,917)
Amortization of debt discount (146,674) (84,535) --
Foreign currency gain (loss) 33,157 (15,267) (3,144)
------------ ------------ ------------
TOTAL OTHER EXPENSES, net (211,087) (116,941) (15,747)
------------ ------------ ------------
NET LOSS $ (1,392,340) $ (1,112,594) $ (2,326,144)
============ ============ ============
NET LOSS PER COMMON SHARE, basic and diluted $ (0.10) $ (0.10) $ (0.24)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 13,720,171 11,472,508 9,590,212
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, May 31, 1996 7,801,950 $ 7,802 $ 975,494 $ (516,312) $ 466,984
Sale of common stock 1,513,500 1,514 266,015 -- 267,529
Issuance of common stock
for services 626,531 627 1,171,287 -- 1,171,914
Issuance of options
for services -- -- 151,032 -- 151,032
Issuance of common stock
for compensation 171,400 171 59,829 -- 60,000
Net loss -- -- -- (2,326,144) (2,326,144)
----------- ----------- ----------- ----------- -----------
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)
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended May 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,392,340) $(1,112,594) $(2,326,144)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 55,184 13,805 345
Common stock and options issued for payment
of services and compensation 122,315 146,250 1,254,280
Common stock issued for payment of interest expense 15,175 11,522 --
Options issued as payment for services -- 34,155 --
Cancellation of options for services (21,505) -- --
Amortization of debt discount 146,674 84,535 128,666
Changes in assets and liabilities, net of the effect from acquisition:
Accounts receivables (11,440) (9,250) --
Inventory (99,573) 21,179 (143,313)
Other receivables 17,367 23,212 (28,711)
Prepaid and other current assets (5,799) (2,801) --
Refundable deposits -- -- 178,148
Other assets 5,223 (1,147) (10,135)
Accounts payable 156,456 26,404 53,305
Accrued interest 46,214 5,868 12,077
Accrued expenses and other current liabilities (8,171) 16,625 35,205
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (974,220) (742,237) (846,277)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (15,564) (118,246) (2,503)
Sale (purchase) of marketable securities -- 13,250 (13,250)
Acquisition of business, net of cash acquired (330,236) -- --
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (345,800) (104,996) (15,753)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor 56,700 -- --
(Decrease) increase in advance from shareholders (37,000) 37,000 134,405
Proceeds from bridge financing -- -- 265,230
Proceeds from debt financing 1,155,000 480,470 --
Proceeds from issuance of debt with warrants -- 69,530 --
Proceeds from issuance of debt without warrants -- 40,000 49,770
Proceeds from the sale of common stock
and exercise of options 98,000 259,243 267,529
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,272,700 886,243 716,934
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (47,320) 39,010 (145,096)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 49,108 10,098 155,194
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,788 $ 49,108 $ 10,098
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 36,513 $ 691 $ 1,269
=========== =========== ===========
Income taxes $ 689 $ 689 $ --
=========== =========== ===========
Non-cash financing and investing activities:
Conversion of debt to equity $ 550,000 $ 315,000 $ --
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. And Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
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
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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.
(b) Cash and Cash Equivalents - The Companies maintains 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.
(c) 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.
(d) 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.
(e) Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
(f) 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 was also estimated to approximate
fair value.
(g) 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, 1999, 1998 and 1997,
diluted loss per share is the same as basic loss per share since the
inclusion of stock options and warrants would be antidilutive.
F-8
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) 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.
(i) 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.
(j) 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.
(k) Reclassification - Certain reclassifications have been made to the
1998 consolidated financial statements in order to conform with the
1999 presentation.
(l) 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.
(m) 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.
F-9
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) 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, 1999, 1998 and 1997 amounted to approximately $12,700,
$1,100 and $0, respectively.
3. CONCENTRATION OF CREDIT RISK
(a) Cash and Cash Equivalents
The Companies maintains cash balances at several commercial banks.
Accounts at these financial institution 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 does not require collateral to support accounts receivable.
F-10
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
4. INVENTORY
Inventories at May 31, 1999 and 1998, consists of the following:
1999 1998
-------- --------
Raw Material $113,288 $ 76,276
Work in Progress 3,217 440
Finished Goods 105,202 45,418
-------- --------
$221,707 $122,134
======== ========
5. PROPERTY AND EQUIPMENT
Property and equipment at May 31, 1999 and 1998, consists of the following:
1999 1998
--------- ---------
Property and equipment $ 231,095 $ 103,247
Leasehold Improvements 17,330 17,330
--------- ---------
248,425 120,577
Less: accumulated depreciation
and amortization (167,511) (13,979)
--------- ---------
$ 80,914 $ 106,598
========= =========
6. GOODWILL
Goodwill arose in connection with the acquisition of Arm Pro by the Company
in September, 1998, and is being amortized on the straight-line method over
10 years. As of May 31, 1999, goodwill, net of accumulated amortization of
$30,795, is $316,300. Amortization expense charged to operations for fiscal
year 1999 was approximately $31,000. There was no amortization expense for
fiscal years 1998 and 1997.
F-11
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
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 (20.50% at May 31,
1999).
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.
8. ADVANCES FROM SHAREHOLDERS
During fiscal 1998, the Company was advanced $37,000 from existing
shareholders to provide working capital for operations. In fiscal 1999, the
Company issued 100,000 shares of its common stock as payment for the funds
advanced in 1998.
9. INCOME TAXES
At May 31, 1999, the Company had federal, state and city net operating loss
carryforwards of approximately $3,175,000 resulting from accumulated
operating losses through fiscal 1999. At May 31, 1999 and 1998, the Company
has net deferred tax assets of approximately $1,260,000 and $848,000,
respectively. The Company has established a valuation allowance for the
full amount of such net deferred tax assets at May 31, 1999 and 1998, 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.
F-12
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
9. INCOME TAXES (Continued)
The Company's wholly owned subsidiary has not had to pay Canadian income
taxes as they have generated operating losses since its inception.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax asset:
Net operating loss
carryforward $ 1,260,000 $ 848,000 $ 402,000
Valuation Allowance (1,260,000) (848,000) (402,000)
----------- ----------- -----------
Net deferred tax asset $ -0- $ -0- $ -0-
=========== =========== ===========
</TABLE>
10. LONG TERM DEBT
At May 31, long-term debt consists of:
1999 1998
---------- ----------
Debentures payable (a) $ -- $ 550,000
Notes payable (b) 40,000 40,000
Debentures payable(c) 800,000 --
Debenture payable (d) 250,000 --
Notes payable (e) 105,000 --
---------- ----------
1,195,000 590,000
Less: Unamortized discount on debentures 28,870 69,530
---------- ----------
1,166,130 520,470
Less: Current portion 393,548 520,470
---------- ----------
$ 772,582 $ --
========== ==========
F-13
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
10. LONG-TERM DEBT (Continued)
(a) At May 31, 1998, the Company was obligated to debenture holders for
$550,000 with 1,100,000 detachable stock warrants exercisable at
$0.30. A total of $104,296 was allocated to the warrant portion of the
debt, with an unamortization discount of $69,530 at year end resulting
in a net note payable of $480,470. The debentures bore interest at 10%
per annum and were converted with accrued interest of $15,175 into
2,730,737 shares of common stock in October, 1998, (see Note 11(d)).
(b) In May 1998, the Company issued notes payable for a total of $40,000,
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. As of May 31, 1999, these notes have not
been satisfied (see Note 17).
(c) Included in long-term debt are debentures owing to a stockholder of
the Company, Quilcap Corp., 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, with an un-amortized
discount of $27,417 as of May 31, 1999 (see Note 17).
(d) 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 matures 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, with an unamortized discount of $1,453 as of May
31, 1999 (see Note 17).
F-14
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
10. LONG-TERM DEBT (Continued)
(e) At various dates during fiscal 1999, the Company issued promissory
notes payable for a total of $105,000, 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 $ .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. As of May
31, 1999, these notes have not been satisfied (see Note 17).
11. SHAREHOLDERS' EQUITY
(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 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 who it alleges
have received securities without paying fair consideration to the
Company.
(b) During fiscal 1997, the Company issued 500,000 shares of common stock
for the purchase of the Novacrete Admixture formulation.
During fiscal 1997, the Company's president, at the time, accepted
171,400 shares of the Company's common stock as partial payment for
his annual salary. The shares issued were based on $60,000 of
compensation and the remaining unpaid compensation of $31,250 was
included in accrued expenses and other current liabilities at May 31,
1997. During fiscal 1998, the Company issued 97,665 shares of common
stock as payment for the $31,250 in compensation owed to him.
During fiscal 1997, the Company issued 126,531 shares as consideration
for various services.
F-15
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
11. SHAREHOLDERS' EQUITY (Continued)
(c) During fiscal 1998, the Company issued 295,000 shares of its common
stock as payment for services provided by the current president prior
to assuming his role as a Company officer, and to a financial
consultant. These shares were valued at prices ranging from $0.14 to
$0.40 per share.
In fiscal 1998, the Company issued 331,441 of its common stock to its
former and current president as compensation. These shares were valued
at a price range of $ .20 to $ .35 per share.
The Company issued 988,824 shares of its common stock as full payment
for the notes payable of $315,000 plus accrued interest of $11,522
during fiscal 1998.
During fiscal 1998, the Company sold 720,750 shares of its common
stock to various shareholders, at market prices ranging from $ .24 to
$ .40 per share to raise working capital.
(d) 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 as full payment for debentures payable of $550,000 plus accrued
interest of $15,175 (see note 10(a)).
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.
F-16
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1999, 1998 and 1997
12. STOCK OPTIONS AND WARRANTS
The following table summarizes the activity with regard to options and
warrants for the years ended May 31, 1999, 1998 and 1997 (See page F-16 for
chart references).
<TABLE>
<CAPTION>
Stock Options Warrants
Shares Exercise Exercisable Shares Exercise Exercisable
Price Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
May 31, 1996 -- -- -- -- -- --
Granted -- $ -- --(3) 768,000 $0.50 768,000
Exercised -- -- -- (768,000) -- (768,000)
Grante -- -- --(3) 91,504 0.50 91,504
Outstanding at
May 31, 1997 -- -- -- 91,504 0.50 91,504
(1)Granted 1,727,772 0.50 1,727,772(2) 308,000 0.35 308,000
(3)Granted 40,000 0.25 40,000(3) 60,000 0.50 60,000
(1)Granted 300,000 0.40 300,000(2) 1,100,000 0.30 308,000
(1)Granted 25,000 0.30 25,000 -- -- --
(3)Granted 20,000 0.25 20,000 -- -- --
(1)Granted 65,000 0.35 65,000 -- -- --
(3)Granted 25,000 0.31 25,000 -- -- --
Outstanding at
May 31, 1998 2,202,772 0.25-0.50 2,202,772 1,559,504 0.30-0.50 1,559,504
(1)Granted 195,000 0.40 195,000(2) 1,650,000 0.45 1,650,000
(1)Granted 100,000 0.45 100,000(2) 5,000 0.20 5,000
(1)Granted 12,500 0.30 12,500 -- -- --
(1)Granted 27,500 0.50 27,500 -- -- --
(3)Canceled (60,000) (0.25) (60,000) -- -- --
(3)Canceled (25,000) (0.31) (25,000) -- -- --
Outstanding at
May 31, 1999 2,452,772 $ 0.25-0.50 2,452,772 3,214,504 $ 0.20-0.50 3,214,504
========= =========== ========= ========= =========== =========
</TABLE>
F-17
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
12. STOCK OPTIONS (Continued)
(1) issued for employee services, including directors fees
(2) issued with debt
(3) issued for consulting services
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 who received the grants have not earned them. Therefore,
Novex is currently seeking to have all shares issued to these parties
returned and canceled.
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 $ .25 to $ .50 per share. The Company has recorded
$34,155 in consulting expenses in the accompanying consolidated statement
of operations.
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.
13. STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under APB No. 25,
"Accounting for Stock 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,
1999, 1998, and 1997 was $6,949, $34,155 and $128,666 respectively. The
valuation for options and warrants issued with debt during the years ended
May 31, 1999, 1998, and 1997 was $106,014, $154,065 and $0, respectively.
F-18
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
13. STOCK-BASED COMPENSATION (Continued)
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, 1999, 1998 and 1997 respectively: annual dividends of
$0; expected volatility of 50%; 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, 1999, 1998 and 1997, was
$0.17, $.20 and $.08 respectively.
<TABLE>
<CAPTION>
Year ended May 31,
----------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss to shareholders:
As reported $ (1,392,340) $ (1,112,954) $ (2,326,144)
Pro forma $ (1,432,076) $ (1,562,387) $ (2,320,553)
Net loss per share:
As reported $ (0.10) $ (0.10) $ (0.24)
Pro forma $ (0.10) $ (0.14) $ (0.24)
</TABLE>
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 managements's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options and warrants.
14. 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
F-19
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
14. SEGMENT INFORMATION (Continued)
performance. To date, the Company has viewed its operations as principally
one segment. Key financial information for the one segment by country is as
follows:
<TABLE>
<CAPTION>
United States Canada Adjustments(1) Consolidated
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
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
Depreciation 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
Depreciation 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
Year Ended May 31, 1997
Sales to unaffiliated customers $ -- $ -- $ -- $ --
Interest Income -- -- 314 314
Interest Expense -- 2,111 10,806 12,917
Depreciation and Amortization -- -- 345 345
Segment Loss -- 10,266 2,315,878 2,326,144
Segment Assets -- 205,839 13,694 219,533
Long Lived Asset Expenditures -- -- 2,503 2,503
</TABLE>
(1) This column represents the amount of non-segment information necessary to
reconcile reportable segment information with consolidated totals
F-20
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
15. ACQUISITION
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 10(c)). 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.
Year 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-21
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
16. COMMITMENTS AND CONTINGENCIES
(a) The Company has a verbal month to month sublease arrangement for its
headquarters in New York City as of fiscal 1999. The Subsidiary has a
lease arrangement for office and production facilities commencing May
1, 1997 and expiring on April 30, 2002. This lease requires monthly
rental payments of approximately $3,400 in the first two years of the
lease and $3,600 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
----------- ----------
1999 $ 56,893
2000 57,137
2001 48,530
2002 40,115
----------
Totals $ 202,673
==========
Total rental expenses for the years ended May 31, 1999, 1998 and 1997
was approximately $57,000, $61,000 and $64,000, 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-22
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
16. COMMITMENTS AND CONTINGENCIES (Continued)
(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.
17. SUBSEQUENT EVENT
During August 1999, the Company acquired from The Sherwin Williams Company
("Sherwin") substantially all the assets of their Allied Composition and
Por Rok ("Allied/ Por-Rok") business line. Allied/Por-Rok manufactures and
distributes specialty building products.
Pursuant to the purchase agreement Novex (I) paid $800,000 to Sherwin, (ii)
issued 1,000,000 shares of restricted common stock to Sherwin with the
requirement to register the common stock with the Securities and Exchange
Commission and (iii) issued a note payable for $1,294,973, as adjusted from
$1,300,000, which bears interest at 10% per annum and is payable over a one
year period. In order, to induce Sherwin to accept the note payable, the
Company had to convert all the previously issued debt to equity, except for
the $250,000 debenture which will be paid as a condition of the
Allied/Por-Rok acquisition (see Note 10(d)). Further, Sherwin has a
subordinated security interest in substantially all the assets of the
company.
F-23
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998 and 1997
17. SUBSEQUENT EVENT (Continued)
Novex has entered into a $890,000 installment term note with Dime
Commercial Corp. of which $800,000 was used for the purchase of Allied /
Por Rok and the remaining $90,000 was used for working capital needs in
fiscal 2000. This financing arrangement also provides for a $750,000
revolving note payable to fund future working capital requirements. The
bank has a senior secured interest in substantially all the assets of
Novex. In addition, the Company granted a class B warrant with a "put"
right to purchase 233,365 shares of restricted common stock at an exercise
price of $.25. Dime Commercial Corp. has the right to demand the purchase
of the warrant if Novex completes a refinancing of all or a portion of the
Dime term loan and/or revolving line of credit from funds provided by
someone other than Dime. Therefore, Dime has the option of requesting
payment in cash or waiving its right to sell the warrant to Novex. If Dime
requests payment the amount they will receive is either (I) if the closing
stock price is less than or equal to the exercise price, then Novex pays
$58,341, which is the exercise price times the 233,365 shares underlying
the warrant or (ii) if the closing price exceeds the exercise price, then
Novex pays the closing price up to a maximum of $.51 per share underlying
the warrant or $119,016. Alternatively, if Dime decided to exercise the
warrant, they can issue a 60-day non-interest bearing note for the entire
amount due to Novex for the 233,365 shares of common stock underlying the
warrant.
In accordance with Emerging Issues Task Force No. 96-13, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," we have allocated $20,400 to the put warrant and will
record the amount as part of long-term debt. Subsequent changes in the
measure of fair value of the put warrant will be reported in the statement
of operations. 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-24
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
(Formerly Stratford Acquisition Corp. and Subsidiary)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended May 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning cost and Deductions- end of
Description of year expenses describe Year
---------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allowance for doubtful
Accounts
Year ended May 31,1999 $ -- $ 890 $ -- $ 890
Year ended May 31,1998 $ -- $ -- $ -- $ --
Year ended May 31,1997 $ -- $ -- $ -- $ --
</TABLE>
F-25
<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 &
Horowitz as its outside auditors to audit the company's annual financial
statements for the fiscal year ending May 31, 1999 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, 1999.
Name Aqe Position
---- --- --------
William K. Lavin 55 Chairman, Secretary
Daniel W. Dowe 37 Director, President
and Chief Executive Officer
D. Friedenberg 47 Director, Treasurer
Edward J. Malloy 63 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. He has been the President of 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
34
<PAGE>
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.
Item 11. Executive Compensation
The following table shows all remuneration in excess of $100,000 paid by Novex
and its subsidiaries through March 31, 1999, to all directors and officers:
Table 1
Summary Compensation Table
Long-Term Compensation
----------------------
Annual compensation Awards Payouts
------------------- ------ -------
Securi-
ties
Name Other Underly- All
and Annual Restrict- ing Other
Princi- Compen- ed Stock Options LTIP Compen-
pal Fis. Salary Bonus ation Awards ARS Payout sation
Position Year ($) ($) ($) (#) (#) ($) ($)
--------------------------------------------------------------------------------
Daniel
Dowe
President 1996 n/a
(1)(2)(3) 1997 n/a
1998 $89,850 432,357 575,924
1999 $180,000
----------
(1) From November 17, 1997 through March 31, 1998, during which time Mr. Dowe
served as interim president of the company, he earned $52,500 in cash
compensation. Commencing April 1, 1998, Mr. Dowe became an employee of the
company 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. In addition,
Mr. Dowe made an interest-free loan to Novex of $30,378 in the fiscal year
1999 to cover working capital shortfalls. 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 the
company through November, 1997. From November 17, 1997 through March 31,
1998, during which time Mr. Dowe served as interim president, he earned
97,500 shares of common stock. When Mr. Dowe became an employee of the
35
<PAGE>
company, 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, the company 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 then current market price of $.35 per Share and
will expire on June 25, 2002. As part of the financing of the Por- Rok
acquisition Mr. Friedenberg agreed to waive his ownership interest in his
option to purchase 575,924 shares of common stock. In addition as part of
his severance from the company, Mr. Macmillan also agreed to waive his
ownership interest in his option to purchase 575,924 shares of common
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 March 1, 1999
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 Beneficial owner Ownership Class(1)
------------------- --------- --------
Douglas Friedenberg, (2) 2,879,883 13.74%
Director, Treasurer
67 Wall Street, Suite 2001
New York, New York 10005
Daniel W. Dowe (3) 1,008,281 4.81%
Director, President,
Chief Executive Officer
67 Wall Street, Suite 2001
New York, New York 10005
William K. Lavin (4) 222,158 1.07%
Chairman, Secretary
67 Wall Street, Suite 2001
New York, New York 10005
Edward J. Malloy (4) 222,158 1.07%
Director
71 West 23rd Street
New York, New York 10010
All Directors and Officers
as a group 4,332,480 20.91%
36
<PAGE>
(1) The class includes stock options and stock warrants granted to the directors
and officers prior to May 31, 1999 which are deemed by Novex to be acquirable by
the beneficial owner within 60 days of the date of this offering memorandum by
exercise of the option or warrant. As of May 31, 1999, there were 15,250,771
shares issued and outstanding, 20,918,047 on a fully diluted basis. Percentages
are stated on a fully diluted basis.
(2) Mr Friedenberg and various entities for which Mr. Friedenberg exercises sole
voting and investment power as investment advisor presently hold an aggregate of
2,879,883 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.
(3) Mr. Dowe presently owns 432,357 shares of common stock and has the right to
acquire beneficial ownership of 575,924 additional shares upon exercise of an
equal number of common stock options.
(4) Mr. Lavin and Mr. Malloy each presently owns 22,158 shares of common stock
and each has the right to acquire beneficial ownership of 200,000 additional
shares upon exercise of an equal number of common stock options.
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 prices 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 shall receive an additional
$10,000 per annum, payable in equally 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 1999, there were no committee meetings.
Table 2
Security Ownership of Certain Beneficial Owners
(Non-Management)
Set forth below is certain information about the only shareholder known by
Novex (other than Mr. Friedenberg and his affiliated companies) to be a
beneficial owner of more than 5% of the outstanding common shares of Novex as of
the May 31, 1999:
Name and Address Amount and Nature Percent
of Beneficial Ownerof Beneficial Ownership of Class(1)
----------------------------------------------------------------------
Quilcap Corporation 5,113,277 24.40%
375 Park Avenue
Suite 1404
New York, New York
(1) Percentage is stated on a fully diluted basis.
37
<PAGE>
Item 13. Certain Relationships and Related Transactions
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 is a partner in the law firm Dowe, Capetanakis & Preite.
During the period December 1998 through May 1999, 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
provides legal services to Novex. Any payments to Dowe, Capetanakis and Preite
for services rendered to Novex must be approved by the Board of Directors,
except for Mr. Dowe who is 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.
38
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) The following financial statements and supplementary data are included
in Part II Item 8
<TABLE>
<CAPTION>
Page
<S> <C>
Index to Consolidated Financial Statements F-1
Independent Auditors Report F-2
Financial Statements:
Consolidated Balance Sheet as of May 31, 1999 and 1998 F-3
Consolidated Statement of Operations for the years ended
May 31, 1999, 1998 and 1997 F-4
Consolidated Statement of Changes in Shareholders' Equity
(Deficiency) for the years ended May 31, 1999, 1998 and 1997 F-5
Consolidated Statement of Cash Flows for years ended May 31,
1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7-24
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts F-25
</TABLE>
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 Incorporated Document
------- ---------------------
3(i) - Articles of Incorporation Form 10-K/A for the
of Stratford Acquisition period ending May 31,
Corp. 1996
4 - 10% $550,000 Convertible Form 10-K for the
Debenture and Stock Warrant period ending May 31,
Agreement 1998
99 - Battista Agreement Form 10-K/A for the
period ending May 31,
1997.
99 - Supercrete N/A Limited Form 10-K for the period
Agreement dated December ending May 31, 1997
20, 1996
99 - Employment Agreement for Form 10-K for the period
Daniel W. Dowe dated ending May 31, 1998
April 1, 1998
39
<PAGE>
(B) Exhibits filed herein:
Exhibit
3(i) Certificate of Incorporation of
Novex Systems International, Inc.
Plan of Merger of Stratford
Acquisition Corp. And Novex Systems
International, Inc. Into Novex Systems
International, Inc.
New York Certificate of Merger of
Stratford Acquisition Corp. into
Novex Systems International, Inc.
Minnesota Articles of Merger of
Stratford Acquisition Corp. Into
Novex Systems International, Inc.
3(ii) By-Laws
4 - 9% $800,000 Convertible
Debenture and Stock Warrant
Agreement
15% $250,000 Senior Debenture and
Stock Warrant Agreement
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
21 - Subsidiaries of Novex Systems International, Inc.
(C) Reports on Form 8-K
Part IV, Item 14 Form 8-K filed on
October 2, 1998
Part IV, Item 14 Form 8-K/A filed on
November 30, 1998
40
<PAGE>
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: /ss/ Daniel W. Dowe
------------------------------
Daniel W. Dowe, President
By:
------------------------------
Douglas Friedenberg, Treasurer
Dated: July 5, 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
-----
/ss/ Daniel W. Dowe Director July 5, 2000
------------------------------
Daniel W. Dowe
/ss/ William K. Lavin Director July 5, 2000
------------------------------
William K. Lavin
/ss/ Douglas Friedenberg Director July 5, 2000
------------------------------
Douglas Friedenberg
/ss/ Edward J. Malloy Director July 5, 2000
------------------------------
Edward J. Malloy
41
