FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2000 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
---------- ----------.
NOVEX SYSTEMS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
New York 0-26112 41-1759882
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(State of Jurisdiction) (Commission (IRS Employer
File Number) Identification No.)
16 Cherry Street Clifton, New Jersey 07014
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(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code 973-777-2307
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for the
past 90 days. Yes X No .
The Company had 23,173,988 shares of its $.001 par value common stock and
1,390,388 shares of its $.001 par value preferred stock issued and outstanding
on November 30, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Location in Form 10-Q Incorporated Document
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Part II, Item 6 None
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC.
Index
Page No.
Part I Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
November 30, 2000 and May 31, 2000................................F-1
Consolidated Statements of Operations for the three months
ended November 30, 2000 and November 30, 1999 (Restated) and
for the six months ended November 30, 2000 and
November 30, 1999.................................................F-2
Consolidated Statements of Cash Flows for the
six months ended November 30, 2000 and
November 30, 1999.................................................F-3
Notes to Financial Statements ....................................F-4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................1
Part II Other Information
Item 1. Legal Proceedings...................................................4
Item 2. Changes in Securities...............................................4
Item 3. Defaults Upon Senior Securities.....................................5
Item 4. Submission of Matters to a Vote of Security Holders.................5
Item 5. Other Information...................................................5
Item 6. Exhibits and Reports on Form 8-K....................................5
ii
<PAGE>
PART I
Page
No.
Item 1. Financial Information (Unaudited)
Consolidated Balance Sheet as of
November 30, 2000 and May 31, 2000................................F-1
Consolidated Statements of Operations for the three months
ended November 30, 2000 and November 30, 1999 (Restated) and
for the six months ended November 30, 2000 and
November 30, 1999.................................................F-2
Consolidated Statements of Cash Flows for the
six months ended November 30, 2000 and
November 30, 1999.................................................F-3
Notes to Financial Statements ....................................F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
November 30, May 31,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 285
Accounts receivable, net 472,545 553,270
Inventories 382,955 299,121
Prepaid expenses and other current assets 63,722 8,040
Net assets of discontinued operations 42,250 433,454
----------- -----------
TOTAL CURRENT ASSETS 961,472 1,294,170
PROPERTY AND EQUIPMENT, net of
accumulated depreciation and amortization 1,360,520 1,341,713
GOODWILL, net of accumulated amortization 703,879 541,095
OTHER ASSETS 7,565 11,445
----------- -----------
$ 3,033,436 $ 3,188,423
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
CURRENT LIABILITIES:
Cash overdraft $ 47,655 $ 40,297
Current portion of long term debt 216,351 989,223
Due to factor -- 68,184
Note payable -- 1,281,351
Bank line of credit 656,322 701,310
Accounts payable 896,501 615,965
Loans payable - shareholders 106,456 71,488
Accrued interest 11,657 105,155
Accrued expenses and other current liabilities 177,924 50,778
----------- -----------
TOTAL CURRENT LIABILITIES 2,112,866 3,923,751
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
LONG TERM DEBT, net of current portion 720,265 --
SHAREHOLDERS' EQUITY(DEFICIENCY):
Cumulative preferred stock - $.001 par value
10,000,000 shares authorized,
1,390,388 shares issued and outstanding 1,390,388 --
Common stock - $0.001 par value
50,000,000 shares authorized,
23,173,988 and 15,250,771 shares
issued and outstanding, respectively 23,174 22,144
Additional paid-in capital 5,947,445 5,807,575
Accumulated deficit (7,160,702) (6,565,046)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) 200,305 (735,327)
----------- -----------
$ 3,033,435 $ 3,188,424
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-1
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
November 30, November 30,
---------------------------- ----------------------------
2000 1999 2000 1999
(Restated)
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 504,561 $ 415,550 $ 1,002,394 $ 537,935
COST OF GOOD SOLD 351,401 321,920 664,708 324,688
------------ ------------ ------------ ------------
GROSS PROFIT 153,160 93,630 337,686 213,247
SELLING, GENERAL AND ADMINISTRATIVE 266,404 240,641 499,948 480,669
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (113,244) (147,011) (162,262) (267,422)
------------ ------------ ------------ ------------
OTHER EXPENSES:
Interest expense (69,017) (53,363) (150,938) (113,072)
Amortization of debt discount (2,638) -- (5,276) (28,870)
------------ ------------ ------------ ------------
OTHER EXPENSES (71,655) (53,363) (156,214) (141,942)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (184,899) (200,374) (318,476) (409,364)
DISCONTINUED OPERATIONS:
Loss from operations of Novex Canada -- 9,861 (48,124) (133,004)
Loss on disposal of Novex Canada including
operating losses during the phase out period of $102,190 (229,056) -- (229,056) --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (229,056) 9,861 (277,180) (133,004)
------------ ------------ ------------ ------------
NET LOSS $ (413,955) $ (210,235) $ (595,656) $ (542,368)
============ ============ ============ ============
NET LOSS PER COMMON SHARE, basic and diluted:
Continuing operations (0.01) (0.01) (0.02) (0.02)
Discontinued operations (0.01) -- (0.01) (0.01)
------------ ------------ ------------ ------------
NET LOSS PER COMMON SHARE, basic and diluted $ (0.02) $ (0.01) $ (0.03) $ (0.03)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 23,143,988 21,987,738 22,834,425 20,233,440
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
November 30,
--------------------------------
2000 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (595,656) $ (542,368)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for bad debts 12,955 --
Depreciation and amortization 63,996 51,902
Common stock and options issued for payment
of services and compensation 3,900 7,500
Amortization of debt discount 5,276 28,870
Changes in assets and liabilities, net of the effect from acquisition:
Accounts receivables 67,770 (495,716)
Inventories (83,834) (273,308)
Prepaid and other current assets (55,682) (34,134)
Net assets of discontinued operations 391,204 --
Other assets 3,880 6,059
Accounts payable 280,536 304,960
Accrued interest 15,540 --
Accrued expenses and other current liabilities 127,145 88,501
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 237,030 (857,734)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business, net of cash acquired (108,588) (800,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (108,588) (800,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 7,358 --
Due to factor (68,184) (3,700)
Proceeds from loans payable - shareholders 33,093 30,378
Proceeds from bank line of credit (44,988) 434,741
Proceeds from debt financing -- 1,222,506
Repayment of debt obligations (56,006) --
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (128,727) 1,683,925
----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (285) 26,191
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 285 1,788
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ -- $ 27,979
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 133,447 $ 91,999
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash financing and investing activities:
Conversion of debt and interest to equity $ 1,390,388 $ 1,033,500
=========== ===========
Common stock issued for assets acquired $ 137,000 $ 260,000
=========== ===========
Note payable issued for assets acquired $ -- $ 1,294,973
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 2000 (unaudited)
1. BASIS OF PRESENTATION AND RESTATEMENT
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operation results for
the six months period ended November 30, 2000 are not necessarily
indicative of the result that may be expected for the year ended May 31,
2001. The unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended May 31, 2000.
At the time of preparing the Form 10-Q for the first quarter ending August
31, 1999, Novex had owned the Por-Rok unit for two weeks and used a cost of
goods sold rate of 40% (or an estimated gross profit of 60%) to estimate
the ending inventory versus an actual amount based on a physical count for
the period. During the second quarter ending November 30, 1999, Novex
conducted a physical inventory in order to implement a perpetual inventory
system. As a result, Novex determined that they had incorrectly estimated
the ending inventory for the first quarter. Therefore, Novex prepared a
roll-forward of the Por-Rok inventory from the acquisition date of the
Por-Rok unit, August 13, 1999, to the end of the quarter and as well
analyzed the mix of product gross profit margins for Por-Rok. Thus, Novex
has restated the ending inventory from $219,581 to $157,988 and a $61,593
increase in net loss from $270,540 to $332,133 for the three months ended
August 31, 1999. The inventory has been revised to reflect the discontinued
operations of Novex Canada (see Note 3). The increase in net loss did not
have a material effect on net loss per share.
As a result of the above, for the three months ended November 30, 1999, the
net loss before the correction of the error of $271,828 decreased by 61,593
to a net loss of $210,235. The decrease in the net loss did not have a
material effect on the net loss per share.
2. LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding. For the six
months ended November 30, 2000 and November 30, 1999 diluted loss per share
is the same as basic loss per share since the inclusion of stock options
and warrants would be antidilutive.
F-4
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 2000 (unaudited)
3. DISCONTINUED OPERATION
In October and December 2000, the Company entered into agreements to sell
the assets, except for accounts receivable and the Fiberforce trade name,
of its subsidiary, Novex Systems International, Ltd. ("Novex Canada"), for
approximately $245,300. The balance sheet, results of operations and cash
flows for Novex Canada has been reclassified as discontinued operations for
all periods presented.
The remaining asset of the discontinued operation at November 30, 2000 is a
receivable for $42,250 due from the sale of property and equipment.
Summarized results of the discontinued operation is as follows:
For the six months ended
November 30,
------------------------------
2000 1999
--------- ---------
Net Sales $ 100,643 $ 313,539
========= =========
Loss from operations $ (48,124) $(133,004)
Loss on disposal (229,056) --
--------- ---------
Total loss on discontinued
operations $(277,180) $(133,004)
========= =========
4. INVENTORIES
Inventories were determined based on the perpetual inventory system and
consisted of the following:
November 30,
2000
-----------
(unaudited)
Raw Material $144,551
Finished Goods 238,404
--------
$382,955
========
5. SHAREHOLDERS' DEFICIENCY
During August 2000, Novex issued 30,000 shares as compensation for services
rendered.
F-5
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 2000 (unaudited)
6. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") as of June 1, 1997. SFAS 131 establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services, and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available
for evaluation by the chief operation decision maker or decision making
group, in making decisions how to allocate resources and assess
performance. Historically, the Company has viewed its operations as
principally two segments, the fiber business and the Allied/Por-Rok
business. During October 2000, the Company divested of its subsidiary (see
Note 3), Novex Systems International, Ltd., and as a result, the chief
operating decision-maker no longer receives discrete financial information
about individual components of the Company's operations.
7. ACQUISITION
On August 1, 2000, the Company acquired certain assets from The Sta-Dri
Company of Odenton, Maryland and the unaudited pro-forma results of
operations of the Company and Sta-Dri, as if the acquisition occurred on
June 1, 1999, have not been provided since they were not considered
material to the financial statements.
8. CONTINGENCY
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.
9. SUBSEQUENT EVENTS
On December 21, 2000, the Company entered into a short-term financing
arrangement for $600,000. The short-term loan bears interest at 10% per
annum and the principal plus interest is due on June 19, 2001. The
short-term financing is secured by a subordinated security interest in
Novex's plant and equipment. In addition, the Company issued 600,000 shares
of restricted common stock as consideration for the short-term financing
and has granted piggyback registration rights.
F-6
<PAGE>
NOVEX SYSTEMS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED NOVEMBER 30, 2000 (unaudited)
9. SUBSEQUENT EVENTS (Continued)
On December 26, 2000, the Company's commercial bank notified the Company
that they are no longer in default on their financing arrangement as result
of paying approximately $444,000 on the bank credit facility.
F-7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
the information contained in the Financial Statements and the Notes to the
financial statements appearing elsewhere in this Form 10-QSB. The Financial
Statements for the six month period ended November 30, 2000, included in this
Form 10-QSB are unaudited; however, this information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the opinion
of management, necessary to present a fair statement of the results for the
interim period.
Results of Operations
Six months ending November 30, 2000 vs. November 30, 1999
Effective October 19, 2000, Novex discontinued the operations of its
subsidiary, Novex Canada and, therefore, sold certain assets used in the
manufacturing of concrete reinforcing fibers to Interstar Materials Inc. of
Quebec, Canada. Part of the proceeds were used to pay off the outstanding
balance on the equipment loan from Montcap Financial Corporation. The remaining
cash proceeds were used to pay down debts. The company sold the remaining
manufacturing equipment and closed the Mississauga, Ontario plant in December
2000. Novex will retain ownership of its proprietary concrete enhancing
admixture, all accounts receivable and the Fiberforce trade name. Novex will
continue to use the Fiberforce trade name to promote sales of one particular
type of concrete-reinforcing fiber that Novex will continue to market to The
Home Depot and other home improvement centers and retail outlets.
In the six month period ended November 30, 2000, Novex had net sales of
$1,002,394 versus $537,935 in the corresponding six month period in 1999. Cost
of goods sold in this period was $664,708 which was approximately 66% of gross
revenues, versus 60% in 1999. Novex incurred general and administrative costs of
$499,948, which resulted in a loss from operations of $162,262 in this period.
In this period, Novex incurred $156,214 in interest expense including $5,696
of amortization of debt discount.
Included in the general and administrative costs of $499,948, were
approximately $90,000 of non-recurring expenses for professional fees,
relocating the Sta-Dri operation and miscellaneous costs. The increase in sales,
cost of goods sold and general operating expenses during this period was
attributable primarily to the Por-Rok acquisition and the integration of the
line of products acquired from The Sta-Dri Company ("Sta-Dri") in August 2000.
The Sta-Dri products include a line of masonry waterproofing and building
products that have been in existence for over 40 years. Upon purchasing the
Sta-Dri assets Novex relocated the manufacturing processes, marketing and
administration of the Sta-Dri products into its Clifton, New Jersey location.
On November 30, 2000, Novex had $961,472 in current assets which consisted
primarily of inventory of $382,955 and accounts receivable of $472,545. The
company's property, plant and equipment increased to $1,360,520 net of
accumulated depreciation of $99,782 and goodwill
<PAGE>
increased to $703,879 net of accumulated amortization of $52,953. These
increases were directly attributable to Novex's purchase of certain assets from
Sta-Dri and were offset by the sale of property and equipment and the write-off
of goodwill by Novex Canada to discontinued operations which had net carrying
values of $57,613 and $285,730, respectively.
As a result of the sale on October 19 of the Canadian operations, Novex
recognized a loss on the disposal of $127,866. Of the $245,332 received from the
sale of these operations, approximately $200,000 was used for operations. The
balance will be used to pay off the liabilities of the subsidiary. Novex does
not expect the discontinued operations of its Canadian subsidiary to have any
further impact on future operations.
Three months ending November 30, 2000 vs. November 30, 1999
In the three month periods ending November 30, 2000 and November 30, 1999,
net sales were $504,561 and $415,550 respectively. In the three month period
ending November 30, 2000, the Company generated a loss from operation of
$113,244.
In the second quarter of fiscal year May 31, 2001, Novex experienced an
increase in its gross margin for the three months ending November 30, 2000 to
30% versus 23% for the three months ended November 30, 1999. This increase was
mostly attributable to the increase in sale volume of the Novex's entire line of
product which included sales from its newly acquired Sta- Dri masonry
waterproofing product line.
In the three months ending November 30, 2000, Novex experienced an increase
in its selling, general and administrative costs to $266,404 as compared to
$240,641 in the same period in the previous year. The increase was generally
attributable to sales commissions and marketing costs related to participation
in industry trade shows. By generating higher sales volume while containing its
operating expenditures, Novex experienced a lower loss from operations of
$113,244, versus $147,011 in the same period in the previous year.
Because Novex increased its revolving line of credit to fund its operations
it incurred an increase in interest charges to $69,017 versus $53,363 in the
same period in the previous year.
Liquidity and Financial Resources at November 30, 2000
As of November 30, 2000, Novex had $2,112,866 in current liabilities. Of
this amount, $656,322 was the balance on Novex's secured revolving line of
credit with Dime Commercial Corp. which is used to fund the Company's
operations. It had accounts payable of $896,501, accrued expenses of $189,580
and a cash overdraft of $47,655. The loans from shareholders of $106,456
consists of a loan made by Novex's current President, Daniel W. Dowe, in June
and July, 1999 to assist Novex with its operating cash flow needs before
acquiring the Por-Rok Unit and opening the line of credit with Dime Commercial
Corp. and the remaining balance of $54,000 that is owed on a downpayment of
$72,000 that Mr. Dowe made at the Sta-Dri acquisition. The $72,000 paid by Mr.
Dowe to the former Sta-Dri shareholders was in the form
2
<PAGE>
of a check that was secured by 350,000 share of common stock owned by Mr. Dowe.
Mr. Dowe has entered into an agreement with Novex's board of directors to have
the loan repaid without interest. There is no agreement between Novex's board of
directors and Mr. Dowe to repay the loan on a specified date. However, if Novex
has adequate cash on hand after it finances another acquisition, or if it
becomes profitable, Novex and Mr. Dowe will agree to a mutually acceptable
payment plan. At the present time, Mr. Dowe has agreed to allow Novex time to
repay the loan with no set conditions for repayment.
The current and long-term portion of long-term debt consists of a three
year term loan and put warrant totalling $811,616, net of a debt discount of
$11,600 that was made by Dime Commercial Corp. to enable the Company to acquire
the Por-Rok Unit in August 1999 (the "Dime Note"). The remaining portion of the
purchase price for the Por-Rok Unit was paid with the Sherwin-Williams Note
totalling $1,281,350 which has been converted into 1,390,388 preferred shares.
Included in the current portion of long-term debt is a debenture payable for
$125,000 that is past due as it matured on May 31, 1999. This $125,000 note is
the remaining balance on a bridge loan of $250,000 that was purchased by Novex'
largest shareholder, which is a private equity fund managed by Quilcap
Corporation.
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.
For the period ended November 30, 2000, sales volume and selling, general
and administrative expenses have increased when compared to the same period
ended November 30, 1999. The increase in sales has resulted in higher levels of
inventory as well as accounts payable and accrued expenses. In addition, the
acquisition of Sta-Dri has increased the amount of loans payable to
shareholders. Novex believes this trend will continue since it acquired the
Sta-Dri assets on August 1, 2000, and therefore, had only the revenues and costs
generated from sales of the Sta-Dri products for only four months of the period
ending November 30, 2000. While future operating cash inflows should continue to
increase, unless Novex's sales volume increases, the company will not have
sufficient cash flow to cover its operating, investing and debt payment
requirements. Therefore, Novex has developed plans to improve profitability and
cash flows and to raising capital, if necessary.
To improve Novex's profitability, management has undertaken a number of
initiatives to increase sales and reduce expenses. For example, Novex has issued
a new price list and freight policy that became effective June 1, 2000. The new
price list will improve Novex's margins on sales of its Por-Rok products and the
new freight policy will pass all outgoing freight charges to the customers.
Novex will also begin marketing some of its former Novacrete products under the
Por-Rok brandname to existing Por-Rok customers. In addition, management is
aggressively pursuing sales of the Por-Rok and Sta-Dri products to large home
center stores and major cooperative retailers of building materials.
To improve cash flow, Novex is working to procure more favorable payment
terms from vendors by extending the payment due date for raw materials and
supplies used in manufacturing. These vendors have extended only limited credit
to Novex. At the time, the limited credit terms increased our use of cash for
operations. In addition, the discontinuation of Novex' Canadian operations on
October 19, 2000 will improve cash flow since this unit was operating on a net
negative cash flow basis.
3
<PAGE>
Inflation and Changing Prices
Novex does not foresee any risks associated with inflation or substantial
price increase in the near future. In addition, the raw materials that are used
by Novex in the manufacturing of its materials are available locally through
many sources and are for the most part commodity products. For these reasons,
while Novex will always have exposure to inflationary risks, it does not believe
that inflation will have any materially significant impact on its operations in
the near future.
Part II Other Information
Item 1. Legal Proceedings
On August 12, 1997, a shareholder who was once a director and officer of
Novex ("the Plaintiff") commenced an action against Novex and its former
president, Mr. A. Roy Macmillan, to enjoin Novex from taking any action that
would restrict the sale of up to 300,000 shares of common stock that he
allegedly owns and for the costs he will incur to conduct the lawsuit. He has
not asked for, nor does Novex expect him to ask for, damages. The Plaintiff has
since named Novex's current president, Mr. Dowe, in the lawsuit. The Plaintiff
has no other affiliation with Novex other than for being a shareholder. The
plaintiff submitted a motion for summary judgment which the court denied. Novex
has raised several defenses to this action and believes that plaintiff's claims
are without merit. Novex has also asserted multiple counterclaims against the
plaintiff alleging that he caused the company to issue to himself and others
stock for work that was never done and at a time when current management
believes that fraudulent activities were being undertaken which caused he
company's stock price to be overinflated. Plaintiff claims that he received
stock as compensation for services rendered. When Novex investigated the matter
it found virtually no records of any tangible service. These actions and
omissions caused the U.S. Securities and Exchange Commission in or about 1997 to
commence an investigation of the company, then known as Stratford Acquisition
Corp. It is Novex's understanding that the investigation is still pending and
the Company has no information as to what action, if any, the SEC may take
pursuant to the investigation. Mel Greenspoon vs. Stratford Acquisition
Corporation, et. al., Ontario Court (General Division), Index No. 97-CV-126814.
On November 16, 2000, Novex entered into a settlement agreement for $41,000
with G.O.D. trucking company to settle a dispute relating to shipping charges
incurred in late 1999 and early 2000. As of the date of this filing, the entire
settlement amount has been paid. G.O.D. Inc. v. Novex Systems International,
Inc., Superior Court of New Jersey (Law Division), Passaic County, Docket No.
L-3031-00.
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Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities
On September 1, 2000, Dime Commercial Corp. issued a formal default notice
to the company and demanded full payment of its two notes. The default notice
was retracted on December 26, 2000, as a result of the Registrant's payment of
approximately $444,000 on the Dime's credit facility. The funds to pay down the
loans were made available in part through the sale of the Registrant's Canadian
facility as well as through a six-month secured bridge loan which the company
received from a private investor on December 21, 2000. (See Item 5 below).
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information
On December 21, 2000, the Registrant obtained from a private investor a
six-month secured bridge loan in the amount of $600,000. The bridge loan bears
interest at a rate of 10% per annum. In exchange for the bridge financing, the
Registrant issued 600,000 shares of its common stock to the investor. The Bridge
Note is also secured by the same assets as, and is subordinated to, the Dime
Note.
Item 6. Exhibits and Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Novex Systems International Incorporated has duly caused
this report to be signed on its behalf by the undersigned person who is duly
authorized to sign on behalf of the Registrant and as chief accounting officer.
NOVEX SYSTEMS INTERNATIONAL, INC.
By: /s/ Daniel W. Dowe
----------------------------------------
Daniel W. Dowe
President and Chief Executive Officer
Date: January 19, 2001
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