FORM 10-KSB/A
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, 2003.
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
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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 $.01 on May 31, 2003, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
approximately $250,000. The company had 26,245,187 shares of its $.001 par value
common stock and 1,390,388 shares of its $.001 par value preferred stock issued
and outstanding on May 31, 2003. Effective September 3, 2003 all preferred
shares were canceled and 1,000,000 shares of common stock were canceled.
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 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security 12
Holders
Part II
Item 5. Market for Registrant's Common Equity and Related 12
Stockholder Matters
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition 14
and Results of Operations
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on 18
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management 20
Item 13. Certain Relationships and Related Transactions 22
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 23
ii
PART I
Item 1. Business and Risk Factors
Novex Systems International, Inc. (hereinafter "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
Novex has had losses and may not be able to achieve profitability. Novex has
recorded net losses for each year of operation. In addition, a significant
portion of Novex's assets are attributable to goodwill. 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
regarding its operations and the operations forecasted undiscounted cash flows.
Any reduction in the value of goodwill would be to the extent that the present
value of the expected future cash flows are less than the carrying amount of
goodwill. This analysis may result in a complete or partial write-off or
acceleration of the amortization period. A write-down of part or all of the
goodwill will negatively impact Novex's operating results. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
"Consolidated Financial Statements and Notes."
If Novex cannot reach a final settlement agreement with its former bank it will
have to file a voluntary petition for bankruptcy to protect the ownership of its
intellectual property from a judgment. Novex's former bank, Dime Commercial
Corp., (hereinafter "Dime") has secured a judgment in April, 2003 for $1,336,000
and it has taken actions to satisfy this judgment. As part of a resolution of
the litigation, Novex conveyed ownership of its former manufacturing facility to
Dime, including all equipment located at the property. Novex believes that the
fair market value of these assets, at the very least, exceeds the judgmen and
therefore Dime shall have no further right to execute the judgment against
Novex's remaining assets which are the intangible assets it owns and needs to
own to continue the licensing arrangement it entered in February, 2003
(hereinafter "Licensing Agreement" as defined below). While Dime and Novex have
entered into a written agreement prohibiting Dime from executing its judgment
against Novex's intangible assets as of this filing, unless the parties reach a
final settlement agreement or extend the stay of execution Novex will be forced
to file a voluntary petition to reorganize under Chapter 11 of the U.S.
Bankruptcy Code to protect its intangible assets from an execution of the
judgment. 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
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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 its president and chief executive
officer, who is the company's only executive officer and is now handling all
sales and marketing functions in conjunction with Novex's licensee. On February
1, 2003, Novex entered into an exclusive licensing deal with CGM, Inc., a
privately-held manufacturer and marketer of building materials (hereinafter
"Licensee") whereby all products sold under the trade names owned by Novex are
produced and shipped by CGM and a royalty is paid to Novex ("Licensing
Agreement"). To the extent that the services of Novex's current president become
unavailable, it would be very difficult to attract or retain personnel who would
be able to adequately perform the functions currently performed by Novex's
president, which would impair the company's ability to continue its operations
until a replacement is hired. See "Management".
Because our stock is presently considered to be a "penny stock", the
applicability of "Penny Stock Rules" could make it difficult for investors to
sell their shares in the future in the secondary trading market. Federal
regulations under the Exchange Act regulate the trading of so-called "penny
stocks" (the "Penny Stock Rules"), which are generally defined as any security
not listed on a national securities exchange or NASDAQ, priced at less than
$5.00 per share, and offered by an issuer with limited net tangible assets and
revenues. In addition, equity securities listed on NASDAQ that are priced at
less than $5.00 per share are deemed penny stocks for the limited purpose of
Section 15(b)(6) of the Exchange Act. Therefore, during the time which the
common stock is quoted on the NASDAQ OTC Bulletin Board at a price below $5.00
per share, trading of the common stock will be subject to the full range of the
Penny Stock Rules. Under these rules, broker dealers must take certain steps
prior to selling a "penny stock," which steps include: (i) obtaining financial
and investment information from the investor; (ii) obtaining a written
suitability questionnaire and purchase agreement signed by the investor; and
(iii) providing the investor a written identification of the shares being
offered and in what quantity. If the Penny Stock Rules are not followed by the
broker-dealer, the investor has no obligation to purchase the shares.
Accordingly, the application of the comprehensive Penny Stock Rules may be more
difficult for broker- dealers to sell the common stock, and purchasers of the
shares of common stock offered hereby may have difficulty in selling their
shares in the future in the secondary trading market.
If a trading market is not maintained, holders of the common stock may
experience difficulty in reselling such Common Shares or may be unable to resell
them at all. The Common Shares of the Company are presently quoted on the NASDAQ
Over-The-Counter (OTC) Bulletin Board, a regulated quotation service that
captures and displays real-time quotes and indications of interest in securities
not listed on The NASDAQ Stock Market, or any U.S. securities exchange. The
current trading ticker symbol for the Common Shares is "HARD". The Company may,
but has not, entered into any agreements with market makers to make a market in
the Company's Common Stock. In addition, any such market making activity would
be subject to the limits imposed by the Securities Act, and the Securities
Exchange Act of 1934, as amended, ("Exchange Act") and it is possible that the
market in the common stock can be discontinued at any time. Accordingly, if
there is no active market available for the common shares, no liquidity or if
the market is discontinued, holders of the common stock may have difficulty or
may be unable to sell the shares which he or she may hold.
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Certain information included in this Form 10-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.
BUSINESS
a. General Business Development
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.
Pursuant to the Licensing Agreement (defined above) Novex's currently
operates as a licensing entity that collects monthly royalty payments from its
Licensee that are derived from sales of building materials that bear Novex's
trade names. The royalties are paid monthly by the Licensee based on sales of
goods made one month from the payment date. For instance, the royalty for sales
of goods in August will be paid on October 1st. The royalty agreement provides
for a fixed licensing fee for each account. Novex continues to provide marketing
and sales support to the Licensee.
In addition, management believes that Novex's publicly-traded status and
its net operating loss carryforward would be attractive to a privately-held
company that is interested in becoming public by way of a reverse merger into an
existing public company. Novex periodically reviews unsolicited requests to
merge with an operating company and its president actively seeks potential
businesses that would merit a merger with Novex to utilize its public-status.
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. As a
result, the Minnesota company essentially dissolved into and became a part of
the surviving entity, Novex.
Novex also had 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.
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 Canada was discontinued after it had sold its fiber manufacturing business
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to Interstar Admixture Co. and its cement product operation to QEP/Roberts, Ltd.
Novex retained the exclusive right to the Fiberforce brand name for use in the
consumer sector for building materials.
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, which expired unexercised 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 shall be converted into common stock
at a rate equal to 85% of the Novex' average closing trading price for Novex'
$.001 par value common stock for twenty consecutive trading days prior to August
7, 2002. On September 3, 2003 Sherwin-Williams tendered certificates
representing all shares of preferred and common stock that it owned for
cancellation. See Subsequent Events.
On August 1, 2000, Novex acquired substantially all of the assets of the
The Sta-Dri Company located in Odenton, Maryland ("Sta-Dri"). Sta-Dri
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. As of August 1, 2001 and until August 1,
2002, Novex will had to pay an additional $6,000 each month in the aggregate to
the Sta-Dri shareholders in the event that the common stock of the Company has
not traded above $1.00 per share for twenty consecutive trading days prior to
August 1, 2001. If and when Novex common stock shall trade in excess of $1.00
per share for twenty consecutive trading days the $6,000 monthly obligation
shall terminate. Sta-Dri shareholders have received a judgment against Novex in
the amount of $95,000 for unpaid royalties that stemmed from Novex's cash flow
problems and its litigation with Dime.
b. Financial Information About Industry Segments
All assets, revenues and operating expenses are dedicated to one business
segment -- the marketing of building materials. 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 consolidated balance sheet and consolidated statement
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of operations appearing on pages F-3 and F-4, respectively.
c. Subsequent Events
On July 17, 2003, Novex conveyed ownership of its real property and
industrial equipment located at its real property to its Dime. With this
transfer of assets, Novex believes it has satisfied the judgment Dime has for
$1,336,000. Dime has not agreed with this position, but has agreed to stay any
execution of the judgment against Novex's intangible assets until October 15,
2003 to enable the parties to work toward a final settlement of all litigation.
In the event the parties cannot settle the litigation and Dime refuses to extend
the stay of execution Novex will need to file a petition in bankruptcy to
protect its intangible assets from being executed upon.
On September 3, 2003, Sherwin-Williams surrendered all its Preferred Stock
and the 1,000,000 shares of common stock it owned to Novex for cancellation.
d. Novex's Current Business Operation
Novex is engaged in the business of marketing premium building product
materials through the Licensing Agreement. 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.
e. How Novex Markets Its Products
Novex markets all its products in conjunction with the sales and marketing
staff of its Licensee. Most of these efforts involve direct contact with
existing and new customers and periodic incentive based promotions to attract
new sales.
f. Description of Novex' 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.
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POR-ROK Aqua Plug - durable water resistant hydraulic cement which sets in 3-5
minutes. Designed to stop leaks or running water, patch cracks and fill holes in
masonry surfaces. Can be used in interior and exterior surfaces and sets under
water.
POR-ROK Concrete Patch - requires only mixing of water at jobsite, will level or
smooth most concrete or masonry surfaces and can be used to repair and patch
spalled concrete, cracks in masonry, broken steps and porches. Sets in 40-80
minutes and is stronger than ordinary concrete. Can be used in interior and
exterior surfaces.
POR-ROK Dash Patch - powder-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.
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STA-DRI Concrete Patch - acrylic resin fortified material that is mixed with
water and used to patch all types of concrete surfaces: sidewalks, patios,
driveways and walls.
STA-DRI Waterstop - quick-setting cement product that is mixed with water and
can be used to plug holes in concrete surfaces even if and will water may be
trickling through. The product hardens in 3-5 minutes and can be applied under
water.
STA-DRI Anchoring Cement - fast-setting expanding cement that is mixed with
water and used to anchor posts, railings, mailboxes, bolts, hooks and other
devises that require a strong, permanent attachment to a wall or floor surface.
FIBERFORCE PRODUCTS - Fiberforce products are made from monofilament
polypropylene fibers that are cut into specified lengths. Novex currently
markets this product in 4 oz. bags.
g. 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 Novex's Por-Rok, Sta-Dri or Fiberforce products don't work
inasmuch as customers have been using them for years. Novex's prices are
competitive with other like products and it does 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, Novex cannot offer the full range of
products that they can so consequently it cannot offer volume price discounts to
the extent larger competitors can. To remain competitive, Novex aims to provide
customers with exceptional service and very favorable pricing and payment terms
with respect to the product currently in our line.
As of the filing of this annual report, 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.
Brand Major Competitors
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Por-Rok Conspec
Anchoring Cement Tamms
Master Builders
Quikcrete
Sonneborn
Sika
W.R. Meadows
ChemMasters
Rockite
UGL
THORO
Oldcastle
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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
Mapei
Dap
Por-Rok Dependable
Dash Patch & Mascrete
Super Dash Patch Tamms
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
Sta-Dri Waterproofing Paint (Oil) Thoro
UGL
Quikcrete
Sta-Dri Sealer Thompson
Link All Purpose Sealer Thoro
Quikcrete
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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 sales incentives to its customers than Novex. Should
Novex be unable to compete effectively, Novex's results of operations and
financial position would be materially and adversely affected.
h. 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 stable sales in the winter months.
i. 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.
j. Raw Materials
The raw materials used in manufacturing products using Novex's tradenames
are readily available in the United States and Canada. 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.
k. Intellectual Property Rights
Novex received a certificate of registration for the use of the trademark
"Novacrete" from the Canadian Intellectual Property Office on June 15, 1997. The
Certificate remains in effect until June 5, 2012 and can be renewed by Novex. On
March 3, 1998, Novex received a Certificate of Trademark Registration No.
2,140,062 to use the trademark "Novacrete" in the United States. The term of the
U.S. trademark registration is for ten years. With Novex's acquisitions of
Por-Rok in August 1999 and Sta- Dri in August 2000, Novex acquired the
registered trade names for all Por-Rok, Dash Patch 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. However, if patented the technology would ultimately become
public information. Novex has developed internal controls to protect the
confidentiality of its technology and does not believe that the lack of legal
patent protection will impair its ability to effectively compete with other
manufacturers of like products or cause Novex to incur unnecessary risk of loss
of the technology. Even if Novex had patent protection over its
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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.
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.
l. Novex's Working Capital Requirements To Operate Its Business
For the fiscal year ended May 31, 2003, Novex experienced substantially
less fluctuations in its working capital requirements to finance its operations
due to it having entered into the Licensing Agreement Novex currently requires
approximately $20,000 to cover its fixed operating expenses before interest
charges and it has no variable expenses.
m. No Backlog Orders
As of May 31, 2003, Novex did not have any backlog orders on account of
its new business operation as a licensing company .
n. 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.
o. 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 16
Segment Information of Consolidated Financial Statements.)
p. Novex's Research and Development Activities
Novex currently markets products that have been widely accepted in the
marketplace for building materials in both the commercial and consumer channels.
Novex is not actively seeking to develop new innovative products, but to
capitalize on sales of its existing products.
q. Environmental Compliance
Novex does not manufacture its products nor does it use raw materials in
its products that are
10
deemed to be subject to rules or regulations relating to the discharge of
certain materials into the environment. With the conveyance of its real property
to Dime on July 17, 2003, Novex no longer has any exposure to environmental
claims on the property, although in its best judgment it does not believe there
are any environmental liabilities at the property.
r. Novex's Future Operations
Novex's plan to combine its Licensee's sales and marketing staff with its
own efforts to increase sales of products sold under Novex's tradenames and
consequently its monthly royalty payments. Novex will also continue to assess
the prospects of merging with an operating business to better utilize Novex's
publicly-traded status.
s. Number of Employees
As of May 31, 2003, Novex, on a consolidated basis, employed three (3)
full-time employees.
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. This facility was conveyed to Dime on
July 17, 2003 in satisfaction of a judgment Dime has received for unpaid. See,
Subsequent Events, Legal Proceedings.
Until 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 closed in October 2000 upon the sale of the
Fiberforce business.
Item 3. Legal Proceedings
In March, 2002, Dime commenced an action in foreclosure and a separate
lawsuit to seeking payment on the two notes it issued to Novex. In April, 2003,
Dime was awarded a judgment of $1,336,000 and on July 17, 2003 it took title to
Novex former real property and equipment. Novex believes the fair market value
of these assets exceeds the amount of the judgment and it is therefore
satisfied. Dime has extended its stay of execution of judgment until October 14,
2003 on consent with Novex to enable it to assess a final settlement offer made
by Novex. Dime Commercial corp. v. Novex Systems International, Inc., Superior
Court of New Jersey, Docket No. PAS-L-1577-2.
The former shareholders of the Sta-Dri company filed a lawsuit for unpaid
royalty payments and received a judgment in the amount of $95,000.
Other trade creditors have commenced lawsuits against Novex to secure
payment on unsecured claims, however none of these judgment can be satisfied
against Novex assets due to there being a properly perfected security interest
in place with a financial creditor that is willing to work with the company.
11
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 and the
matter has been dormant for three years. Mel Greenspoon vs. Stratford
Acquisition Corporation, et. al., Ontario Court (General Division), Index No.
97-CV-126814.
Item 4. Submission of Matters to a Vote of Security Holders
During the fiscal year ended May 31, 2003, there were no proposals
submitted to a vote of the shareholders.
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 quarters of the fiscal years ending May
31, 2003 and May 31, 2002, 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, 2003, the closing bid price was $.01. Novex has never
paid a cash dividend 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 $.01 $.01 August 31, 2002
2nd $.01 $.01 November 30, 2002
3rd $.01 $.01 February 28, 2003
4th $.01 $.01 May 31, 2003
Quarter High Low Last Day of Quarter
------- ---- --- -------------------
1st $.32 $.31 August 31, 2001
2nd $.19 $.17 November 30, 2001
3rd $.25 $.15 February 28, 2002
4th $.28 $.14 May 31, 2002
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
12
and revenues. In addition, equity securities listed on NASDAQ that are priced at
less than $5.00 per share are deemed penny stocks for the limited purpose of
Section 15(b)(6) of the Exchange Act. Therefore, during the time which the
common stock is quoted on the NASDAQ OTC Bulletin Board at a price below $5.00
per share, trading of the common stock will be subject to the full range of the
Penny Stock Rules. Under these rules, broker dealers must take certain steps
before selling a "penny stock," which steps include: (i) obtaining financial and
investment information from the investor; (ii) obtaining a written suitability
questionnaire and purchase agreement signed by the investor; and (iii) providing
the investor a written identification of the shares being offered and in what
quantity. If the Penny Stock Rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. Given the application of the
comprehensive Penny Stock Rules it may be more difficult for broker-dealers to
sell the common stock.
Accordingly, no assurance can be given that an active market will always
be available for the Common stock, or as to the liquidity of the trading market
for the Common stock. If a trading market is not maintained, holders of the
Common stock may experience difficulty in reselling them or may be unable to
resell them at all. In addition, there is no assurance that the price of the
Common stock in the market will be equal to or greater than the offering price
when a particular offer of securities is made by or on behalf of a Selling
Securityholder, whether or not Novex employs market makers to make a market in
Novex's stock.
Item 6. Selected Financial Data
The following selected historical consolidated statement of operations for
the three years ended May 31, 2003, 2002 and 2001and balance sheet as of May 31,
2003 and 2002 have been derived from the consolidated financial statements of
Novex that are included elsewhere in this Form 10-KSB and that have been audited
by Radin & Glass, P.C. (except as noted below) whose reports with respect to the
consolidated financial statements are also included elsewhere in this
Prospectus. This information should be read in conjunction with the consolidated
financial statements and notes to the consolidated financial statements
appearing elsewhere in this Form 10-KSB and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Years Ended May 31
-----------------------------------------------
2001 2002 2003
----------- ----------- -----------
(unaudited)
STATEMENT OF OPERATIONS
DATA:
Net Sales ......................................... $ 2,007,562 $ 1,866,914 $ 1,046,808
Gross Profit ...................................... 616,864 672,313 341,773
Net Loss .......................................... (1,496,819) (1,103,360) (1,566,687)
Net Loss Per Common Share ........................ $ (.06) $ (.04) $ (.06)
BALANCE SHEET DATA:
Working Capital Deficit ........................... $(2,430,940) $(2,954,752) $(4,007,260)
Goodwill, net ..................................... 678,236 628,784 591,694
Total Assets ...................................... 2,533,121 2,570,791 1,430,326
Long Term Debt .................................... -0- -0- -0-
Stockholders' Deficiency .......................... (550,808) (1,094,569) (2,648,267)
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Year ended May 31, 2003 (Fiscal 2003) as compared to May 31, 2002 (Fiscal 2002)
While net sales for the year ending May 31, 2003 were $1,046,673 net sales
for the same period ended May 31, 2002, were $1,866,914. The decrease in sales
was attributable principally to the Company's new business operation being a
licensing company versus a manufacturer. Prior to entering into the Licensing
Agreement Novex would record revenues based on the invoice value of goods sold.
From February 1, 2003 through May 31, 2003, Novex records revenue based on the
royalty payments, which are a percentage of the invoice value of goods sold and,
therefore, net sales are now much lower than the invoice value of goods sold.
However, Novex has eliminated a substantial amount of its fixed and variable
expenses by terminating its manufacturing expenses.
Novex achieved a gross margin of 33% for the year ending May 31, 2003. Due
to the change in the manner in which Novex conducts its business it is not
relevant to compare the gross margin achieved in Fiscal Year 2003 with prior
fiscal periods years that consisted of twelve full months of manufacturing
activity. In Fiscal 2003, Novex had operated a manufacturing business for eight
months and a licensing business for four months.
For the year ending May 31, 2003, the Company generated a loss of
$1,566,687. Included in this loss was a one-time charge of $643,005 for the
closing of the Novex's manufacturing operation and $410,409 in finance charges.
Novex also recorded non-cash expenses for depreciation and amortization of
$105,393. Based solely on its business operations, Novex generated a loss before
interest, taxes depreciation, amortization and the one-time write-off from the
discontinuation of its manufacturing operations of $407,880.
Since the commencement of the Licensing Agreement, Novex generated
$110,558 of royalty fees. On a monthly basis, Novex now incurs approximately
$20,000 in selling, general and administrative expenses expense.
As of May 31, 2003, the Company had $71,333 in current assets, which
consisted principally of accounts receivable of $15,138 and royalty receivables
of $53,030, with the remaining balance in cash. The Company's net property,
plant and equipment totaled $767,299 and it has goodwill of $591,694 which is
attributable to the two acquisitions that the Company completed in 1999 and
2000.
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 were $1,866,914 while net
sales for the same period ended May 31, 2001 were $2,007,705. The decrease in
sales was attributable principally to Novex's inability to ship orders on a more
timely basis due to cash constraints and the overall slowness of the economy.
Novex only achieved a gross margin of 36% for the year ending May 31,
2002. The increase in
14
gross margin during this period was attributable primarily to the
discontinuation of certain lower margin products and some products that were
associated with Novex's Canadian operation.
For the year ending May 31, 2002, the Company generated a loss from
operations of $661,088.
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 three acquisitions that the
Company completed in 1998, 1999 and 2000.
Liquidity and Financial Resources
As of May 31, 2003, the Company had $4,078,592 in current liabilities,
which includes loans (including interest) that are now due totaling $3,334,114,
a term loan of $704,667 and a revolving line of credit of $414,018 with Dime
Commercial Corp. which is used to fund the Company's operations. It had accounts
payable of $960,000 and accrued expenses of $32,000.
Of the loans due in the amount $3,334,114, approximately $1,336,000 was
satisfied on July 17, 2003 when Novex conveyed ownership of its real property
and equipment to Dime. Four of Novex's shareholders have also loaned the company
a total of $1,645,000 and have earned $318,057 of interest that has been
accrued, but unpaid. Of the $1,645,000 of principal loans outstanding,
$1,061,000 is held by one person that has properly perfected security interest
against Novex's remaining assets, being all its intangible property.
Novex is planning to increase its royalty revenue and use excess cash
proceeds to pay down its debt while it continues to pursue a new business that
could be merged with Novex. With any merger Novex will seek to refinance its
debt by either paying off all debt in cash or an offer of cash and stock.
Although Novex is required to carry its intangible property at a net value of
$592,000, it believes that the fair market value for these assets are
$1,500,000. Assuming another business could be merged into Novex with all of
Novex's current expenses being applied to the new business, the royalty
payments, even if not improved, would produce $30,000 on average of monthly cash
flow, which under current valuation methods to for measuring the worth of a
business would merit a value of $1,500,000. As such, Novex believes that a
refinancing that would enable creditors to receive cash and some additional
equity in the company will eliminate all debts.
Until such time as Novex shall merge with another entity, its current cash
flow is sufficient to meet its fixed monthly expenses. Since entering into the
Licensing Agreement Novex has paid down over $150,000 in liabilities from
royalty income and accounts receivables.
Inflation and Changing Prices
Novex does not foresee any risks associated with inflation or substantial
price increase in the near future. In addition, the raw materials that are used
by Novex in the manufacturing of its materials are available locally through
many sources and are for the most part commodity products. The one raw material
that Novex uses in all its products that cannot be classified as a pure
commodity is currently in sufficient supply. In addition, Novex presently owns
approximately 600,000 lbs. of this product. For these reasons, while Novex will
always have exposure to inflationary risks, it does not believe that
15
inflation will have any materially significant impact on its operations in the
near future.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses, and related disclosure on contingent assets and liabilities at the
date of our financial statements. Actual results may differ from these estimates
under different assumptions and conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies
see our note 2 to our financial statements.
Long-Lived Assets (including Tangible and Intangible Assets)
We acquired businesses in recent years, which resulted in tangible assets being
recorded. The determination of the value of such intangible assets requires
management to make estimates and assumptions that affect our consolidated
financial statements. We assess potential impairment to the intangible and
tangible assets on a quarterly basis or when evidence that events or changes in
circumstances indicate that the carrying amount of an assets may not be
recovered. Our judgments regarding the existence of impairment indicators, if
any, and future cash flows related to these assets are based on operational
performance of our business, market conditions and other factors.
Accounting for Income Taxes
As part of the process of preparing our financial statements we are required to
estimate our income taxes. Management judgment is required in determining our
provision of our deferred tax asset. We recorded a valuation for the full
deferred tax asset from our net operating losses carried forward due to the
Company not demonstrating any consistent profitable operations. In the event
that the actual results differ from these estimates or we adjust these estimates
in future periods we may need to adjust such valuation recorded.
Going Concern
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. The Company has had negative working
capital for each of the last two years ended May 31, 2003 and 2002. The Company
has recently relinquished title to its property and equipment due to default of
its bank line of credit and mortgage on its property. The Company is in arrears
with paying payroll taxes for several months. Those conditions raise substantial
doubt about the abilities to continue as a going concern. The financial
statements of the Company do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
16
Item 8. Financial Statements and Supplementary Data
Page
Independent Auditors' Report F-2
Financial Statements:
Balance Sheet as of May 31, 2003 F-3
Statement of Operations for the years ended
May 31, 2003 and 2002 F-4
Statement of Changes in Shareholders'
Deficiency for the year ended May 31, 2003 F-5
Statement of Cash Flows for years ended May 31,
2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7
17
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, 2003, and the related statements of
operations, shareholders' deficiency, and cash flows for each of the two years
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.
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,
2003, and the results of its operations and cash flows for each of the two years
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 $1,566,685 for the
year ended May 31, 2003, and has a negative working capital and shareholder
deficiency as of May 31, 2003. The Company is also in default with its bank
lines of credit and is in arrears with paying payroll taxes by several months.
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.
Certified Public Accountants
New York, New York
October 14, 2003
F-2
NOVEX SYSTEMS INTERNATIONAL, INC.
BALANCE SHEET
May 31, 2003
ASSETS
CURRENT ASSETS:
Cash $ 3,165
Accounts receivable 68,169
------------
Total Current Assets 71,334
PROPERTY, PLANT AND EQUIPMENT - net 767,298
GOODWILL - net 591,695
------------
$ 1,430,327
============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long term debt $ 2,210,868
Bank line of credit 414,018
Accounts payable 592,224
Loans payable - shareholder 126,519
Accrued expenses and other current liabilities 358,128
Accrued payroll taxes 376,835
------------
Total Current Liabilities 4,078,592
------------
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
26,245,187 shares issued and outstanding 26,245
Additional paid-in capital 6,413,267
Accumulated deficit (10,731,910)
------------
Total shareholders' deficiency (2,648,265)
------------
$ 1,430,327
============
See notes to financial statements.
F-3
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Year Ended May 31,
2003 2002
---- ----
NET SALES 936,115 1,866,914
ROYALTY REVENUE 110,558 --
------------ ------------
TOTAL SALES 1,046,673 1,866,914
COST OF GOODS SOLD 705,034 1,194,601
------------ ------------
GROSS PROFIT 341,639 672,313
SELLING, GENERAL AND ADMINISTRATIVE 1,555,358 1,333,401
------------ ------------
LOSS FROM OPERATIONS (1,213,719) (661,088)
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (315,877) (312,529)
Amortization or debt discount (37,089) (38,016)
Change in valuation of put warrant -- 3,279
------------ ------------
OTHER EXPENSES, net (352,966) (347,266)
------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM (1,566,685) (1,008,354)
------------ ------------
EXTRAORDINARY ITEM:
Gain on extinguishment of debt -- 42,873
------------ ------------
NET LOSS (1,566,685) (965,481)
Less: Preferred stock dividend 164,413 137,879
------------ ------------
NET LOSS TO COMMON SHAREHOLDERS $ (1,731,098) $ (1,103,360)
============ ============
LOSS PER COMMON SHARE, basic and diluted:
FROM CONTINUING OPERATIONS $ (0.07) $ (0.04)
FROM EXTRAORDINARY ITEM -- --
------------ ------------
TOTAL LOSS PER COMMON SHARE, basic and diluted $ (0.07) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING, basic and diluted 26,557,687 26,085,795
============ ============
See notes to financial statements.
F-4
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)
Share repurchase (625,000) (625) (8,750) (9,375)
Warrant contribution 22,364 22,364
Preferred stock dividend --
Net loss (1,566,685) (1,566,685)
----------- ----------- ----------- ---------- ------------ ------------ -----------
BALANCE, May 31, 2003 1,644,133 $ 1,644,133 26,245,187 $ 26,245 $ 6,413,267 $(10,731,910) $(2,648,265)
=========== =========== =========== ========== ============ ============ ===========
See notes to financial statements.
F-5
NOVEX SYSTEMS INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Year Ended May 31,
---------------------------
2003 2002
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,566,685) $(965,481)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for bad debts -- 77,799
Depreciation and impairment of equipment 464,101 88,136
Amortization of goodwill 37,089 49,452
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 22,364 38,016
Changes in assets and liabilities, net of the
effect from acquisition:
Accounts receivable 318,049 (107,560)
Inventories 156,284 47,970
Prepaid and other current assets 143,477 (113,257)
Accounts payable 210,864 (130,205)
Accrued expenses and other current liabilities 194,776 424,213
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (19,681) (612,316)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES: -- --
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft -- (28,343)
Repayment of loans payable - shareholders (26,152) 80,653
Repayment of proceeds from bank line of credit (158,292) 115,902
Proceeds from debt financing 192,036 300,000
Repayment of debt obligations -- (69,500)
Repurchase of common stock (9,375)
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 (USED) BY FINANCING ACTIVITIES (1,783) 636,945
----------- ---------
NET INCREASE(DECREASE) IN CASH (21,464) 24,629
CASH AT BEGINNING OF YEAR 24,629 --
----------- ---------
CASH AT END OF YEAR $ 3,165 $ 24,629
=========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 260,783 $ 205,748
=========== =========
Income taxes $ 0 $ --
=========== =========
Non-cash flow and investing and financing activities:
Accrued preferred stock dividend payable $ 0 137,879
=========== =========
See notes to financial statements.
F-6
NOVEX SYSTEMS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2003 AND 2002
1. DESCRIPTION OF BUSINESS
Novex Systems International, Inc. ("Novex" or the "Company") currently
receives a monthly royalty from 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 consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. The Company has incurred net losses of
$1,566,685 and $965,481 for the years ended May 31, 2003, and 2002,
respectively. Additionally, the Company had a net working capital
deficiency and a shareholders' deficiency at May 31, 2003 and
negative cash flow from operations for the years ended May 31, 2003
and 2002. 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 in the foreseeable future and recognizes the need to raise
capital to achieve their business plans. The accompanying
consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as
a going concern.
b. 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.
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. The Company has written down
its equipment for an amount in excess of $300,000 due the
restructuring of its operations, whereby the Company no longer is
manufactures its products. The manufacturing of its products is
performed by an unrelated party effective January 31, 2003 and the
Company now receives a royalty for each product sold.
F-7
e. 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.
f. 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.
g. 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, 2003 and 2002, the Company recorded shipping and
handling fees of $135,587 and $140,730, respectively.
h. 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, 2003 and 2002 amounted to approximately $10,225 and
$25,875, respectively.
i. 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, 2003 and 2002,
diluted loss per share is the same as basic loss per share since the
inclusion of stock options and warrants would be antidilutive.
j. Stock Options -The Company accounts for all transactions under which
employees, officers and directors receive shares of stock in the
Company in accordance with the provisions of Accounting Principles
Board Opinion No. 25. "Accounting for Stock Issued to Employees." In
accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," the Company
adopted the pro forma disclosure requirements of SFAS 123.
Accordingly, no compensation has been recognized in the results of
operations for the employees, officers and directors stock option
plan.
k. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
l. 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.
F-8
m. 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.
n. Recent Accounting Pronouncements - 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.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of
the method used on reported results. The Company has adopted the
disclosure provisions in the accompanying financial statements as
discussed.
In November 2002, the FASB issued FASB Interpretation ("FIN") No.
45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN No. 45 requires the recognition of a liability for
certain guarantee obligations issued or modified after December 31,
2002. FIN No. 45 also clarifies disclosure requirements to be made
by a guarantor of certain guarantees. The disclosure provisions of
FIN No. 45 are effective for fiscal years ending after December 15,
2002. We have adopted the disclosure provisions of FIN No. 45 as of
February 28, 2003. The Company does not expect the adoption of FIN
No. 45 to have a material impact on its financial position, results
of operations or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." FIN
No. 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 is
effective for all new
F-9
variable interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for
the first interim or annual period beginning after June 15, 2003.
The company is currently analyzing the existing guidance and
reviewing any developments with regard to the proposed FASB Staff
Positions issued on the implementation of FIN No. 46 which are
currently subject to public comment. Therefore, the company cannot
determine whether there will be an impact on its financial position,
results of operations, or cash flows at this time.
In January 2003, the FASB issued EITF Issue No. 02-16, "Accounting
by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor." This EITF addresses the accounting by a
vendor for consideration (vendor allowances) given to a customer,
including a reseller of the vendor's products, and the accounting by
a reseller for cash consideration received from a vendor. It is
effective for certain arrangements entered into after November 21,
2002, and for all new arrangements, including modifications to
existing arrangements, entered into after December 31, 2002. The
company adopted the provisions of the EITF in the fourth quarter of
fiscal 2003 and, as the company's policies were already consistent
with those of EITF 02-16, the adoption of this standard did not have
a material impact on the company's financial position, results of
operations or cash flows.
In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities,"
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No.
133, Accounting for Derivative instruments and Hedging Activities.
This Statement is effective for contracts entered into or modified
after June 30, 2003, except for certain hedging relationships
designated after June 30, 2003. Most provisions of this Statement
should be applied prospectively. The Company does not expect the
adoption of SFAS No. 149 to have a material impact on our financial
statements.
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement establishes standards for
how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This
statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003,
except for mandatory redeemable financial instruments of nonpublic
entities, if applicable. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period
of adoption. The Company does not expect the adoption of SFAS No.
150 to have a material impact on our financial statements.
F-10
3. CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are concentrated 100% with one
customer.
4. ROYALTY AGREEMENT
On January 31, 2003, the Company entered into a licensing agreement, until
December 2004 with an unrelated entity "Licensee" to manufacture, market and
distribute the Company's Por-Rok, Dash patch and Sta-Dri products in exchange
for monthly royalty payments ranging from 15% to 25% of the invoiced amount to
the customer. In addition the Licensee purchased at cost the inventory on hand
from the Company payable in three installments through March 31, 2003. The
Licensee has the right to terminate the agreement within 180 days from the
commencement date of the agreement for the following reasons; failure to ship a
minimum of $375,000 of merchandise in two consecutive quarters, Licensee having
become subject to a 50% change in control, Licensee becoming subject to
involuntary bankruptcy.
5. PROPERTY, PLANT AND EQUIPMENT
At May 31, 2003 property, plant and equipment consists of the following:
Land $ 400,000
Building 415,000
Property and equipment 157,575
Leasehold Improvements 5,764
---------
978,339
Less: Accumulated depreciation
and amortization (211,041)
---------
$ 767,298
=========
6. ACCRUED EXPENSES AND OTHER LIABILITIES
As of May 31, 2003, accrued expenses and other liabilities consist of the
following:
Accrued interest payable $ 318,057
Other accrued 37,026
---------
$ 358,128
=========
F-11
7. 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. Effective June 1, 2002, the Company applied
the provisions of SFAS and goodwill continues to be amortized on the
straight-line method over 10 years for Arm Pro and over 15 years for
Allied/ Por-Rok and Sta-Dri.
8. LOANS PAYABLE -SHAREHOLDER
Loans payable to shareholders bear interest at 10% per annum and the
principal plus accrued interest is due on demand.
9. INCOME TAXES
At May 31, 2003, the Company has available unused net operating loss
carryovers approximately $9,400,000 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.
2003
-----------
Deferred tax asset:
Net operating loss carryforward $ 3,200,000
Valuation allowance (3,200,000)
-----------
Net deferred tax asset $ --
===========
A reconciliation of the statutory federal income tax benefit to actual tax
benefit is as follows:
2003 2002
--------- ---------
Statutory federal income tax benefit $ 510,000 $ 296,000
Income tax benefit not utilized (510,000) (296,000)
--------- ---------
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
10. 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 Subsequent Events
Note). 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 settle such
debt through the release of its collateral. At May 31, 2003, the prime
rate was 4.25%.
As of May 31, 2002 and 2003, the Company was not in compliance with
several of the financial covenants.
11. LONG TERM DEBT
At May 31, 2003, long-term debt consists of:
Notes payable (a) $1,061,000
Debenture payable (b) 125,000
Dime note payable (c) 704,668
Notes payable (d) 325,000
----------
2,215,668
Less: Unamortized debt discount 4,800
----------
2,210,868
Less: Current portion 2,210,868
----------
$ --
==========
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
In December 2002, a note holder signed an agreement to forbear from
pursuing any claims against the Company to seek repayment of
outstanding principal and interest due on the promissory notes
purchased from the Company. In consideration for signing the
agreement, the Company agreed to pay the note holder $50,000 on the
additional condition that the note holder tender to the Company for
cancellation, 625,000 shares of the Company's $.001 par value common
stock it is holding. The $50,000 payment was allocated $40,625 to
interest expense and $9,375 to the repurchase of common stock.
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. The put
warrant expired in August 2002 and the remaining recorded value of
such warrant was recorded as a contribution to equity. The note is
collateralized by all of Novex's property, plant and equipment at
the Clifton facility. Prime rate at May 31, 2003, was 4.25%. As of
May 31, 2003, 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) In May 2002 and 2003, the Company raised $325,000 from outside
investors. 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 for the 2002 portion 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. The Company is in default of note payables, which have
matured are currently due and outstanding.
12. 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
F-14
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 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.
During 2003, the Company did not issued the 164,413 dividends attributed
to the terms of the preferred stock through May 31, 2003, since the
Company was in active negotiations to acquire or eliminate such series A
preferred stock. See Subsequent Events Note.
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 December 2002, these
shares were canceled.
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.
F-15
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. These shares were valued at prices
ranging between $.056 to $.061 per share.
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.
d. Equity transactions during fiscal year 2003 were as follows:
o The Company reacquired 625,000 shares of common stock as
part of a debt forbearance agreement with its single
largest non-institutional creditor.
o The Dime put warrant expired in August 2002, resulting
in a contribution to capital in the amount of $22,364.
F-16
13. 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 2003.
Stock Options Warrants
-------------------------------------------------- ------------------------------------------------
Shares Exercise Price Exercisable Shares Exercise 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.
14. 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 2003 and 2002.
15. 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:
Year Ending
May 31, 2004
------------
------------
$ 3,384
============
F-17
Total rental expenses for the years ended May 31, 2003 and 2002 was
approximately $1,000 and $9,600, 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.
c. During fiscal 1997, a shareholder commenced an action against the
Company and its former President to enjoin the Company and the
former President from taking any action that would restrict the sale
of common stock that he allegedly owns. In the opinion of
management, this action is without merit and will not have a
material adverse effect on the Company's financial position or
results of operations.
d. As of August 1, 2001 and until August 1, 2002, the Company will have
to pay an additional $6,000 each month to the former owners of The
Sta-Dri Company 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 Company's common stock did not trade
above the questioned time period and therefore has accrued for such
payments due. These payments due and outstanding are recorded in
accounts payable.
16. SUBSEQUENT EVENTS
a. On September 3, 2003, The Sherwin-Williams Company ("Sherwin")
surrendered for cancellation all of its 1,000,000 shares of common
stock and all of its 1,758,839 shares of preferred stock, including
accrued dividends after February 28, 2003. The decision was based
solely on Sherwin's review of its mandatory right to convert its
preferred shares into common stock pursuant to an agreement reached
on August 7, 2000, which upon exercise would have resulted in
Sherwin ownng over 90% of the company's common stock. Under the
circumstances Sherwin preference was to terminate its entire
ownership interest in the Company, versus having to assume a
substantial controlling interest in the Company pursuant to the
terms and conditions of the August 7, 2000 agreement.
Effective September 3, 2003, the Company has terminated all of its
preferred shares having had a liquidation preference of $1.00 per
share, or a face value of $1,758,359, and has reduced its issued and
outstanding common stock by 1,000,000 shares to 25,245,187.
b. The Company's former bank Dime Commercial Corp ("Dime"), refused to
extend its foreclosure date of July 1, 2003, to enable the Company
to close a contract to sell its former
F-18
operating plant in Clifton, New Jersey to a buyer that had agreed to
purchase the property for $1,380,000 (and had placed $100,000 into
escrow). On July 1, 2003, pursuant to the foreclosure, the Company
conveyed full ownership of its real property and personal tangible
property to Dime. The Company continues to own all of its intangible
personal property which it needs to remain as a going concern.
Dime has since listed the real property for sale at $1,500,000 and
has appraised the personal tangible property at $157,575 for a total
value of $1,657,575. On July 1, 2003, the full amount of the
judgment owed to Dime, plus costs was $1,336,299. The Company has
demanded in a formal court filing that it receive a surplus of the
difference between the fair market value of its property and the
judgment. The Company continues to negotiate a settlement with Dime
and is also considering filing for bankruptcy.
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, 2003 and has had no disagreements
with them.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following provides certain information concerning the directors and
executive officers of Novex and its subsidiaries as of May 31, 2003.
Name Aqe Position
---- --- --------
William K. Lavin 59 Chairman, Secretary
Daniel W. Dowe 41 Director, President
and Chief Executive Officer
Edward J. Malloy 67 Director
Kevin DeMatteis 39 Director
William K. Lavin. Mr. Lavin became a director in October, 1997 and currently
operates his own consulting business that he formed in 1994. Before forming his
firm, he was Chief Executive Officer of Woolworth Corporation (renamed
"Venator") from 1993 to 1994 and immediately before that position he served as
Woolworth's Chief Administrative and Financial Officer. Mr. Lavin also serves on
the board of directors of the Allegheny Corporation (NYSE:Y) and Chicago Title
Corporation (NYSE:CTZ).
Daniel W. Dowe. Mr. Dowe became a director in March, 1997, Acting President on
November 17, 1997 and President and Chief Executive Officer on April 1, 1998.
Mr. Dowe has agreed to serve in this capacity for a three year period pursuant
to a written employment agreement and will have an option to serve for an
additional three year period. He was the founder of Dowe & Dowe, a New York
City-based law firm that provided legal services to Novex. From 1993 to November
17, 1997, Mr. Dowe practiced corporate and securities law at his firm. 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.
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.
18
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 and Malloy (the
"Compensation Committee"). 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. As a result, Mr.
Dowe is handles all financial matters with certain bookkeeping and
administrative duties being performed by clerical workers and certain accounting
and tax-related matters being performed by outside professionals.
Item 11. Executive Compensation
The following table shows all remuneration in excess of $100,000 paid by Novex
and its subsidiaries through May 31, 2003, to all directors and officers:
Table 1
Summary Compensation Table
Long-Term Compensation
Annual compensation Awards Payouts
------------------- ------ -------
Securi-
ties
Name Other Underly- All
and Annual Restrict- ing Other
Princi- Compen- ed Stock Options LTIP Compen-
pal Salary Bonus sation Awards SARs Payout sation
Position Year ($) ($) ($) (#) (#) ($) ($)
----------------------------------------------------------------------------------------------------------------------------
Daniel
Dowe
President 2003 $180,000
(1)(2) 2002 $180,000
2001 $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
19
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.
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, 2003 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:
20
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)
----------------------- ------------ --------
Daniel W. Dowe 2,869,690 11.00%
Director, President, (4)
William K. Lavin 105,316 1.22%
Chairman, Secretary(5)
Kevin DeMatties, Director 200,000 1.00%
Edward J. Malloy, Director (6) 65,316 .33%
--------- ------
All Directors and Officers
as a group 3,240,322 12.85%
--------- ------
A. The address for Messrs. Dowe, Lavin, Malloy and DeMatteis is 16 Cherry
Street, Clifton, New Jersey 07014.
B. The class includes stock options and stock warrants granted to the
directors and officers before May 31, 2003 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, 2003 there were
26,245,187 shares issued and outstanding and 27,455,842 on a fully diluted
basis. Percentages are stated on a fully diluted basis.
Director Compensation
None of Novex's directors are compensated for serving as directors.
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)
------------------- ------------ --------
Not Applicable.
21
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.
David A. Dowe who is the brother of Daniel W. Dowe has made loans to the
company and has purchased common stock under the same terms and conditions as
other non-affiliated investors that either loaned money to the company or
purchased 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.
22
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
Independent Auditors' Report F-2
Financial Statements:
Balance Sheet as of May 31, 2003 F-3
Statement of Operations for the years ended
May 31, 2003 and 2002 F-4
Statement of Changes in Shareholders'
Deficiency for the year ended May 31, 2003 F-5
Statement of Cash Flows for years ended May 31,
2003 and 2002 F-6
Notes to Consolidated Financial Statements F-7
23
(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 pageof this Prospectus).
99.1 Battista Agreement
99.2 Supercrete N/A Limited Agreement dated December 20, 1996
(B) Exhibits filed herein:
21.1 Subsidiaries of Novex
31 Certification of Principal Executive and Financial Officer
32 Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Stratford Acquisition Corporation has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized:
NOVEX SYSTEMS INTERNATIONAL CORPORATION
By: /ss/ Daniel W. Dowe
-------------------
Daniel W. Dowe, Chief Executive Officer and
Chief Financial Officer
Dated: December 22, 2003
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 December 22, 2003
-------------------------
Daniel W. Dowe
/ss/ William K. Lavin Director December 22, 2003
--------------------------
William K. Lavin
/ss/ Edward J. Malloy Director December 22, 2003
--------------------------
Edward J. Malloy
/ss/ Kevin DeMatteis Director December 22, 2003
--------------------------
Kevin DeMatteis
25