FORM 10-KSB
UNITED STATE
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED May 31, 2002.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
NOVEX SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
New York 0-26112 41-1759882
(State of Jurisdiction) (Commission File Number) (IRS Employer ID No.)
16 Cherry Street Clifton, New Jersey 07014
(Address of Principal Executive offices) (Zip Code)
Registrant's telephone number, including area code 973-777-2307
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock $.001 par value OTC Electronic Bulletin Board
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for the
past 90 days. Yes |X| No |_|
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. |_|.
Based on the closing sale price of $.06 on May 31, 2002, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
approximately $1,200,000. The company had 26,870,187 shares of its $.001 par
value common stock and 1,644,134 shares of its $.001 par value preferred stock
issued and outstanding on May 31, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
--------------------- ---------------------
None
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 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security
Holders 20
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
Part III
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management 30
Item 13. Certain Relationships and Related Transactions 31
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K 32
ii
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-KSB.
Our limited operating history makes it difficult for investors to evaluate our
business based on past performance - Novex has only had manufacturing operations
and related revenues since April 1998 and we have only owned the Por-Rok
business since August, 1999 and the Sta-Dri business since August, 2000. 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 (1994-2002). In addition, a
significant portion of our assets are attributable to goodwill. In August, 2000,
Novex purchased all the assets of The Sta-Dri Company, which resulted in
goodwill of $149,000 and is being amortized on a straight-line method over 10
years. As of May 31, 2002, goodwill net of accumulated amortization amounted to
$628,784. Amortization expense charged to operations for the fiscal year 2002
was approximately $49,452. Management will periodically review the
recoverability of goodwill to determine if it has been impaired. Events that may
cause an impairment would be Novex's future intentions with regard to the
operations, and the operations forecasted undiscounted cash flows. Effective
June 1, 2002, any reduction in the value of goodwill would be to the extent that
the fair market value is 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, Novex anticipates 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 "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, or we need
to have other companies private label products using our brand names and their
own formulations and/or develop new products. Because of the uncertainties
associated with obtaining acquisition financing and with closing these
transactions, we may not achieve our objective to expand our product line this
year. Furthermore, we do not currently know when new products under development
will be ready for manufacturing, generate revenues, or whether they can be
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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."
If Novex cannot obtain additional financing, it could default on its debt
obligations, lose the Por-Rok facility and suffer a decrease in revenues. Novex
is required to make monthly payments on the $890,000 Secured Term Loan
Promissory Note in favor of Dime Commercial Corp. In addition, we have bridge
loans outstanding in the amount of $1,011,000 that have matured on September 15,
2001 and are still outstanding, which notes are secured by our assets, but
subordinated to the loans owed to Dime Commercial Corp. Our ability to pay off
the debt owed to Dime Commercial Corp. and the bridge loan holders will be
dependent to a large extent upon a successful refinancing of the company's
entire business. If the revenues generated by our sales and marketing efforts
are not sufficient to pay off the debt owed to Dime Commercial Corp. and the
bridge loan holders, we will need to obtain financing from an outside source. If
Novex shall need additional financing for working capital it does not have any
assets to pledge, therefore any future financing would have to be in the form of
unsecured debt financing that would be subordinated to current secured loans, or
equity financing such as the sale of preferred or common stock. If Novex had to
raise capital through unsecured debt the interest rate would be much higher than
secured financing and could be as high as 15%-20%. It may also require the
issuance of common stock or a warrant to purchase common stock at less than
favorable prices. On the other hand, if Novex had to raise financing through the
sale of preferred stock the dividend rate on the stock would likely be in the
10%-15% range. A potential investor could also require that the preferred stock
be convertible into common stock at a future date on terms that are not
favorable to current common shareholders. Lastly, Novex could offer to sell
common stock to a prospective investor, however since the company has yet to
become profitable it is likely that this form of financing would be very
dilutive to current shareholders. If Novex is unable to obtain additional
financing, it could default on the loans made by Dime Commercial Corp. and the
bridge loan holders. Failure to make any of the payments to Dime Commercial
Corp. could result in a re-transfer of the Por-Rok facility to Dime Commercial
Corp. Any such re-transfer would reduce Novex's operations substantially,
adversely effect its financial condition and results of operation and make it
even more difficult to achieve profitability in the future. See "Business",
"Management's Discussion and Analysis of Condition and Results of Operations"
and "Financial Statements and Notes."
Because Novex has no patent protection for its product formulae, its competitors
could copy its products and market them under another name which could decrease
Novex's revenues and hamper its ability to achieve profitability. Since the
formulae would become public knowledge if Novex were to obtain patent
protection, Novex has chosen not to obtain patents on any of its proprietary
technology. Therefore, the absence of patent protection represents a risk in
that Novex will not be able to prevent other persons from developing competitive
products. If Novex's competitors were to learn of the secret formulae for making
its products, they could easily duplicate the products and offer them to Novex's
customers without any suggestion of patent infringement. As a result, Novex's
revenues would decline and its ability to achieve profitability would be
hampered.
Novex has only one executive officer who performs multiple functions and may not
be able to handle all financial and executive responsibilities required. Novex
relies considerably on the services of Mr. Daniel W. Dowe, its President. At
present, Mr. Dowe is the company's only executive officer, in that the company's
chief financial officer recently left the company. Mr. Dowe is now directly
handling all sales and marketing function and oversees financial and legal
responsibilities. To the extent that the services of Mr. Dowe become
unavailable, it would be very difficult to attract or retain personnel who would
be able to adequately perform the functions previously performed by Mr. Dowe and
the company's ability to continue its operations until a replacement is hired
would be substantially hampered. See "Management".
2
Because our stock is presently considered to be a "penny stock", the
applicability of "Penny Stock Rules" could make it difficult for investors to
sell their shares in the future in the secondary trading market. Federal
regulations under the Exchange Act regulate the trading of so-called "penny
stocks" (the "Penny Stock Rules"), which are generally defined as any security
not listed on a national securities exchange or NASDAQ, priced at less than
$5.00 per share, and offered by an issuer with limited net tangible assets and
revenues. In addition, equity securities listed on NASDAQ that are priced at
less than $5.00 per share are deemed penny stocks for the limited purpose of
Section 15(b)(6) of the Exchange Act. Therefore, during the time which the
common stock is quoted on the NASDAQ OTC Bulletin Board at a price below $5.00
per share, trading of the common stock will be subject to the full range of the
Penny Stock Rules. Under these rules, broker dealers must take certain steps
prior to selling a "penny stock," which steps include: (i) obtaining financial
and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor; and
(iii) providing the investor a written identification of the shares being
offered and in what quantity. If the Penny Stock Rules are not followed by the
broker-dealer, the investor has no obligation to purchase the shares.
Accordingly, the application of the comprehensive Penny Stock Rules may be more
difficult for broker-dealers to sell the common stock, and purchasers of the
shares of common stock offered hereby may have difficulty in selling their
shares in the future in the secondary trading market.
If a trading market is not maintained, holders of the common stock may
experience difficulty in reselling such Common Shares or may be unable to resell
them at all. The Common Shares of the Company are presently quoted on the NASDAQ
Over-The-Counter (OTC) Bulletin Board, a regulated quotation service that
captures and displays real-time quotes and indications of interest in securities
not listed on The NASDAQ Stock Market, or any U.S. securities exchange. The
current trading ticker symbol for the Common Shares is "HARD". The Company may,
but has not, entered into any agreements with market makers to make a market in
the Company's Common Stock. In addition, any such market making activity would
be subject to the limits imposed by the Securities Act, and the Securities
Exchange Act of 1934, as amended, ("Exchange Act") and it is possible that the
market in the common stock can be discontinued at any time. Accordingly, if
there is no active market available for the common shares, no liquidity or if
the market is discontinued, holders of the common stock may have difficulty or
may be unable to sell the shares which he or she may hold.
3
Certain information included in this Form 10-KSB contain statements that are
forward-looking, such as statements relating to future anticipated direction of
Novex, plans for expansion, corporate acquisitions, anticipated sales growth and
capital funding sources. Such forward-looking information involves risks and
uncertainties that could significantly affect anticipated results in the future,
and accordingly, such results may even materially differ from those expressed in
any forward-looking statements made by or on behalf of Novex. All forward
looking statements are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
BUSINESS
a. General Business Development
Novex Systems International, Inc. ("Novex") is a corporation formed under
the laws of New York and has its principal place of business and executive
offices located at 16 Cherry Street, Clifton, New Jersey 07014, telephone
973-777-2307. Until May 11, 1999, Novex was known as Stratford Acquisition Corp.
and had been a corporation organized under the laws of Minnesota. Effective May
11, 1999, Stratford merged into its wholly-owned subsidiary, Novex Systems
International, Inc., a newly-formed New York corporation, which was the
surviving corporation. The purpose of the merger was to "redomesticate" the
company from the state of Minnesota where it had virtually no business activity,
to the State of New York where the company had its corporate headquarters.
Furthermore, it was management's belief that New York has a more developed body
of laws governing public companies than does Minnesota. For this reason, the new
entity, Novex, was incorporated in the State of New York, and the Minnesota
company, Stratford, was merged into Novex. As a result, the Minnesota company
essentially dissolved into and became a part of the surviving entity, Novex.
Novex also has a wholly-owned operating subsidiary, Novex Systems
International, Ltd. (formerly known as Novacrete Technology (Canada) Inc.),
which is a company registered under the laws of the Province of Ontario, Canada
and is located at 2525 Tedlo Street, Unit B, Mississauga, Ontario L5A 4A8,
telephone 905-566-0716 ("Novex Canada"). The operations of Novex Canada were
discontinued in October, 2001 and the entity is now dormant.
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. No payments were made under the royalty agreement, nor are any future
payments expected to be made as a result of management's decision to abandon the
marketing of Adment due to the large capital costs needed to develop the
technology into a commercially viable product that could be successfully
marketed in a very competitive environment.
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.
On November 17, 1997, Novex made a major change in its business plan. In
1998, the Novex Canada facility was opened and the company began to manufacture
a line of concrete repair products under the Novacrete brand name. Novex's also
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
4
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.
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 expired 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 Canada's Mississauga, Ontario operating facility. In
October, 2001, the manufacturing operations of Novex Canada was discontinued
after it had sold its fiber manufacturing business to Interstar Admixture Co.
and its cement product operation to QEP/Roberts, Ltd. Novex retained the
exclusive right to the Fiberforce brand name which it now sells to The Home
Depot and other retailers.
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.
On August 7, 2000, Novex and The Sherwin-Williams Company entered into an
agreement whereby, Sherwin-Williams agreed to convert the entire principal
amount of its outstanding note having a face value of $1,281,351, plus all
accrued and outstanding interest of $109,037 into 1,390,388 shares of Series A
Redeemable Convertible Preferred Stock ("Preferred Stock"). The Series A
Redeemable Preferred Stock pays an annual dividend of 139,038 shares of
Preferred Stock for two consecutive years and if the Preferred Stock is not
redeemed prior to August 7, 2002, an additional 208,558 shares of Preferred
Stock shall be issued to Sherwin-Williams. If on August 7, 2002, any of the
Preferred Stock that has not been redeemed it shall be converted into common
stock at a rate equal to 85% of the Novex' average closing trading price for
Novex' $.001 par value common stock for twenty consecutive trading days prior to
August 7, 2002. In July, 2002, Sherwin-Williams agreed to extend the conversion
date for one additional year to August 7, 2003.
On August 1, 2000, Novex acquired substantially all of the assets of the
The Sta-Dri Company located in Odenton, Maryland ("Sta-Dri"). Sta-Dri
manufactured a well-known line of waterproofing and building material 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 facility.
The purchase price for the Sta-Dri acquisition was 1,000,000 shares of Novex'
common stock that was valued at $137,000 based on the average trading price
three days before and after the date the acquisition was agreed to and
announced, which was August 1, 2000. In addition
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Novex' President issued a check in the amount of $72,000 to the Sta-Dri
shareholders that is collateralized by 350,000 shares of common stock owned by
the President that was payable in October, 2000. The company's president and the
company have entered into a agreement whereby the company will pay the president
the full amount of the $72,000 paid to the Sta-Dri shareholders on behalf of the
company. As part of the terms to the acquisition, the Company has provided the
Selling Shareholders with certain piggyback registration rights. Therefore, in
the event that the Company shall register any shares of its common stock with
one year from August 1, 2000, the Company will register any of the unregistered
and non-freely tradeable shares of common sock issued to the Sta-Dri
shareholders. Additionally, the company has provided the Sta-Dri shareholders
with the right to purchase any shares of the Novex common stock offered for sale
or securities convertible into its common stock from August 1, 2000 until August
12, 2002. From August 1, 2001 until August 1, 2002, Novex has incurred an
additional $6,000 each month in the aggregate to the Sta-Dri shareholders
because the common stock of the Company has not traded above $1.00 per share for
twenty consecutive trading days prior to August 1, 2002. If and when Novex
common stock shall trade in excess of $1.00 per share for twenty consecutive
trading days the $6,000 monthly obligation shall terminate. Regardless of the
stock price, Novex's obligation to pay $6,000 to the Sta-Dri shareholders shall
cease on August 1, 2002.
Novex believes that distributors would rather stock one manufacturer's
product line to reduce the number of vendors with which they have to do
business, meaning less shipments to their warehouses and less accounting for
only a few large vendors versus multiple smaller ones. Furthermore, with larger
orders, distributors are able to demand better pricing on all products.
Accordingly, Novex believes that by diversifying the array of products that
Novex can offer to distributors of building materials, it will become more
favorable to distributors as well.
While having a smaller product line does not mean that Novex would be
unable to market its products, the company believes that as its product line
grows, it will become more favorable to end-users and distributor, resulting in
increased sales to both of these types of customers. For this reason, Novex is
proactively pursuing opportunities to acquire entire companies or selected
product lines from companies to further expand its line of speciality building
materials. Although there are no agreements or letters of intent to acquire any
companies as of May 31, 2002, Novex has engaged in discussions with several
targets with the goal of closing at least one more transaction in the next
twelve months to expand the array of products that Novex offers and to increase
its market share in the United States and in Canada. To date, there have been no
discussions on price. In fact, the decision as to which companies would be
suitable acquisition candidates does not rest solely on price, but also upon
other factors such as the breadth of its product line, its management, its
distribution channels and how easily its operations could be integrated with
Novex's existing facilities in Clifton, New Jersey. 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 capital sourced from third-parties. 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. 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.
Increasing Novex's product line and hiring additional staff to help
management the business will be very challenging, but not impossible. To expand
the product line apart from acquisitions, Novex would be required to undertake
internal research and development. The cost to develop new products is minimal
given the cost of the materials required for the desired products. Although
Novex currently has the financial capability to develop these new products, the
real "cost" in developing these products is the time needed to ensure that a new
product will perform satisfactorily under field conditions and whether the
6
product will gain market acceptance once it is completed. One advantage Novex
has is that the brand name "Por-Rok" is well known and any new products that are
marketed under the brand name Por-Rok should be easier to market than a
"no-name" product. Nevertheless, until the new product is offered for sale, no
one can actually gauge how successfully the product will sell. For this reason,
management prefers to purchase products that are already accepted and have a
loyal customer base rather than rely upon the development of new products. If
Novex acquires a company having just a few products, it can then offer its own
Por-Rok products to customers that purchase products offered by the newly
acquired company. This is called "cross-marketing" which management believes is
the most suitable approach to growing its product line.
At present, the company has insufficient cash flow to hire additional
employees. If we were to acquire additional products, whether through
acquisition or internal development, our existing manufacturing staff would be
capable of manufacturing the new products until additional shifts were needed to
meet increased demand. Furthermore, since the new products would be sold
primarily to our existing customers, we would continue to use the same personnel
and process for marketing our products.
A benefit of making acquisitions is that quality personnel that have
considerable experience often can be attracted to stay with the acquiring
company. For example, when Novex acquired Por-Rok it retained all the key
employees that now contribute greatly to Novex's daily operations. If Novex were
to improve its operating cash flow predicament and increase sales any new
employees would likely be hourly plant employees and the current employment
market would not make these positions difficult to fill.
In addition, Novex's success depends, to a large extent, on certain
economic factors that are beyond its control. Unfavorable changes in factors
such as general economic conditions, levels of unemployment, interest rates, tax
rates at all levels of government, competition and other factors beyond Novex's
control may have an adverse effect on its ability to sell its products and to
collect its receivables.
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-KSB to Novex's balance sheet and statement of operations appearing on
pages F-3 and F-4, respectively.
c. Subsequent Events
The company has reached an agreement with Dime to settle all litigation,
conditional upon Novex paying Dime the full amount of all outstanding principal
and interest, and court awarded costs of $62,850 by August 31, 2002. The company
has been in negotiations with an investor group that is interested in purchasing
the company's real property for $1,200,000 and loaning the company an additional
$500,000. The first proceeds from the refinancing would be used to pay off the
Dime Notes in full, plus certain accounts payable and leave the remaining cash
for working capital. The transaction is still being finalized and Dime has
granted Novex an extension to complete the transaction.
In August, 2002 the company entered into a strategic marketing alliance
with the Florida-based, U.S. Anchor Corp. which began marketing the company's
Por-rok products through its national sales force.
7
U.S. Anchor markets a full line of concrete accessory products including
different types of anchoring and adhesive products. U.S. Anchor believes that
its highly complimentary product line and its well-trained sales staff will
provide additional exposure to the Por-Rok product line and result in increased
sales. From August 1, 2002 to the date of this filing, U.S. Anchor Corp.
purchased $150,000 of our Por-Rok products.
The marketing alliance is a non-exclusive marketing agreement that still
enables Novex to market any and all of its products to customers and is limited
to the commercial/industrial sector for building materials. The consumer sector,
which includes outlets like, Home Depot, True Value, and ACE will not involve
U.S. Anchor.
d. Novex's Current Business Operation
Novex is engaged in the business of manufacturing and marketing premium
building product materials. The first line of products are pre-packaged concrete
repair and floor resurfacing products that are marketed to contractors directly
and also to distributors of building material products under the tradenames
Por-Rok and Dash Patch. The second line of products are masonry waterproofing
products also marketed to contractors and distributors of building materials and
paint products under the brand name Sta-Dri. The third line of products is a
line of polypropylene concrete reinforcing fibers that are sold under the
Fiberforce trade name. (See Description of Products).
Novex currently has its executive offices at 16 Cherry Street, Clifton,
New Jersey 07014. Novex's manufacturing operations are conducted at its 25,000
square foot facility and two 10,000 square foot warehouses located in Clifton,
New Jersey. The overall facility consists of three buildings located on a 1.6
acre tract of commercially-zoned land.
The Clifton operating facility is a fully-integrated manufacturing plant
with the capacity to manufacture approximately 30 million lbs. of product per
annum which translates into roughly $10-12 million per annum in sales on a
single shift basis. Novex has the capability of running at least two shifts and
possibly a full third shift. Although Novex has the capacity to produce this
quantity of product, it does not currently sell all that the company can
produce. This operating plant currently runs at approximately 20% of its
capacity on a single shift level. At present, the Clifton facility manufacturers
7.5 million lbs. of product or approximately $2.0 million in revenues per annum.
Novex plans to expand its product line 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.
Novex's 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.
8
e. How Novex Manufactures and Distributes Its Products
Novex manufactures all of its products, with the exception of the
Fiberforce products, from its Clifton, New Jersey facility. Novex' products are
distributed from this facility as well as through seven warehouses operated by
an affiliated entity, U.S. Anchor Corp. The Clifton facility is a
fully-integrated blending and packaging facility having the capacity to produce
and package both powder and liquid products. The majority of raw materials used
at this facility are stored in silos affixed to the roof of one of the
buildings. Through an automated raw material batching system that is controlled
by a plant supervisor, the raw materials are fed through the silo system and
into mixing blenders. When the raw materials have been blended into a finished
product, the finished batch is forced from the blender by compressed air into an
automated packaging system that packages the products into various bag sizes.
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 within the factory to other packaging systems that package blended
products into 1lb., 5lb., 7lb. and 50lb. pails and 1 and 5 gallon buckets. Most
of the smaller quantity pails are then repacked into cardboard boxes in
quantities of 4-8 pails per carton for distribution to hardware and retail
outlets. The Fiberforce products are purchased in bulk and bagged in our
facility.
f. How Novex Markets Its Products
Novex currently markets its products through distributors that have large
sales forces, and through the efforts of the Company's president and sales
assistant and through a marketing alliance with U.S. Anchor Corp. that commenced
on August 1, 2002.
g. How Novex's Products Are Graded By Industry Standards
Building material products are classified in accordance with standardized
performance criteria established by the American Society of Testing Materials
(ASTM). The basic performance characteristics that are considered when
classifying the types of building products that Novex sells are:
1. Compressive strength
2. Flexural strength (flexibility)
3. Tensile strength (splitting)
4. Bonding strength (adherence)
5. Shrinkage
6. Resistance to water penetration
7. Durability in freeze/thaw cycles
j. A Description of Novex's Products
As of the filing of this registration statement, the following is a list
of the Por-Rok and Fiberforce products marketed by Novex:
POR-ROK PRODUCTS (A Line of Grouts and Patching Products)
POR-ROK Anchoring Cement - non-shrink expansion cement that requires only water
at the job site to create a pourable, yet durable, anchoring, patching or
grouting compound.
SUPER POR-ROK Exterior Anchoring Cement - non-shrink expansion cement for
exterior applications that requires only water at the jobsite to create
exceptionally high early strengths in the first three days from installation.
POR-ROK Halco Grout - contains expansive agents and flow enhancers to provide
high strengths yet exceptional flowability for ease of application.
POR-ROK Aqua Plug - durable water resistant hydraulic cement which sets in 3-5
minutes. Designed to stop
9
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-based product that when mixed with water bonds well
to concrete, wood or plaster that is used to smooth surfaces before the
placement of carpeting or wood floors. Fills cracks, ruts and score lines,
strong bond adhesion and no shrinkage.
POR-ROK Super Dash Patch - powder-based product that when mixed with water bonds
well to concrete, wood or plaster that is used to smooth surfaces before the
placement of tile, carpeting or wood. Fills cracks, ruts and score lines, strong
bond adhesion and no shrinkage.
POR-ROK Dash Flow - powder-based product that when mixed with water is used to
self-level floors prior to the installation of new flooring products. This
product is used primarily when old floors and being converted into flooring
surfaces and in new construction when newly poured concrete is either not level
or rough and requires a smoother surface.
POR-ROK Lev-L-Astic - used as an underlayment over concrete, wood, quarry tile,
terrazzo, before installing asphalt or vinyl asbestos, tile, linoleum, and other
types of floor surfaces. Eliminates the need for felt paper over wood surfaces,
eliminates high spots on floor, improves bonding base to new tile and linoleum.
STA-DRI PRODUCTS
STA-DRI Waterproofing Paint (Powder form) - this product is a cement-based
product that is mixed with water and can be applied to all types of interior and
exterior masonry surfaces with a brush or roller to provide a waterproof
surface.
STA-DRI Heavy-Duty Waterproofing Paint - this product is an oil-based redi-mixed
product that can be applied with a brush or roller and required no addition of
water. It can be used on interior and exterior masonry surfaces and can be
tinted with different color additives.
STA-DRI Latex Waterproofing Paint - this product is a latex-based redi-mixed
product that can be applied with a brush or roller and required no addition of
water. It can be used on interior and exterior masonry surfaces and can be
tinted with different color additives.
Sta-Dri All Purpose Sealer - Clear, colorless sealer for all masonry and wood
surfaces. Can be used as a primer for most paint systems, and as a curing
membrane for new concrete. The product is designed to protect surfaces against
deterioration and weathering.
LINK Superbonding Agrent - Liquid bonding agent that enhances the bond of most
surface applied products to masonry. Can be used as a primer for hard-to-paint
surfaces and when mixed with STA-DRI Waterproofing Paint (Powder form) it
enhances the adhesion of this product, al it would for most paints and coatings.
STA-DRI Concrete Patch - acrylic resin fortified material that is mixed with
water and used to patch all types of concrete surfaces: sidewalks, patios,
driveways and walls.
10
STA-DRI Waterstop - quick-setting cement product that is mixed with water and
can be used to plug holes in concrete surfaces even if and will water may be
trickling through. The product hardens in 3-5 minutes and can be applied under
water.
STA-DRI Anchoring Cement - fast-setting expanding cement that is mixed with
water and used to anchor posts, railings, mailboxes, bolts, hooks and other
devises that require a strong, permanent attachment to a wall or floor surface.
FIBERFORCE PRODUCTS - Fiberforce products are made from monofilament
polypropylene fibers that are cut into specified lengths. Novex currently
markets this product in 4 oz. bags.
k. Novex's Competitors
The principal methods of competition in our industry are price, service
and the reliability of the product as demonstrated by performance. Each product
offered by Novex currently has been on the market for at least 10 years and in
some cases over 50 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, Sta-Dri 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.
Novex competes with several other companies nationwide that manufacture
and distribute construction products that are substantially similar to those
manufactured and distributed by Novex. Until Novex can effect its business
strategy, which will eliminate some competition, at least in certain markets,
Novex believes the following companies will be its primary competitors.
11
Brand Major Competitors
----- -----------------
Por-Rok Conspec
Anchoring Cement Tamms
Master Builders
Quikcrete
Sonneborn
Sika
W.R. Meadows
ChemMasters
Rockite
UGL
THORO
Oldcastle
Super Por-Rok (Same as above)
Exterior Anchoring
Cement &
Sta-Dri Anchoring Cement
Por-Rok (Same as above)
Aqua Plug &
Sta-Dri Waterstop
Por-Rok (Same as above)
Concrete Patch &
Sta-Dri Concrete Patch
Por-Rok Mapei
Halco Grout Tamms
Por-Rok Mascrete
Lev-L-Astic Tamms
Dependable
Bostik/Findlay
Mapei
Dap
Por-Rok Dependable
Dash Patch & Mascrete
Super Dash Patch Tamms
CGM Underlayment
Taylor Vitrex
Armstrong
QEP/Roberts
Por-Rok Dash Flow Ardex
Dependable
Dayton-Richmond
Sta-Dri Waterproofing Paint (Powder) Thoro
UGL
Quikcrete
Sta-Dri Waterproofing Paint (Latex) Thoro
UGL
Quikcrete
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Sta-Dri Waterproofing Paint (Oil) Thoro
UGL
Quikcrete
Sta-Dri Sealer Thompson
Link All Purpose Sealer Thoro
Quikcrete
Fiberforce Products Columbian Fiber
Some of Novex's competitors may be better capitalized, better financed,
more established and more experienced than Novex and may offer products at lower
prices or with greater concessions than Novex. Should Novex be unable to compete
effectively, Novex's results of operations and financial position would be
materially and adversely affected.
l. Seasonality
Most of Novex's products are used in the maintenance of existing
structures and have interior and exterior applications. Even in winter months a
significant portion of construction and building maintenance continues,
especially on interior projects where the company's products are used most.
Although the high points of the construction season tends to be the busier
period for sales, Novex does experience larges sales in the winter months.
m. Customer Dependence
Novex is not dependent upon any one customer nor does it anticipate
becoming dependent upon one customer in the future. Its marketing strategy is to
diversify its sales through major distributors that are located in various
geographical areas and to a large number of construction professionals, such as
engineers, architects, contractors, construction managers and end-users all of
whom are involved in separate construction projects. The Por-Rok, Sta-Dri and
Fiberforce products are sold to various distributors and retailers none of which
account for more than 5% of the respective line of product sales.
n. Raw Materials
An important aspect of Novex's business is having an adequate supply of
raw materials. The raw materials used in manufacturing the Por-Rok products are
readily available in the United States and Canada. Novex currently purchases
most of its raw materials from approximately twelve 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.
o. Intellectual Property Rights
Novex received a certificate of registration for the use of the trademark
"Novacrete" from the Canadian Intellectual Property Office on June 15, 1997. The
Certificate remains in effect until June 5,
13
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 acquisitions of Por-Rok in August 1999 and Sta-Dri in August 2000,
Novex acquired the registered trade names for all Por-Rok and Sta-Dri 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 and any patent filing would make this information publicly
available. Novex has developed internal controls to protect the confidentiality
of its technology and does not believe that the lack of legal patent protection
will impair its ability to effectively compete with other manufacturers of like
products or cause Novex to incur unnecessary risk of loss of the technology.
Even if Novex had patent protection over its technology, it still assumes the
risk that a competitor may misappropriate the technology and then its only
recourse would be to commence costly and time consuming litigation. The
existence or absence of a patent poses no commercial disadvantage to marketing
Novex's products.
On an internal basis, any proprietary technology is maintained by the
manager of research and development and Novex's senior management on a
"need-to-know" basis in order to perform their jobs. By keeping all laboratory
developments in close confidence Novex seeks to limit misappropriation of
company secrets by employees or third parties. Although Novex had initially
thought to require its Por-Rok employees to sign confidentiality agreements
relating to the Por-Rok products, upon reconsideration, the company has
determined it will not require them to sign confidentiality agreements since
these products have been manufactured for up to 40 years under previous
management without confidentiality agreements in place.
Novex has learned that other companies have been issued a trademark for
the name "Novex". We do not believe that our company will be injured by these
uses of the name Novex nor do we consider our use of the name Novex to be an
infringement upon any of these trademarks since these trademarks relate to
companies, goods and services which are entirely distinguishable and unrelated
to the construction products industry. Even if Novex were required to change its
corporate name, this would not diminish our sales since our products are
marketed under the brand names "Por-Rok" "Sta-Dri" and "Fiberforce". These
product names are protected by registered trademarks in the United States,
Canada and the United Kingdom.
p. Novex's Working Capital Requirements To Operate Its Business
Because of its early stage of development and that Novex was
undercapitalized from its inception its working capital was derived from a
number of sources. For the fiscal year ended May 31, 2000, Novex experienced
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 had with Dime Commercial Corp.
With the termination of the company's banking relationship with Dime, it
was forced to fund its operation from accounts receivable and from additional
cash advances from the same investor group that the company plans to sell its
real property to and leaseback for a five year term and an option for an
additional five years. Also, in July and August 2001 the company raised $179,651
by selling units of a security that consisted of one share of common stock at
$.15 per share and a warrant to purchase one share of common stock for every
three shares of common stock purchased. The warrants have an exercise price of
$.20 per share and an expiration period of three years.
14
On December 21, 2000, Novex 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, Novex issued
600,000 shares of its common stock to the investor. The Bridge Note is secured
by the same assets as, and is subordinated to, the Dime Note (discussed below).
During the period February 21, 2001, through May 31, 2001, the same private
investor made additional bridge loans of $511,000 for which he received 511,000
shares of common stock. The terms of the additional bridge loans are identical
to those of the original Bridge Note. He also made an equity investment of
$50,000 on January 21, 2001 for which he received 625,000 shares of Novex'
common stock.
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 the
company's former Mississauga, Ontario facility. With the closing of the
company's Canada operation the loan to Montcap was paid in full.
Although Novex's general credit policy is to invoice customers on a thirty
day payment basis, to encourage customers to take larger volume orders Novex
may, in limited circumstances, allow for payment of an invoice in sixty days. In
addition, although invoices are stated as being due in thirty days, it is fairly
common practice in the construction products industry for contractor customers
to pay over a 45-day period. This delay results from the contractor having to
submit invoices for work completed which includes the cost of materials used on
the project. Although Novex will be very aggressive in allowing extending
payment terms to customers where it will result in additional sales of Novex's
products, extended payment terms will generally be discouraged.
q. Backlog Orders
As of May 31, 2002, the company had approximately $80,000 in 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.
15
s. Financial Information About Foreign and Domestic Operations and Export
Sales.
Novex exports a small percentage of its annual sales to customers located
outside of the United States. Whenever goods are sold outside of the United
States the invoice is either paid in full prior to the shipment, or the goods
are released upon confirmation of an irrevocable letter of credit. (See Note
2(n) Segment Information of Financial Statements.)
t. Novex's Research and Development Activities
In the fiscal period ending May 31, 2002, Novex spent approximately
$10,000 in research and development. With the discontinuation of the Adment
product and the development of a new product line under the Novacrete brand
name, Novex's expenditures for research and development were substantially
curtailed in the fiscal year ending May 31, 2001 to nominal levels. In fiscal
year 2000, Novex spent aproximately $15,000 on fees payable to outside testing
laboratories. In fiscal year 1999, Novex spent approximately $30,000 on fees
payable to outside independent testing laboratories that were engaged to conduct
various testing procedures to improve the Novacrete products. Novex further
incurred approximately $60,000 in expenses for personnel and laboratory
equipment. In fiscal year 1998 Novex spent approximately $40,000 on fees payable
to outside testing laboratories to advance testing of its Novacrete products.
Other than for a brief period in 1997 in which Novex employed the services of a
cement technology consultant for approximately three months, Novex did not have
any technical personnel on staff from January, 1997 through February, 1998 to
conduct research and development on new products. In 1996, Novex spent less than
$20,000 on fees payable to outside testing laboratories to advance testing of
its Novacrete products and an old formulation for a Novacrete Fast-Set product
that Novex has since abandoned.
u. Environmental Compliance
Novex does not manufacture products or use raw materials in its products
that are deemed to be subject to rules or regulations relating to the discharge
of certain materials into the environment. Although Novex has installed a
compressed-air dust control system in its facilities to maintain a higher
quality of air in its operating plant this system is not mandatory.
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. During June, 2001 a physical inspection of our plant was made by a
representative of OSHA, which resulted in fines of approximately $3,500 to
address some violations of health and safety regulations. None of the violations
were deemed by management to be material and some corrective measures were
already being planned prior to the inspection by OSHA. As part of the pending
sale/leaseback transaction another on-site inspection was conducted at the
Clifton, New Jersey plant which resulted in a clean bill of health except for
the removal of small amounts of asbestos in the floor tiles in a building used
only for storage. The cost of removing the asbestos was $3,500.
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
16
Novex's products are environmentally safe, unless new regulations are adopted by
the governments of Canada or the United States, we expect to expend a nominal
percentage of its operating budget on environmental compliance for the next
fiscal year and for the foreseeable future.
v. Novex's Future Operations
Although an integral component of Novex's business plan and future growth
will be the acquisition of targeted companies and product lines in the building
materials industry, Novex's operating strategy will also include the following
initiatives:
Developing Marketing Alliances with Larger Companies
Several companies in our industry have expressed interest in varying
degrees of acquiring all or certain brand names that we own. Because
we believe that having a wider range of products to sell to
distributors is a preferred strategy, selling off fragments of the
company would be contrary to our plans. However, the cost to develop
a sales team and distribution system are very high and one means to
achieve sales without incurring the additional cost is to enter into
marketing agreements with larger companies that already have
established sales teams and distribution systems. This approach will
give us immediate access to trained sales teams that can sell our
products at much lower sales costs. For instance, a U.S. Anchor
sales person will incur costs to meet with a customer. At this
meeting he would not incur any additional costs to sell our Por-Rok
products - essentially our products would be one additional page in
the product catalog. If, on the other hand, we had to have our own
company-hired sales people they would have to incur the same costs
to attend the same meeting and then be limited to offering a smaller
line of products. Marketing alliances cut our selling costs and will
give us immediate access to a larger sales force.
In August, 2002 we entered into a marketing alliance for our Por-Rok
products and we are in negotiations with another company to
represent our Sta-Dri products.
New Retail Channels
As part of Novex's efforts to expand sales of products in all
possible distribution channels, Novex will work aggressively to
expand Por-Rok's existing retail base by offering promotional
discounts to other regional hardware outlets and purchasing
cooperatives along with "big-box" stores like The Home Depot and
Lowe's.
Advertising
Novex intends to present to the construction industry and the
consumer channel for building and home improvement projects an
ongoing marketing campaign. To achieve this, Novex will establish
and maintain an advertising and marketing budget. The budget will be
used primarily to participate in trade shows and trade journal
advertising. Where possible, Novex will participate in cooperative
advertising. Novex is also creating promotional materials and has
formulated marketing plans to increase sales by Novex and other
representatives throughout the U.S. and Canada. In the past fiscal
year, Novex has advertised its products in publications serving the
commercial and consumer sectors.
17
Future Acquisitions
Novex is currently considering the acquisition of companies that
would expand its product line into specialized flooring and concrete
repair products, cures and seals, moisture protection products,
specialized industrial grouts, bonding agents, and other accessory
products.
w. Number of Employees
As of May 31, 2002, Novex employed ten (10) full-time employees. All of
the 10 employees are located in Novex's principal executive offices and
manufacturing facility in Clifton, New Jersey. Of the 10 employees, six are in
plant operations and four persons occupy sales and administrative positions.
With the Por-Rok acquisition, Novex now has a collective bargaining agreement
with the plant personnel in Clifton that terminated on June 1, 2002. Novex
currently operates under the same wages rates and policies set forth in its
former collective bargaining agreement. Novex has not experienced any work
stoppages as a result of labor disputes and considers its employee relations to
be good.
Item 2. Properties.
In November, 1999 Novex's principal executive offices were moved from 67
Wall Street, Suite 2001, New York, New York 10005, 212-825-9292 to 16 Cherry
Street, Clifton, New Jersey 07014 973-777-2307, which is the location of the
offices and manufacturing operation that Novex acquired from The
Sherwin-Williams Company in August 1999. Upon closing that transaction, Novex
became the owner of all the real property, buildings and personal property
located at 16 Cherry Street, Clifton, New Jersey. The real property consists of
a 1.58 acre tract of commercially-zoned land with three separate buildings. The
main building is 15,000 square feet, of which 3,000 square feet is dedicated to
office space and a reception area and the remaining 12,000 square feet is
allocated to the manufacturing of Por-Rok products and the warehousing of
certain raw materials. The other two buildings at the Por-Rok facility are
approximately 5,000 square feet each and are used for warehousing supplies, raw
materials and finished goods. In addition, there is another 10,000 square feet
of undeveloped land that could be used to expand the manufacturing and
warehousing capacity of this facility. This operating plant currently runs at
approximately 25% of its capacity on a two shift level.
Until it was closed in October, 2000, Novex's subsidiary, Novex Canada
operated 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 was 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). This
facility was closed in October 2000 upon the sale of the Fiberforce business.
Management believes that the facilities used by it in the operation of its
business are adequately covered by insurance and are suitable and adequate for
their respective purposes.
18
Item 3. Legal Proceedings
On March 5, 2002, Dime Commercial Corp. commenced two actions against the
company to seek repayment on two notes owed to Dime. On July 10, 2002, we
entered into a settlement agreement with Dime to repay all the notes in full,
plus interest and court awarded attorney's fees of $62,850 by August 31, 2002.
Due to delays in the closing of the pending real property sale and leaseback
transaction and the equipment financing, the proceeds of which will be used to
pay-off the notes owing to Dime the settlement agreement has not been completed.
Dime has provided continuous extensions to enable us to complete the closing of
the refinancing and pay-off its obligations Dime Commercial Corp. v. Novex
Systems International, Inc., Index No. PAS-L-1577-02, Superior Court of New
Jersey (Law Division) and Dime Commercial Corp. v. Novex Systems International,
Inc., Index No. F-5859-02, Superior Court of New Jersey (Chancery Division).
In April, 2002, the former owners of the Sta-Dri company sued Novex to
secure payment on outstanding monthly royalties of $6,000 and for inventory that
was purchased when we acquire the Sta-Dri assets in August, 2000. Novex had
paid most of the royalty payments and had to cease making payments when Dime
stopped funding our business to preserve cash flow to operate our business until
we were able to refinance the Dime obligations. We believe the parties will
settle this matter to get it behind us since the the amount in controversy is
less than $100,000. The Sta-Dri Company v. Novex Systems International, Inc.,
Index No. C-2002-79467.
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 and, in December, 1999, it asserted multiple claims against two
third-party defendants, Herbert Adams, a former consultant to the company, and
Colin Raynor, a former director and former outside counsel to the company Novex
has alleged that the plaintiff and the two third-party defendants (none of whom
are presently affiliated with Novex) had caused the company to issue them stock
for work that was never done and at a time when current management believes that
fraudulent activities were being undertaken which caused the company's stock
price to be overinflated. All three individuals are claiming that they received
stock as compensation for services rendered. When Novex investigated the matter
it found virtually no records of any tangible service. Their actions and
omissions caused the U.S. Securities and Exchange Commission in or about 1997 to
commence an investigation of the company, then known as Stratford Acquisition
Corp. It is Novex's understanding that the investigation is still pending and
the Company has no information as to what action, if any, the SEC may take
pursuant to the investigation. Mel Greenspoon vs. Stratford Acquisition
Corporation, et. al., Ontario Court (General Division), Index No. 97-CV-126814.
The lawsuit was discontinued for failure of the plaintiff to procecute the
action.
On January 25, 2001, Novex entered into a settlement agreement for
$46,256.70 with Estes Express Lines to settle a dispute relating to shipping
charges incurred in early 2000. As of the date of this filing, approximately
$17,346.30 has been paid. Estes Express Lines v. Novex Systems International,
Inc., Commonwealth of Virginia, (Richmond Circuit Court), Index No.
760CL00L01946-00.
19
Item 4. Submission of Matters to a Vote of Security Holders
During the fiscal year ended May 31, 2002, there were no proposals
submitted to a vote of the shareholders. The company intends to call a
shareholders meeting at the end of the calendar year.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Novex's common stock, $.001 par value, is traded on the Over-the-Counter
("OTC") Bulletin Board operated by the National Association of Securities
Dealers under the ticker symbol "HARD". The table below presents the high and
low closing bid prices for each of the first four quarters of the fiscal year
ending May 31, 2002 and May 31, 2001, respectively. The quotations reflect
interdealer prices without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions. Novex's common stock became actively
traded in July, 1995. On May 31, 2002, the closing bid price was $.06. Novex has
paid no cash dividends in the fiscal year ended May 31, 2002 and does not expect
to change its dividend policy in the foreseeable future.
Quarterly Common Stock Bid Price Ranges
Quarter High Low Last Day of Quarter
------- ---- ---- -------------------
1st .17 .11 August 31, 2001
2nd .14 .05 November 30, 2001
3rd .11 .07 February 28, 2002
4th .10 .05 May 31, 2002
Quarter High Low Last Day of Quarter
------- ---- ---- -------------------
1st $.32 $.31 August 31, 2000
2nd $.19 $.17 November 30, 2000
3rd $.25 $.15 February 28, 2001
4th $.28 $.14 May 31, 2001
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
20
comprehensive Penny Stock Rules it may be more difficult for broker-dealers to
sell the common stock.
Accordingly, no assurance can be given that an active market will always
be available for the Common stock, or as to the liquidity of the trading market
for the Common stock. If a trading market is not maintained, holders of the
Common stock may experience difficulty in reselling them or may be unable to
resell them at all. In addition, there is no assurance that the price of the
Common stock in the market will be equal to or greater than the offering price
when a particular offer of securities is made by or on behalf of a Selling
Securityholder, whether or not Novex employs market makers to make a market in
Novex's stock.
During the 2001 fiscal year the Company issued additional shares of its
common stock, preferred stock and common stock options and warrant to finance
various aspects of the Company's business. As part of its agreement with its
preferred shareholders, the Company issued an additional 253,745 new shares of
preferred stock to pay outstanding stock dividends. The Company also issued
additional shares of common stock for the following reasons: (i) 285,786 shares
were issued to the Company's President to pay- off outstanding loans made to the
Company, (ii) 135,000 shares were issued to an investor relations group in
satisfaction of $24,753 of services rendered, (iii) 261,000 shares were issued
in exchange for the payment of $27,733 of loans from a shareholder, (iv) 190,000
shares were issued to a lender for making a $190,000 loan to the Company, (v)
1,349,413 shares were issued to raise $153,000 of working capital. All of the
securities issued were unregistered and therefore restricted from resale, other
than pursuant to Rule 144 of the federal securities regulations.
Item 6. Selected Financial Data
The following selected historical statement of operations for the three
years ended May 31, 2002, 2001 and 2000 and balance sheet as of May 31, 2002,
2001 and 2000 have been derived from the financial statements of Novex that are
included elsewhere in this Form 10-KSB. The statement of operations for the year
ending May 31, 2002 and the balance sheet at May 31, 2002 have been audited by
Radin, Glass & Co., LLP, whose reports with respect to the financial statements
are also included elsewhere in this Form 10-KSB. The statement of operations for
the years ending May 31, 2001 and 2000 and the balance sheets at May 31, 2001
and 2000 are unaudited. This information should be read in conjunction with the
financial statements and notes to the financial statements appearing elsewhere
in this Form 10-KSB and "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Years Ended May 31
-----------------------------------------
2000 2001 2002
----------- ----------- -----------
STATEMENT OF OPERATIONS DATA:
Net Sales ......................... $ 1,592,562 $ 2,007,705 $ 1,866,914
Gross Profit ...................... 649,341 616,864 672,313
Net Loss .......................... (1,217,656) (1,496,819) (1,103,360)
Net Loss Per Common Share ......... $ (.06) $ (.06) $ (.04)
BALANCE SHEET DATA:
Working Capital Deficit ........... $(2,972,578) ($2,430,940) ($2,954,752)
Goodwill, net ..................... 826,465 678,236 628,784
Total Assets ...................... 3,188,424 2,533,121 2,570,791
Long Term Debt .................... -0- -0- -0-
Stockholders' Deficiency .......... (735,327) (550,808) (1,094,569)
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Year ended May 31, 2002 (Fiscal 2002) as compared to May 31, 2001 (Fiscal 2001)
While net sales for the year ending May 31, 2002 was $1,866,914 net sales
for the same period ended May 31, 2001, were $2,007 705. The decrease in sales
was attributable principally to the Company's inability to ship orders on a more
timely basis due to cash constraints and the overall slowness of the economy. On
May 31, 2002, Novex had approximately $80,000 in back orders that needed to be
shipped.
Novex achieved a gross margin of 36% for the year ending May 31, 2002. The
increase in gross margin during this period was attributable primarily to the
discontinuation of certain lower margin products and some products that were
associated with Novex' Canadian operation. Any further change in the gross
margin will result directly from changes in product sales mix and sales volume.
For the year ending May 31, 2002, the Company generated a loss from
operations of $661,088. Included in this loss are non-recurring expenses of
$20,275 that were paid to an investor relations group, $72,000 of royalty
payments to the former Sta-Dri shareholders and $24,057 in sales commissions to
former manufacturer's representatives that were terminated when the company
entered into a marketing alliance with U.S. Anchor Corp. Also, in this period,
the Company incurred non-cash charges for depreciation and amortization of
$137,588. The aggregate of the non-recurring expenses and the non-cash expenses
was $253,920.
In addition, on account of Novex having been in a default position on its
term loan with Dime Commercial Corp. its rate of interest during the entire
fiscal year through may 31, 2002 which was approximately 2% over the referenced
rate set forth in the loan agreements. Debt-related finance charges for the
fiscal period 2002 were $347,266 and the company had to issue 137,879 shares of
the same class of preferred stock that is outstanding to the existing holders of
the Company's preferred stock. The total of these finance-related charges equals
$476,362.
As of May 31, 2002, the Company had $710,608 in current assets, which
consisted principally of accounts receivable of $386,218 and inventory of
$156,284. The Company's net property, plant and equipment totaled $1,231,399 and
goodwill of $628,784, which is attributable to the two acquisitions that the
Company completed in 1999 and 2000.
Year ended May 31, 2001 (Fiscal 2001) as compared to May 31, 2000 (Fiscal 2000)
While net sales for the year ending May 31, 2001 was $2,007,705 net sales
for the same period ended May 31, 2000, were $1,592,562. The increase in sales
was attributable principally to the Company's acquisition of the Sta-Dri Company
on August 1, 2000.
Novex only achieved a gross margin of 31% for the year ending May 31,
2001. The decrease in
22
gross margin during this period was attributable to two factors. The first
factor being that for the year ended May 31 2000, Novex's revenues were
primarily derived from the sale of its Fiberforce products which had
considerably higher gross margins whereas for the year ended May 31, 2001, Novex
generated a much higher volume of sales of its Por-Rok and Sta-Dri product lines
which have a lower gross margin than the Fiberforce products. Secondly, the
Company was able to source some raw materials and packaging supplies at lower
costs, which have increased its gross margin in the fiscal year ending May 31,
2002. Management does not expect any further decline in the gross margin. Rather
it expects the gross margin to reach a higher level with sales volume increases
which will reduce the percentage of fixed factory overhead as a percentage of
total net sales. Any further change in the gross margin will result directly
from changes in product sales mix and sales volume.
For the year ending May 31, 2001, the Company generated a loss from
operations of $1,496,819. The Company also incurred approximately $270,000 in
outgoing freight expenses which the Company will pass on to its customers
through a new pricing and shipping policy that became effective on June 1, 2000.
Although the new pricing and shipping policy was mailed to all Por-Rok customers
in March, its implementation was delayed until June, 2000 to accommodate major
customers who wanted 90 days to implement the new policy within their own
organizations. Also, in this period, the Company incurred non- cash charges for
depreciation and amortization (including amortization of debt discount) of
$222,595, and a stock dividend paid to the holders of its preferred stock in the
amount of $115,866. In addition, as part of its acquisition of the Por-Rok
business, Novex was required to register the stock issued to Sherwin-Williams
which cost approximately $100,000 in auditing, legal internal accounting charges
to complete the work.
For the year ended May 31, 2001, the Company's overall operating results
do not reflect a normalized operation on a consolidated basis due to having
owned the Sta-Dri operation for only ten of the twelve months in the 2001 fiscal
period.
As of May 31, 2001, the Company had $537,123 in current assets, which
consisted principally of accounts receivable of $302,649 and inventory of
$204,254. The Company's net property, plant and equipment totaled $1,317,762 and
goodwill of $678,236 which is attributable to the two acquisitions that the
Company completed in 1999 and 2000. All of the Company's asset categories
increased substantially when compared to its year ending balance sheet dated May
31, 2000 due to the integration of the assets it acquired in August 1999 as part
of the Por-Rok transaction and the Sta-Dri acquisition in August, 2000.
Liquidity and Financial Resources
As of May 31, 2002, the Company had $3,665,360 in current liabilities,
which includes a bridge loan of $1,011,000 from an investment group that is also
a shareholder and is represented on the Company's board of directors, a $704,000
term loan and a revolving line of credit of $572,310 with Dime Commercial Corp.
that matured on August 13, 2002, but was called prematurely by the lender and
has resulted in two separate lawsuits. (See Legal Proceedings). It had accounts
payable of $381,360, accrued expenses of $306,206 which includes accrued
interest of $151,814.
The loans from shareholders of $152,671, consists of the net balance on a
loan made by a shareholder in the amount of $190,000 to assist Novex with its
operating cash flow requirements.
On December 21, 2000, Novex 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
23
bridge financing, Novex issued 600,000 shares of its common stock to the
investor. The Bridge Note is secured by the same assets as, and is subordinated
to, the Dime Note (discussed below). During the period February 21, 2001,
through May 31, 2001, the same private investor made additional bridge loans of
$511,000 for which he received 511,000 shares of common stock. The terms of the
additional bridge loans are identical to those of the original Bridge Note. He
also made an equity investment of $50,000 on January 21, 2001 for which he
received 625,000 shares of Novex' common stock.
The current portion of the long-term debt also includes 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.
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 Novex's payment of
approximately $444,000 on the Dime's credit facility. The funds to pay down the
loans were made available through the sale of Novex' Canadian facility as well
as through the secured bridge loan of $600,000 which the company received from a
private investor on December 21, 2000.
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 was secured by equipment at the Mississauga location. This loan was paid
off upon the sale of the assets of the Canadian subsidiary. Mr. Friedenberg also
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. This loan has also been repaid.
For the year ended May 31, 2001, the company was unable to increase sales
volume while selling, general and administrative expenses have been slightly
lower when compared to year ended May 31, 2000. The increase in sales has
resulted in higher levels of accounts receivable and inventory as well as
accounts payable and accrued expenses. In addition, the acquisition of Por-Rok
and the Bridge Loans have increased the amount of debt, which has resulted in
higher amounts of interest payments that Novex needs to fund from operations.
Thus, while future operating cash inflows should continue to increase, unless
Novex's sales volume increases, the company will not have sufficient cash flow
to cover its operating,
24
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 is undertaking a number of
initiatives to increase sales and reduce expenses. For example, Novex has issued
a new price list and freight policy that became effective June 1, 2000. The new
price list will improve Novex's margins on sales of its Por-Rok products and the
new freight policy will pass all outgoing freight charges to the customers. In
addition, management is aggressively pursuing sales of the Por-Rok products to
large home center stores and major cooperative retailers of building materials.
On August 1, 2002 the company entered into a marketing alliance with a larger
company that sells similar products into one of the company's two distribution
channels. This marketing alliance is intended to provide the company with
additional sales representation and much wider distribution capabilities.
If these efforts do not generate additional sales to enable Novex to meet
all of its operating and financing expense requirements, it would then seek
additional financing from third-party sources. Although the Novex's assets are
fully secured by loans outstanding to Dime Commercial Corp. and the Bridge Note
holders, Novex would seek to raise additional capital through the sales of
assets, unsecured debt securities, unsecured debt combined with equity
securities or preferred and common stock. It is likely, however, that any
unsecured debt financing would carry a higher interest rate than secured
financing or that any equity financing might be on terms which are not favorable
to Novex and which are dilutive to existing shareholders.
Inflation and Changing Prices
Novex does not foresee any risks associated with inflation or substantial
price increase in the near future. In addition, the raw materials that are used
by Novex in the manufacturing of its materials are available locally through
many sources and are for the most part commodity. 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.
25
Item 8. Financial Statements and Supplementary Data
Page
Index to Financial Statements F-1
Independent Auditors' Report F-2
Financial Statements:
Balance Sheet as of May 31, 2002 F-3
Statement of Operations for the year ended
May 31, 2002 F-4
Statement of Operations for the year ended
May 31, 2001 (Unaudited) F-4A
Statement of Changes in Shareholders'
Deficiency for the year ended May 31, 2002 F-5
Statement of Changes in Shareholders'
Deficiency for the year ended May 31, 2001 (Unaudited) F-5A
Statement of Cash Flows for the year ended May 31,
2002 F-6
Statement of Cash Flows for the year ended
May 31, 2001 (Unaudited) F-6A
Notes to Financial Statements F-7-19
NOTE - The financial statements relating to the periods ending May 31, 2000 and
May 31, 2001 are marked "unaudited" and are now deemed to be unaudited,
notwithstanding that the financial statements were in fact audited when filed in
the applicable periods. The change of status to unaudited is attributable to the
Company's change in independent auditors and its failure to secure the consent
of its former auditors to refile the financial statements for the periods ending
May 31, 2000 and May 31, 2001 with the Company's Form 10-KSB for the period
ending May 31, 2002. The Company's financial statements for the period ending
May 31, 2002 are in fact audited. The Company plans to refile the financial
statements for the periods ending May 31, 2000 and May 31, 2001, as audited,
upon securing the consent of its former auditors, or after having the financial
statements re-audited by its current auditors, whichever is the most expeditious
process. The failure to secure the necessary consent stems from a fee dispute
with the Company's former auditors.
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 Financial Statements or Notes thereto.
26
Index to Financial Statements
Page No.
-------
Independent Auditors' Report F-2
Financial Statements:
Balance Sheet as of May 31, 2002 F-3
Statement of Operations for the year ended
May 31, 2002 F-4
Statement of Operations for the year ended
May 31, 2001 (Unaudited) F-4A
Statement of Changes in Shareholders'
Deficiency for the year ended May 31, 2002 F-5
Statement of Changes in Shareholders'
Deficiency for the year ended May 31, 2001 (Unaudited) F-5A
Statement of Cash Flows for the year ended May 31,
2002 F-6
Statement of Cash Flows for the year ended
May 31, 2001 (Unaudited) F-6A
Notes to Financial Statements F-7-19
NOTE: The financial statements relating to the periods ending May 31, 2000 and
May 31, 2001 are marked "unaudited" and are now deemed to be unaudited,
notwithstanding that the financial statements were in fact audited when filed in
the applicable periods. The change of status to unaudited is attributable to the
Company's change in independent auditors and its failure to secure the consent
of its former auditors to refile the financial statements for the periods ending
May 31, 2000 and May 31, 2001 with the Company's Form 10-KSB for the period
ending May 31, 2002. The Company's financial statements for the period ending
May 31, 2002 are in fact audited. The Company plans to refile the financial
statements for the periods ending May 31, 2000 and May 31, 2001, as audited,
upon securing the consent of its former auditors, or after having the financial
statements re-audited by its current auditors, whichever is the most expeditious
process. The failure to secure the neccessary consent stems from a fee dispute
with the Company's former auditors.
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 Financial Statements or Notes thereto.
F-1
INDEPENDENT AUDITOR'S REPORT
Shareholders and Directors
Novex Systems International, Inc.
We have audited the accompanying balance sheet of Novex Systems
International, Inc. as of May 31, 2002, and the related statements of
operations, shareholders' deficiency, and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The financial statements of Novex Sytems International, Inc. as of
May 31, 2001 were audited by other auditors whose report dated August 10, 2001,
expressed an unqualified opinion on those statements with a going concern
uncertainties explanatory paragraph.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of May 31,
2002, and the results of its operations and cash flows for the year then ended
in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered from
recurring losses from operations, including a net loss of $965,481 for the year
ended May 31, 2002, and has a negative working capital and shareholder
deficiency as of May 31, 2002. These factors raise substantial doubt the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Radin, Glass & Co., LLP
Certified Public Accountants
New York, New York
October 10, 2002
F-2
NOVEX SYSTEMS INTERNATIONAL, INC.
BALANCE SHEET
May 31, 2002
ASSETS
CURRENT ASSETS:
Cash $ 24,629
Accounts receivable, net of allowance for doubtful
accounts of $77,338 386,218
Inventories 156,284
Prepaid expenses and other current assets 143,477
Total Current Assets 710,608
PROPERTY, PLANT AND EQUIPMENT - at cost, net 1,231,399
GOODWILL - at cost, net 628,784
-----------
$ 2,570,791
===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 2,018,832
Bank line of credit 572,310
Accounts payable 381,360
Loans payable - shareholder 152,671
Accrued expenses and other current liabilities 306,206
Accrued payroll taxes 233,981
-----------
Total Current Liabilities 3,665,360
-----------
COMMITMENTS AND CONTINGENCY
SHAREHOLDERS' DEFICIENCY:
Preferred stock - $0.001 par value, 10,000,000 shares authorized,
1,644,133 shares issued and outstanding (liquidation value $1,644,133) 1,644,133
Common stock - $0.001 par value, 50,000,000 shares authorized
26,870,187 shares issued and outstanding 26,870
Additional paid-in capital 6,399,653
Accumulated deficit (9,165,225)
-----------
Total shareholders' deficiency (1,094,569)
-----------
$ 2,570,791
===========
See notes to financial statements.
F-3
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
Year Ended May 31, 2002
-----------------------
NET SALES 1,866,914
COST OF GOODS SOLD 1,194,601
------------
GROSS PROFIT 672,313
SELLING, GENERAL AND ADMINISTRATIVE 1,333,401
------------
LOSS FROM OPERATIONS (661,088)
------------
OTHER INCOME( EXPENSES):
Interest expense (312,529)
Amortization or debt discount (38,016)
(Loss) gain on change in valuation of put warrant 3,279
------------
OTHER EXPENSES, net (347,266)
------------
LOSS FROM CONTINUING OPERATIONS (1,008,354)
------------
DISCONTINUED OPERATIONS
Loss from operations of Novex Canada --
Loss on disposal of Novex Canada including operating
losses during the phase out period of $102,190 --
------------
LOSS FROM DISCONTINUED OPERATIONS 0
LOSS BEFORE EXTRAORDINARY ITEM (1,008,354)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt 42,873
------------
NET LOSS (965,481)
Less: Preferred stock dividend 137,879
------------
NET LOSS TO COMMON SHAREHOLDERS $ (1,103,360)
============
LOSS PER COMMON SHARE, basic and diluted:
FROM CONTINUING OPERATIONS (0.04)
FROM DISCONTINUED OPERATIONS --
------------
FROM EXTRAORDINARY ITEM --
------------
TOTAL LOSS PER COMMON SHARE, basic and diluted $ (0.04)
============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 26,085,795
============
See notes to financial statements.
F-4
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Year Ended May 31, 2001
-----------------------
NET SALES 2,007,705
COST OF GOODS SOLD 1,390,841
------------
GROSS PROFIT 616,864
SELLING, GENERAL AND ADMINISTRATIVE 1,394,701
------------
LOSS FROM OPERATIONS (777,837)
------------
OTHER INCOME( EXPENSES):
Interest expense (279,735)
Amortization or debt discount (90,613)
(Loss) gain on change in valuation of put warrant (19,649)
------------
OTHER EXPENSES, net (389,997)
------------
LOSS FROM CONTINUING OPERATIONS (1,167,834)
------------
DISCONTINUED OPERATIONS
Loss from operations of Novex Canada (48,124)
Loss on disposal of Novex Canada including operating
losses during the phase out period of $102,190 (229,056)
------------
LOSS FROM DISCONTINUED OPERATIONS (277,180)
LOSS BEFORE EXTRAORDINARY ITEM (1,445,014)
EXTRAORDINARY ITEM:
Gain on extinguishment of debt 64,061
------------
NET LOSS (1,380,953)
Less: Preferred stock dividend 115,866
------------
NET LOSS TO COMMON SHAREHOLDERS $ (1,496,819)
============
LOSS PER COMMON SHARE, basic and diluted:
FROM CONTINUING OPERATIONS (0.05)
FROM DISCONTINUED OPERATIONS (0.01)
FROM EXTRAORDINARY ITEM --
------------
TOTAL LOSS PER COMMON SHARE, basic and diluted $ (0.06)
============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 23,569,139
============
See notes to financial statements.
F-4A
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
BALANCE, May 31, 2001 1,390,388 $1,390,388 24,648,988 $24,649 $6,096,020 $ (8,061,865) $ (550,808)
Conversion of debt to common stock -- -- 285,786 286 42,582 -- 42,868
Issuance of common stock
and warrants for services -- -- 135,000 135 24,618 -- 24,753
Issuance of common stock
with debt -- -- 261,000 261 27,472 -- 27,733
Issuance of common stock
with loan from shareholder -- -- 190,000 190 13,310 -- 13,500
Proceeds from sale of
common stock -- -- 1,349,413 1,349 179,651 -- 181,000
Value of options issued with debt -- -- -- -- 16,000 -- 16,000
Preferred stock dividend 253,745 253,745 (137,879) 115,866
Net loss -- -- -- -- -- (965,481) (965,481)
--------- ---------- ---------- ------- ---------- ------------ ------------
BALANCE, May 31, 2002 1,644,133 $1,644,133 26,870,187 $26,870 $6,399,653 $ (9,165,225) $ (1,094,569)
========= ========== ========== ======= ========== ============ ============
See notes to financial statements.
F-5
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
(Unaudited)
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
BALANCE, May 31, 2000 -- $ -- 22,143,988 $22,144 $5,807,575 $ (6,565,046) $ (735,327)
Issuance of common stock
in connection with acquisition -- -- 1,000,000 1,000 136,000 -- 137,000
Issuance of common stock
for services -- -- 130,000 130 7,870 -- 8,000
Issuance of common stock for cash -- -- 625,000 625 49,375 -- 50,000
Issuance of series A preferred stock -
for debt 1,390,388 1,390,388 -- -- -- -- 1,390,388
Issuance of stock in connection
with note payable -- -- 750,000 750 95,200 -- 95,950
Preferred stock dividend (115,866) (115,866)
Net loss -- -- -- -- -- (1,380,953) (1,380,953)
--------- ---------- ---------- ------- ---------- ------------ ------------
BALANCE, May 31, 2001 1,390,388 $1,390,388 24,648,988 $24,649 $6,096,020 $ (8,061,865) $ (550,808)
========= ========== ========== ======= ========== ============ ============
See notes to financial statements.
F-5A
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
Year Ended May 31, 2002
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (965,481)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debts 77,799
Depreciation and amortization 137,588
Loss (gain) on change in valuation of put warrant (3,279)
Gain on extinguishment of debt (42,873)
Common stock and options issued for payment
of services and compensation 24,753
Amortization of debt discount 38,016
Changes in assets and liabilities, net of the effect from
acquisition:
Accounts receivable (107,560)
Inventories 47,970
Prepaid and other current assets (113,257)
Other assets 0
Net assets from discontinued operations 0
Accounts payable (130,205)
Accrued expenses and other current liabilities 424,213
----------
NET CASH USED IN OPERATING ACTIVITIES (614,088)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment 0
Acquisition of business, net of cash acquired 0
----------
NET CASH USED IN INVESTING ACTIVITIES 0
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft (28,343)
Due to factor 0
(Repayment of) proceeds from loans payable - shareholders 80,653
(Repayment of) proceeds from bank line of credit 115,902
Proceeds from debt financing 300,000
Repayment of debt obligations (69,500)
Proceeds from issuance of debt 27,733
Proceeds from the sale of common stock
and exercise of options 194,500
Proceeds from options issued with debt 16,000
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 636,945
----------
NET INCREASE (DECREASE) IN CASH 24,629
CASH AT BEGINNING OF YEAR 0
----------
CASH AT END OF YEAR $ 24,629
==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 205,748
==========
Income taxes $ 0
==========
Non-cash flow and investing and financing activities:
Conversion of debt to equity $ 0
==========
Common stock issued for assets $ 0
==========
Accrued preferred stock dividend $ 137,879
==========
See notes to financial statements.
F-6
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
Year Ended May 31, 2001
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,380,953)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debts 251,318
Depreciation and amortization 131,982
Loss (gain) on change in valuation of put warrant 19,649
Gain on extinguishment of debt (64,061)
Common stock and options issued for payment
of services and compensation 8,000
Amortization of debt discount 90,613
Changes in assets and liabilities, net of the effect from
acquisition:
Accounts receivable (697)
Inventories 185,324
Prepaid and other current assets (22,180)
Other assets 11,445
Net assets from discontinued operations 433,454
Accounts payable (40,339)
Accrued expenses and other current liabilities (38,977)
------------
NET CASH USED IN OPERATING ACTIVITIES (415,422)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (424)
Acquisition of business, net of cash acquired (108,588)
------------
NET CASH USED IN INVESTING ACTIVITIES (109,012)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft (11,954)
Due to factor (68,184)
(Repayment of) proceeds from loans payable - shareholders 530
(Repayment of) proceeds from bank line of credit (244,902)
Proceeds from debt financing 886,000
Repayment of debt obligations (87,341)
Proceeds from issuance of debt 0
Proceeds from the sale of common stock
and exercise of options 50,000
Proceeds from options issued with debt 0
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 524,149
------------
NET INCREASE (DECREASE) IN CASH (285)
CASH AT BEGINNING OF YEAR 285
------------
CASH AT END OF YEAR $ --
============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 159,987
============
Income taxes $ 0
============
Non-cash flow and investing and financing activities:
Conversion of debt to equity $ 1,390,388
============
Common stock issued for assets $ 137,000
============
Accrued preferred stock dividend 115,866
============
See notes to financial statements.
F-6A
NOVEX SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2002 AND 2001
(INFORMATION FOR THE YEAR ENDED MAY 31, 2001 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
Novex Systems International, Inc. ("Novex" or the "Company") is engaged in
the business of manufacturing and marketing a diversified line of
construction products including pre-packaged concrete repair, grouting and
patching products and masonry waterproofing products. The principal
markets for the Company's products are retailers, construction
professionals and distributors located throughout the United States and in
certain areas of Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation - The accompanying financial statements have
been prepared assuming that the Company will continue as a going
concern. The Company has incurred net losses of $965,481 and
$1,380,953 for the years ended May 31, 2002, and 2001, respectively.
Additionally, the Company had approximately a net working capital
deficiency of $2,954,752, an accumulated deficit of $9,165,225 at
May 31, 2002 and negative cash flow from operations for the years
ended May 31, 2002 and 2001, of $614,088 and $415,422, respectively.
The Company is also in default of its bank lines of credit and in
arrears with paying payroll taxes by several months. Those
conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management expects to incur additional
losses for the foreseeable future and recognizes the need to raise
capital to achieve their business plans. During fiscal year 2002,
the Company raised $300,000 from short term financing and $190,000
from the sale of common stock. The Company plans to raise additional
capital through various methods including the private placements of
securities, and the issuance of debt. Further, the Company plans to
enhance its existing product line and is developing new marketing
strategies. In addition, the Company will search for potential
strategic acquisitions that will complement the Company's existing
products and that are synergistic with its future growth prospects.
The accompanying financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as
a going concern.
b. Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
c. Property, Plant and Equipment - Property and equipment are recorded
at cost. Depreciation is provided on the straight-line method based
upon the estimated useful lives of the respective assets. Property
and equipment are being depreciated over a period of five years.
Maintenance, repairs and minor renewals are charged to operations as
incurred, whereas the cost of significant betterments is
capitalized. Upon the sale or retirement of property and equipment,
the related costs and accumulated depreciation are eliminated from
the accounts and gains or losses are reflected in operations.
F-7
d. 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, 2002, the Company
does not believe that any impairment has occurred.
e. Income Taxes - The Company utilizes the asset and liability method
of accounting for income taxes as set forth in FASB Statement
No.109, "Accounting for Income Taxes". Under the asset and liability
method, deferred taxes are determined based on the difference
between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
f. Fair Value of Financial Instruments - The carrying value of cash and
cash equivalents, accounts receivable, other receivables, due to
factor, accounts payable and accrued expenses approximate their fair
values based on the short-term maturity of these instruments. The
carrying amounts of long-term debt were also estimated to
approximate fair value.
g. 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.
h. Shipping and Handling Fees - The Company records the amounts billed
to customers for shipping and handling in net sales and the related
costs in selling, general and administrative expenses. For the years
ended May 31, 2002 and 2001, the Company recorded shipping and
handling fees of $140,730 and $264,406, respectively.
i. 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, 2002 and 2001 amounted to approximately $25,875 and $
41,015, respectively.
j. 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, 2002 and 2001,
diluted loss per share is the same as basic loss per share since the
inclusion of stock options and warrants would be antidilutive.
k. 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
F-8
in the results of operations for the employees, officers and
directors stock option plan.
l. 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.
m. Comprehensive Income - SFAS No. 130, "Reporting Comprehensive
Income", establishes standards for reporting and displaying
comprehensive income, comprising net income and other non-owner
changes in equity, in the financial statements. For all periods
presented, comprehensive income was the same as net income.
n. Segment Information - SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information", defines operating segments as
components of an enterprise for which separate financial information
is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in
assessing performance. Based on the way it organizes its business
for making operating decisions and assessing performance, the
Company has determined that it has a single reportable operating
segment.
o. Reclassification - Certain reclassifications have been made to the
2001 financial statements in order to conform with the 2002
presentation.
p. Recent Accounting Pronouncements - In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142
"Goodwill and Intangible Assets ("SFAS No. 142"). SFAS No. 141
requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method of accounting and
prohibits the use of the pooling-of-interests method for such
transactions. SFAS No. 142 applies to all goodwill and intangible
assets acquired in a business combination. Under the new standard,
all goodwill, including goodwill acquired before initial application
of the standard, should not be amortized but should be tested for
impairment at least annually at the reporting level, as defined in
the standard. Intangible assets other than goodwill should be
amortized over their useful lives and reviewed for impairment in
accordance with SFAS no. 121. The new standard is effective for
fiscal years beginning after December 15, 2001. The Company must
adopt this standard on June 1, 2002.
In June 2002, the Financial Accounting Standards Board issued SFAS
No. 146 on "Accounting for Costs Associated with Exit or Disposal
Activities". The Company is reviewing the requirements and
implications of adopting such standards by December 31, 2002. This
Statement addresses financial and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring)." The Company
currently does not believe adopting such standards will have a
material effect on the presentation of the financial statements.
F-9
3. DISCONTINUED OPERATIONS AND EXTRAORDINARY GAIN
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.
During the fiscal year ending May 31, 2002, and the period March through
May 2001, the Company entered into a settlement with its creditors, which
resulted in an extraordinary gain from extinguishment of debt of $42,873
and $64,061, respectively for 2002 and 2001.
The balance sheet, results of operations and cash flows for Novex Canada
has been reclassified as discontinued operations for the period ending May
31, 2001.
Summarized results of the discontinued operation is as follows:
Year Ended May 31, 2001
-----------------------
Net Sales $ 100,643
=========
Loss from operations (48,124)
Loss on disposal (229,056)
---------
Total loss on discontinued
Operations $(277,180)
=========
4. CONCENTRATION OF CREDIT RISK
a. Cash
The Companies maintains cash balances at several commercial banks.
Accounts at these financial institutions are insured by the Federal
Deposit Insurance Corporation up to $100,000.
b. Accounts Receivable
The concentration of credit risk in the Company's accounts
receivable is mitigated by the Company's credit evaluation process,
credit limits, monitoring procedures and reasonably short collection
terms. Credit losses have been within management's expectations and
the Company does not require collateral to support accounts
receivable.
F-10
5. INVENTORIES
At May 31, 2002 inventories consist of the following:
Raw Material $ 44,795
Packaging 82,757
Finished Goods 28,732
--------
$156,284
========
6. PROPERTY, PLANT AND EQUIPMENT
At May 31, 2002 property, plant and equipment consists of the following:
Land $ 400,000
Building 415,000
Property and equipment 639,977
Leasehold Improvements 5,764
-----------
1,460,741
Less: Accumulated depreciation and
amortization (229,342)
-----------
$ 1,231,399
===========
7. ACCRUED EXPENSES AND OTHER LIABILITIES
As of May 31, 2002, accrued expenses and other liabilities consists of the
following:
Accrued interest payable $178,322
Royalty payable 54,000
Real estate taxes payable 36,858
Other accrued 37,026
--------
$306,206
========
F-11
8. GOODWILL
Goodwill arose in connection with the acquisitions of Arm Pro in September
1998, and with the acquisition of Allied / Por-Rok lines in August 1999
and Sta-Dri in August 2000 (see Note 16). Goodwill is being amortized on
the straight-line method over 10 years for Arm Pro and over 15 years for
Allied / Por-Rok and Sta-Dri. As of May 31, 2002, goodwill, net of
accumulated amortization of $128,922, is $628,784. Amortization expense
charged to operations for fiscal year 2002 and 2001 was approximately
$49,000 and $48,000, respectively.
9. LOANS PAYABLE -SHAREHOLDER
Loans payable to shareholders bear interest at 10% per annum and the
principal plus accrued interest is due on demand.
10. INCOME TAXES
At May 31, 2002, the Company has available unused net operating loss
carryovers of approximately $7,900,000 that may be applied against future
taxable income and expire at various dates through 2020. The Company has a
deferred tax asset arising from such net operating loss deductions and has
recorded a valuation allowance for the full amount of such deferred tax
asset since the likelihood of realization of the tax benefits cannot be
determined.
2002
-----------
Deferred tax asset:
Net operating loss carryforward $ 3,460,000
Valuation allowance (3,460,000)
-----------
Net deferred tax asset $ --
===========
A reconciliation of the statutory federal income tax benefit to actual tax
benefit is as follows:
2002 2001
--------- ---------
Statutory federal income tax benefit $ 296,000 $ 578,000
Income tax benefit not utilized (296,000) (578,000)
--------- ---------
Actual tax benefit $ -- $ --
========= =========
If the Company has a greater than 50% change in ownership of certain stock
holdings by shareholders of the Company pursuant to Section 382 of the
Internal Revenue Code, the net operating losses may be limited. Currently
no such evaluation has been performed.
F-12
11. BANK LINE OF CREDIT
In connection with the acquisition of the Allied/Por-Rok division of The
Sherwin Williams Company, Novex Systems International, Inc. obtained a
$750,000 line of credit from Dime Commercial Corp. (see Note 16 (b)). The
line provides working capital and is secured by accounts receivable and
inventory. Advances under the line are based on 80% of eligible accounts
receivables and 50% of eligible inventory. Interest is computed on the
average monthly balance under the line based on 4% above the prime rate.
The Company is currently in negotiations to refinance such debt. At May
31, 2002, the prime rate was 4.75%.
As of May 31, 2002, the Company was not in compliance with several of the
financial covenants (see Note 12 (c)).
12. LONG TERM DEBT
At May 31, 2002, long-term debt consists of:
Notes payable (a) $1,011,000
Debenture payable (b) 125,000
Dime note payable (c) 704,668
Dime put warrant (c) 22,364
Notes payable (d) 175,000
----------
2,038,032
Less: Unamortized debt discount 19,200
----------
2,018,832
Less: Current portion 2,018,832
----------
$ --
==========
a) In the year ended May 31, 2002, the Company raised an additional $125,000
from the same holder of the notes payable of $886,000 at May 31,2001. The
notes payable bear interest at 10% per annum and the principal plus
accrued interest is due on demand. The notes payable are secured by a
subordinated security interest in Novex's property, plant and equipment.
The notes payable are due to parties associated with a director of the
Company and provide the holder with piggyback registration rights. In
connection with the notes payable the Company issued 750,000 shares of
common stock as consideration for the financing and recorded as debt
discount of $95,950 during the year ended May 31, 2001. During the year
ended May 31, 2002, the Company issued 261,000 shares of common stock
relating to the issuance and extension of the existing debt. These common
shares were valued at $27,597 and recorded as an expense.
F-13
b) Included in long-term debt are debentures owing to a stockholder of the
company, Quilcap, Corp., in the amount of $125,000. This debenture from
February 25, 1999, bears interest at 15% per annum and matured on May 31,
1999.
c) The Company is obligated to Dime Commercial Corp. for $704,668 under a
term loan. The term loan has been recorded net of a discount of $8,200 as
a result of the put warrant. Amortization of discount charged to
operations for fiscal year 2002 was $1,400. The loan provides for monthly
interest payments based on the prime rate plus four percent. Installments
due under the loan begin on March 13, 2000 in the amount of $7,722 per
month. The loan matures on August 13, 2002 with a balloon payment of
$655,000. There was a put warrant granted with the term loan, exercisable
at $.25 and having an expiration date of September 1, 2002. In accordance
with Emerging Issues Task Force No. 96-13 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled In, a Company's
Own Stock," we have allocated $21,037, to the put warrant and recorded the
amount as part of long-term debt as of May 31, 2002. As a result of the
change in valuation from $24,316 on May 31, 2001 to $21,037 as of May 31,
2002 the Company recognized $3,279 in other income. Subsequent changes in
the measure of fair value of the put warrant will be reported in the
statement of operations. The note is collateralized by all of Novex's
property, plant and equipment at the Clifton facility (see Note 16 (b)).
Prime rate at May 31, 2002, was 4.75%. As of May 31, 2002, the Company was
not in compliance with several of the financial covenants and has not
received a waiver from the bank. Therefore, long-term debt has been
classified in the accompanying balance sheet as current liabilities.
d) On May 24, 2002, the Company raised $175,000 from an outside investor. The
note payable bears interest at 10% per annum and the principal plus
accrued interest is due on July 23, 2002. In connection with the note
payable the Company issued 400,000 stock options as consideration for the
financing and recorded as debt discount $16,000, of which $1,600 has been
expensed.
13. SHAREHOLDERS' DEFICIENCY
Preferred Stock
On August 7, 2000, the Company issued cumulative 10% series A convertible
redeemable preferred stock ("series A preferred stock") for $1,281,351 in
notes payable plus accrued interest of $109,037. The series A preferred
stock has a liquidation preference of $1.00 per share plus declared and
unpaid dividends. The series A preferred stock can be redeemed at the
option of the issuer at any time and any number of shares including unpaid
dividends until August 7, 2002. The series A preferred stock shall accrue
dividends at a rate of 10% per year and on each anniversary date of the
issuance of these shares the Company will issue one additional share of
series A preferred stock for each one-dollar amount of unpaid dividends
payable.
During 2002, the Company issued 253,745 shares of preferred stock for
dividends attributed to the terms of the preferred stock through May 31,
2002.
After August 7, 2002, if any shares of the series A preferred stock are
outstanding, including unpaid dividends, the Company will be required to
declare a "special dividend" equal to 15% of the value
F-14
of the series A preferred stock and therefore issues additional shares of
series A preferred stock. Further, the series A preferred stock will
automatically convert to common stock at a rate equal to 85% percent of
the average trading price for the twenty consecutive days prior to August
7, 2003. Should the Company's common stock remain at its current low
prices, upon the maturity date of August 7, 2003, the Company may be
required to issue sufficient common shares to effectuate a change in
control of the Company.
Furthermore, the Company has provided the holder with the right to
purchase any shares of the Company's common stock offered for sale or
securities convertible into its common stock from August 7, 2000 until
August 12, 2002.
Additionally, the Company cannot declare and pay any cash or stock
dividends to any other class of equity securities until the series A
preferred stock has been redeemed or converted to common stock.
Common Stock
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 that it alleges have received securities without paying
fair consideration to the Company.
b. In February 2001, the Company raised $50,000 from the sale of
625,000 shares of restricted common stock.
In August 2000, the Company issued 1,000,000 shares of common stock
in connection with the acquisition of certain assets from The
Sta-Dri Company (See Note 16 (a)).
During August 2000, the Company issued 30,000 shares of restricted
common stock for services rendered. The common stock was valued at
$3,900 and recorded as consulting expense.
In December 2000, the Company issued 100,000 shares of restricted
common stock for investor relation services. The common stock was
valued at $4,100, and was recorded as consulting expense.
During the year ended May 31, 2001, the Company issued 750,000
shares of its common stock to an affiliate as consideration for
notes payable of $886,000 (see Note 12(a)). These shares were valued
at prices ranging between $.056 to $.061 per share.
F-15
c. Equity transactions during fiscal year 2002 were as follows:
o The Company issued 135,000 shares of common stock and
75,000 warrants for services rendered during the year,
which have been valued at $24,753.
o The Company issued 451,000 shares of common stock
relating to the issuance and extension of indebtedness,
such shares were valued at $41,233.
o The Company sold 1,349,413 shares of common stock for
$181,000, during fiscal year 2002 pursuant to a
confidential offering memorandum.
o The Company issued 285,786 shares of common stock for
the conversion of indebtedness of $42,688.
14. STOCK OPTIONS
The following table summarizes the activity with regard to options and
warrants for the year ended May 31, 2002. No options or warrants were
granted, cancelled or exercised in fiscal 2001.
Stock Options Warrants
------------------------------------------ ---------------------------------------
Exercise Exercise
Shares Price Exercisable Shares Price Exercisable
--------- ------------ ----------- ------- ------------- -----------
May 31, 2001 1,373,424 0.25 - 0.50 1,373,424 735,365 0.20 - 0.50 735,365
Granted 400,000 0.07 400,000 75,000 20.00 75,000
--------- ------------ --------- ------- ------------- -------
May 31, 2002 1,773,424 $0.07 - 0.50 1,773,424 810,365 $0.20 - 20.00 810,365
========= ============ ========= ======= ============= =======
The Company granted 75,000 warrants for consulting services during 2002,
which have been valued at $10,503 and expensed.
The Company granted 400,000 stock options relating to the extension of
indebtedness, such options were valued at $16,000 and are to be amortized
over the term of the loan.
15. STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under APB No. 25,
"Accounting for Sock Issued to Employees," ("APB 25"), under which no
compensation cost is recognized. In fiscal 1997, the Company adopted SFAS
no. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") for
disclosure purposes; accordingly, no compensation has been recognized in
the results of operations for its stock option plan as required by APB 25.
No options or warrants have been granted to employees, officers and
directors during fiscal years 2002 and 2001.
F-16
16. ACQUISITIONS
a. On August 1, 2000, the Company acquired certain assets from The
Sta-Dri Company of Odenton, Maryland. In exchange, the Chief
Executive Officer of the Company paid $72,000 and has given 750,000
shares of his registered common stock along with the Company's
issuance of 250,000 shares of restricted common stock to the
majority shareholder of The Sta-Dri Company ("Selling Shareholder").
In addition, the Company has issued 750,000 shares of restricted
common stock to, and has entered into an agreement with the Chief
Executive Officer to repay the $72,000. The total of 1,000,000
shares of the Company's common stock was valued at $137,000 based on
the average trading price three days before and after the date of
the acquisition was agreed to and announced, which was August 1,
2000.
As part of the terms to the acquisition, the Company has provided
the Selling Shareholder with certain piggyback registration rights.
Therefore, in the event that the Company shall register any shares
of its common stock with in one year from August 1, 2000, the
Company will register the 250,000 shares of restricted common stock
issued in this acquisition along with the other shares in the
registration statement.
Additionally, the Company has provided the Selling Shareholder with
the right to purchase any shares of the Company's common stock
offered for sale or securities convertible into its common stock
from August 1, 2000 until August 12, 2002.
As of August 1, 2001 and until August 1, 2002, the Company will have
to pay an additional $6,000 each month to the Selling Shareholder in
the event that common stock of the Company has not traded above
$1.00 per share for twenty consecutive trading days in each month.
In the event that the common stock trades in excess of $1.00 per
share for twenty consecutive days the $6,000 monthly obligation
shall terminate.
The acquisition was recorded using the purchase method of
accounting. The unaudited pro-forma results of operations of the
Company and Sta-Dri, as if the acquisition occurred on June 1, 2000,
have not been provided since they were not considered material to
the financial statements.
b. On August 13, 1999, the Company acquired from The Sherwin Williams
Company ("Sherwin") certain assets representing their Allied/Por-Rok
business. Pursuant to the purchase agreement Novex (i) paid $800,000
to Sherwin, (ii) issued 1,000,000 shares of restricted common stock,
valued at $260,000, to Sherwin with the requirement to register the
common stock with the Securities and Exchange Commission and (iii)
issued a note payable for $1,281,351, as adjusted from $1,300,000,
which bears interest at 10% per annum and is payable over a one year
period. In order, to induce Sherwin to accept the note payable, the
Company had to convert all the previously issued debt to equity,
except for the $250,000 debenture, which will be paid as a condition
of the Allied/Por-Rok acquisition. At May 31, 2000, the outstanding
balance on the debenture is $125,000 (see Note 12 (b)). Further,
Sherwin has a subordinated security interest in substantially all
the assets of the company.
Novex has entered into a $890,000 installment term note with Dime
Commercial Corp. of
F-17
which $800,000 was used for the purchase of Allied/Por Rok and the
remaining $90,000 was used for working capital needs in fiscal 2000
(see Note 12(c)). This financing arrangement also provided for a
$750,000 revolving note payable to fund future working capital
requirements (see Note 11). The bank has a senior secured interest
in substantially all the assets of Novex. In addition, the Company
granted a class B warrant with a "put" right to purchase 233,365
shares of restricted common stock at an exercise price of $.25. Dime
Commercial Corp. has the right to demand the purchase of the warrant
if Novex completes a refinancing of all or a portion of the Dime
term loan and/or revolving line of credit from funds provided by
someone other than Dime. Therefore, Dime has the option of
requesting payment in cash or waiving its right to sell the warrant
to Novex. If Dime requests payment the amount they will receive is
either (i) if the closing stock price is less than or equal to the
exercise price, then Novex pays $58,341, which is the exercise price
times the 233,365 shares underlying the warrant or (ii) if the
closing price exceeds the exercise price, then Novex pays the
closing price up to a maximum of $.51 per share underlying the
warrant or $119,016. Alternatively, if Dime decided to exercise the
warrant, they can issue a 60-day non-interest bearing note for the
entire amount due to Novex for the 233,365 shares of common stock
underlying the warrant.
A total of $20,400 was originally allocated to the put warrant,
resulting in a liability. (See Note 12 (c)). The fair value of the
put warrant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
stock price of $.26 per share; annual dividend of $0; expected
volatility of 50%; risk free interest rate of 6%; and an expected
life of two years.
Goodwill of $571,245 resulted from these acquisitions and is
determined as follows:
Assets acquired:
Accounts receivable $ 311,983
Inventory 225,661
Furniture and equipment 566,360
Building 415,000
Land 400,000
----------
Total 1,919,004
Purchase price 2,341,351
----------
422,347
Acquisition costs 148,898
----------
Goodwill $ 571,245
==========
17. COMMITMENTS AND CONTINGENCY
a. The Company leases an automobile, telecommunication and reproduction
equipment under long-term lease agreements. These lease agreements
require cumulative monthly payments of approximately $880 per month
for the terms of the respective leases expiring between December
2003 and February 2004.
The future minimum lease payments, excluding escalation charges, are
as follows:
F-18
Year Ending
May 31,
-----------
2003 7,830
2004 3,384
-------
$11,214
=======
Total rental expenses for the years ended May 31, 2002 and 2001 was
approximately $9,600 and $19,100, respectively.
b. The Company has a licensing agreement for certain concrete related
products, including an admixture that is capable of enhancing the
basic characteristic of cementitious products. The Company is
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.
b. 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 Company's financial position or
results of operations.
c. In March, 2002, Dime Commercial Corp. commenced a legal action
against Novex to secure payment on the two outstanding notes and a
separate action to seek foreclosure on the real property in an
attempt to force the company to pay-off the notes in a reasonable
time period. Since the filing of the actions, the court in the legal
proceeding for payment on the notes provided Novex with injunctive
relief whereby Novex could retain payments from customers on account
and use a new bank account to fund it operations until the
litigation is resolved.
18. SUBSEQUENT EVENTS
The Company, which had been in litigation with Dime Commercial Corp., has
reached an agreement with Dime to settle all litigation, conditional upon
the Company paying in full all outstanding principal and interest. The
Company has been in negotiations with an investor group that is interested
in purchasing the Company's real property for $1,200,000 and loaning the
company an additional $500,000. The first proceeds from the refinancing
would be used to pay off the Dime notes in full..
F-19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Novex has engaged the certified public accounting firm of Radin, Glass &
Co., LLP as its outside auditors to audit the company's annual financial
statements for the fiscal year ending May 31, 2002 and has had no disagreements
with them. The company elected to discontinue its independent auditor
relationship with the firm of Feldman Sherb & Co., P.C. for this fiscal year.
The company did not have any disagreements over accounting policies or practices
with Feldman & Sherb, which recently merged with the much larger firm of Grassi
& Co., LLC.
Prior to the engagement of Radin Glass, neither the Company nor anyone on
its behalf consulted with such firm regarding the application of accounting
principles to a specified transaction, either completed or uncompleted, or type
of audit opinion that might be rendered on the Company's financial statements.
The 2001 financial statements included in this filing were audited by
Feldman Sherb. The audit opinion for such financial statements has not been
included due to a fee dispute. The audit opinion for the year 2001 will be
included by an amendment to this filing upon resolution of the fee dispute.
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, 2002.
Name Age Position
---- --- --------
William K. Lavin 58 Chairman, Secretary
Daniel W. Dowe 40 Director, President
and Chief Executive Officer
D. Friedenberg 50 Director, Treasurer
Edward J. Malloy 66 Director
Kevin DeMatteis 38 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
27
directors of the Allegheny Corporation (NYSE:Y) and Chicago Title Corporation
(NYSE:CTZ).
Daniel W. Dowe. Mr. Dowe became a director in March, 1997, Acting President on
November 17, 1997 and President and Chief Executive Officer on April 1, 1998.
Mr. Dowe has agreed to serve in this capacity for a three year period pursuant
to a written employment agreement and will have an option to serve for an
additional three year period. He was the founder of Dowe & Dowe, a New York
City- based law firm that provided legal services to Novex. From 1993 to
November 17, 1997, Mr. Dowe practiced corporate and securities law at his firm.
From 1990 to 1993, Mr. Dowe was an associate with Donohue & Donohue, a New York
City-based law firm concentrating on international trade matters. Before
practicing law, he was employed by Alliance Capital Management Company, Salomon
Brothers (Salomon Smith Barney, a division of Citigroup, Inc.) and J.P. Morgan
Bank.
Douglas S. Friedenberg. Mr. Friedenberg has been a director of Novex since
November, 1996 and is currently employed as a financial advisor with American
High Growth Co. He has been the President of Firebird Capital Management, a
financial advisory firm, since March, 1993. In 1991, he co-founded and became
President of Unicorn Capital Management, an investment management firm. From
1983 to 1991, he managed private investment portfolios for Morgan Stanley, Inc.,
a large New York City-based investment banking firm. Mr. Friedenberg also serves
as a Director of Datametrics Corporation (AMEX:DC).
Edward J. Malloy. Mr. Malloy became a director of Novex in January, 1998. Since
1993 he has been President of the Building and Construction Council of Greater
New York. Mr. Malloy represents the interests of over 200,000 laborers involved
in the building trades in the Greater New York City area. He is responsible for
developing building projects in both the public and private sectors to ensure an
adequate level of work for his union members. Mr. Malloy brings to Novex an
extensive level of contacts and industry experience.
Kevin DeMatteis. Mr. DeMatteis became a director of Novex in January 2001. Mr.
DeMatteis is part of the DeMatteis Development Organization, which is a
closely-held developer of large scale real estate projects in the United States
and in international markets.
Committees of the Board of Directors
The Board of Directors does not have a standing audit or nominating
committee or any other committees performing similar functions. Novex does have
a compensation committee consisting of Messrs. Lavin, Friedenberg and Malloy
(the "Compensation Committee") which had one meeting in each of the fiscal years
ending May 31, 2002 and 2001. The Compensation Committee is responsible for
assuring that the officers and key management of Novex are effectively
compensated in terms of salaries, incentive compensation and benefits which are
internally equitable and externally competitive. The Compensation Committee is
responsible for setting the compensation of the executive officers.
Executive Officers
At present, Mr. Dowe is Novex's only executive officer.
28
Item 11. Executive Compensation
The following table shows all remuneration in excess of $100,000 paid by Novex
and its subsidiaries through May 31, 2002, to all directors and officers:
Table 1
Summary Compensation Table
Long-Term Compensation
Annual compensation Awards Payouts
------------------- ------ -------
Securi-
ties
Name Other Underly- All
and Annual Restrict- ing Other
Princi- Compen- ed Stock Options LTIP Compen-
pal Salary Bonus sation Awards SARs Payout sation
Position Year ($) ($) ($) (#) (#) ($) ($)
---------------------------------------------------------------------------------------------------
Daniel
Dowe
President 2002 $180,000
(1)(2) 2001 $180,000
2000 $180,000
(1) Commencing April 1, 1998, Mr. Dowe became an employee of Novex at an
annual salary of $180,000. In the fiscal year ending May 31, 1999, Mr.
Dowe received $150,000 in cash compensation and deferred the remaining
$30,000 until Novex closed the Por-Rok transaction. As of the filing of
this registration statement, Novex has paid to Mr. Dowe the balance of the
deferred compensation. In addition, Mr. Dowe made an interest-free loan to
Novex of $30,378 in the fiscal year 1999 to cover working capital
shortfalls. In June 2001, Mr. Dowe converted his loan into 284,573 shares
of common stock and a warrant to purchase 94,858 shares of common stock at
a price of $.20 per share for a three year exercise period. The terms of
the conversion were the same as those offered to new investors that
purchased common stock and warrants offered by the company through a
private placement of securities. Mr. Dowe does not receive any additional
remuneration for serving as a director.
(2) On April 1, 1998, Novex entered a three-year employment agreement with Mr.
Dowe providing for an additional three years at his option and a minimum
annual salary of $180,000 which the Compensation Committee reviews
annually. As of the date of this Form 10-KSB, the Agreement has been
amended to include a payment from Novex to Mr. Dowe in the amount of
$800,000 if a Change of Control were to occur. The term "Change of
Control" is defined in the Agreement as:
(i) termination of Mr. Dowe's employment by Novex for reasons other than
for cause;
(ii) a significant reduction by Novex of his position, duties or
responsibilities;
(iii) the removal and/or replacement or any increase in the number of
directors of Novex which removal, replacement or increase shall
result in a change of 50% or more of the current board of directors,
or
(iv) the accumulation or acquisition by any one shareholder or group of
shareholders acting in concert resulting in that shareholder(s)'
control over or beneficial ownership of 40% or more of Novex
outstanding capital stock.
29
Item 12. Security Ownership of Certain Beneficial Owners
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the amount of common stock owned as of May 31, 2002 by
each director and officer and affiliates and by all directors and officers as a
group. Each individual has beneficial ownership of the shares which are subject
to unexercised stock options and stock warrants held by him, and each individual
has sole voting power and sole investment power with respect to the number of
shares beneficially owned:
Table 1
Security Ownership of Certain Beneficial Owners and Management
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial owner (1) Ownership(2) Class(2)
----------------------- ----------------- ----------
Douglas Friedenberg, 921,638 3.21%
Director, Treasurer(3)
Daniel W. Dowe 2,918,711 10.01%
Director, President,
Chief Executive Officer(4)
William K. Lavin 305,316 1.06%
Chairman, Secretary(5)
Edward J. Malloy
Director(6) 265,316 1.00%
--------- -----
All Directors and Officers
as a group 4,410,981 15.28%
--------- -----
2. The address for Messrs. Friedenberg, Dowe, Lavin and Malloy is 16 Cherry
Street, Clifton, New Jersey 07014.
3. The class includes stock options and stock warrants granted to the
directors and officers before May 31, 2002 which are deemed by Novex to be
acquirable by the beneficial owner within 60 days of the date of this Form
10-KSB by exercise of the option or warrant. As of May 31, 2002 there were
26,870,187 shares issued and outstanding and 28,674,712 on a fully diluted
basis. Percentages are stated on a fully diluted basis.
4. Mr Friedenberg and various entities for which Mr. Friedenberg exercises
sole voting and investment power as investment advisor presently hold an
aggregate of 921,638 shares of common stock. During the past fiscal year,
Mr. Friedenberg liquidated certain investment funds formerly under his
control and thereby distributed shares of common stock in Novex to owners
of those funds.
5. Mr. Dowe presently owns 2,823,853 shares of common stock and has the right
to acquire beneficial ownership of 94,858 additional shares upon exercise
of an equal number of common stock options.
6. Mr. Lavin presently owns 105,316 shares of common stock and has the right
to acquire beneficial ownership of 200,000 additional shares upon exercise
of an equal number of common stock options.
7. Mr. Malloy presently owns 65,316 shares of common stock and has the right
to acquire beneficial ownership of 200,000 additional shares upon exercise
of an equal number of common stock options.
30
Director Compensation
During the fiscal year ending May 31, 2002 none of the directors received
compensatiobn for their services. Only Mr. Dowe was compensated by the company
but in his capacity as president and not as a director.
Table 2
Security Ownership of Certain Beneficial Owners
(Non-Management)
Amount and Nature
Name and Address of Beneficial Percent of
of Beneficial owner Ownership(1) Class(1)
----------------------- ----------------- ----------
Parker Quillen 4,091,569 15.29%
c/o Quilcap Corporation
375 Park Avenue
Suite 1404
New York, New York
(1) As of May 31, 2002 there were 24,648,988 shares issued and outstanding and
26,757,777 on a fully diluted basis. Percentage is stated on a fully
diluted basis.
Item 13. Certain Relationships and Related Transactions
In August 2001, Mr. Dowe's spouse, Janet L. Dowe became an employee of the
company serving in an administrative capacity. On occasion, Mrs. Dowe renders
legal services to Novex. Any payments to Mrs. Dowe for legal services rendered
to Novex are approved by the Board of Directors, except for Mr. Dowe who was not
entitled to vote on these matters.
In May 1999, Mr. Daniel Dowe made an interest free loan to Novex in the
amount of $30,378 to provide it with cash flow during the operating deficit that
occurred during the last quarter of fiscal 1999. In June 2001, Mr. Dowe
converted his loan into 284,573 shares of common stock and a warrant to purchase
94,858 shares of common stock at a price of $.20 per share for a three year
exercise period. The terms of the conversion were the same as those offered to
new investors that purchased common stock and warrants offered by the company
through a private placement of securities.
With respect to the foregoing transactions, Novex believes that the terms
of these transactions were as fair to Novex as could be obtained from an
unrelated third party. Future transactions with affiliates including loans will
be on terms no less favorable than could be obtained from unaffiliated parties
and will be approved by a majority of the independent disinterested members of
the board of directors.
31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Page
(A) The following financial statements and
supplementary data are included in
Part II Item 8
Index to Financial Statements F-1
Independent Auditors' Report F-2
Financial Statements:
Balance Sheet as of May 31, 2002 F-3
Statement of Operations for the year ended May 31, 2002 F-4
Statement of Operations for the year ended
May 31, 2001 (Unaudited) F-4A
Statement of Changes in Shareholders' Deficiency for the year
ended May 31, 2002 F-5
Statement of Changes in Shareholders'
Deficiency for the year ended May 31, 2001 (Unaudited) F-5A
Statement of Cash Flows for the year ended May 31, 2002 F-6
Statement of Cash Flows for the year ended
May 31, 2001 (Unaudited) F-6A
Notes to Financial Statements F-7-19
NOTE: The financial statements relating to the periods ending May 31, 2000 and
May 31, 2001 are marked "unaudited" and are now deemed to be unaudited,
notwithstanding that the financial statements were in fact audited when filed in
the applicable periods. The change of status to unaudited is attributable to the
Company's change in independent auditors and its failure to secure the consent
of its former auditors to refile the financial statements for the periods ending
May 31, 2000 and May 31, 2001 with the Company's Form 10-KSB for the period
ending May 31, 2002. The Company's financial statements for the period ending
May 31, 2002 are in fact audited. The Company plans to refile the financial
statements for the periods ending May 31, 2000 and May 31, 2001, as audited,
upon securing the consent of its former auditors, or after having the financial
statements re-audited by its current auditors, whichever is the most expeditious
process. The failure to secure the neccessary consent stems from a fee dispute
with the Company's former auditors.
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 Financial Statements or Notes thereto.
32
(B) Exhibits to be incorporated herein by reference:
Exhibit
No. Description of Exhibit
------- ----------------------
2.1 Plan of Merger of Stratford Acquisition Corp. and the Registrant
into the Registrant
3.1(i) Articles of Incorporation of Stratford Acquisition Corp.
3.1(ii) Certificate of Incorporation of the Registrant
3.1(iii) New York Certificate of Merger of Stratford Acquisition Corp. into
Registrant
3.1(iv) Minnesota Certificate of Merger of Stratford Acquisition Corp. into
Registrant
3.2 By-Laws
4.1 Specimen Common Stock Certificate
4.2 Form of Class B Warrants
4.3 Form of 10% $550,000 Convertible Debenture and Stock Warrant
Agreement
4.4 Form of 9% $800,000 Convertible Debenture and Stock Warrant
Agreement
4.5 Form of 15% $250,000 Senior Debenture and Stock Warrant Agreement
4.6 Term Sheets re Director Loans to Company dated July 29, 1998; August
13, 1998; August 20, 1998;
August 27, 1998; September 4, 1998; and May 14, 1999
10.1 Employment Agreement between Registrant and Daniel W. Dowe
10.2 Amendment to Employment Agreement between Registrant and Daniel W.
Dowe
10.3 Amended and Restated Purchase Agreement between The Sherwin-Williams
Company and Registrant
10.4 Form of Promissory Note to Dime Commercial Corp.
10.5 Form of Promissory Note to The Sherwin-Williams Company
10.6 Bill of Sale from The Sherwin-Williams Company to Registrant
10.7 Designation Certificate
10.8 Form of Promissory Notes to Alfonso DeMatteis
24.1 Power of Attorney (contained on signature page of this Prospectus).
99.1 Battista Agreement
99.2 Supercrete N/A Limited Agreement dated December 20, 1996
(B) Exhibits filed herein:
21.1 Subsidiaries of Novex
(C) Reports on Form 8-K:
Form 8-K filed on March 11, 2002
Form 8-K filed on October 10, 2002
Form 8-K/A filed on October 11, 2002
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Novex Systems International, Inc. has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized:
NOVEX SYSTEMS INTERNATIONAL CORPORATION
By: /s/ Daniel W. Dowe
--------------------------------
Daniel W. Dowe, President
By: /s/ Douglas Friedenberg
--------------------------------
Douglas Friedenberg, Treasurer
Dated: October 17, 2002
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 October 17, 2002
-------------------------
Daniel W. Dowe
/ss/ William K. Lavin Director October 17, 2002
-------------------------
William K. Lavin
/ss/ Douglas Friedenberg Director October 17, 2002
-------------------------
Douglas Friedenberg
/ss/ Edward J. Malloy Director October 17, 2002
-------------------------
Edward J. Malloy
/ss/ Kevin DeMatteis Director October 17, 2002
-------------------------
Kevin DeMatteis
34