UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - FOR THE FISCAL YEAR ENDED APRIL 30, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the transition period from ______ to ______
Commission file number: 0-8006
COX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 86-0220617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
69 MCADENVILLE ROAD
BELMONT, NORTH CAROLINA 28012-2434
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (704) 825-8146
Securities registered pursuant to Section 12(b) of the Act: (None)
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
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 Exchange 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 such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if 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
amendment to this Form 10-K. ( )
Estimated aggregate market value of the voting stock held by non-affiliates of
the registrant:
$2,070,247 as of July 22, 2002
Number of shares of Common Stock, no par value, as of the latest practicable
date:
25,878,082 shares as of July 22, 2002
Documents incorporated by reference: Portions of the proxy statement dated July
29, 2002, relating to the August 30, 2002 annual meeting of shareholders, are
incorporated by reference into Part III of this annual report.
COX TECHNOLOGIES, INC.
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED APRIL 30, 2002
----------
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business............................................................... 3
Executive Officers of the Registrant................................... 9
2. Properties............................................................. 10
3. Legal Proceedings...................................................... 10
4. Submission of Matters to a Vote of Security Holders.................... 10
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters......................................... 10
6. Selected Financial Data................................................ 13
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 14
8. Financial Statements and Supplementary Data ........................... 21
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................................. 41
PART III
10. Directors and Executive Officers of the Registrant..................... 41
11. Executive Compensation................................................. 41
12. Security Ownership of Certain Beneficial Owners
and Management...................................................... 41
13. Certain Relationships and Related Transactions......................... 41
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 42
Signatures............................................................. 45
2
PART I
ITEM 1. BUSINESS
GENERAL
Cox Technologies, Inc. (the Company), was incorporated as Mericle Oil
Company in July 1968, under the laws of the State of Arizona. The name was
changed to Energy Reserve, Inc. in August 1975. In November 1994, Energy Reserve
acquired Twin-Chart, Inc. and altered its primary business focus from crude oil
operations to temperature recording and monitoring operations. As a result of
this change in focus, the Company changed its name to Cox Technologies, Inc. in
April 1998. The Company reincorporated in the State of North Carolina in
December 2000.
Executive offices and manufacturing facility are located at 69 McAdenville
Road, Belmont, North Carolina 28012-2434; telephone (704) 825-8146. Except where
the context otherwise indicates, all references to the "Company" are to Cox
Technologies, Inc., its wholly owned subsidiaries, Twin-Chart, Inc., Transit
Services, Inc., Vitsab Sweden, AB, Vitsab, Inc., Vitsab USA, Inc., Fresh Tag
Research & Manufacturing, Inc., Qualtag Engineering, Inc. and Cox Recorders
Australia, Pty. Ltd., a 95% owned Australian distribution company. During July
2001, all domestic subsidiaries were merged into the parent company, Cox
Technologies, Inc. Only the foreign subsidiaries of Vitsab Sweden, AB and Cox
Recorders Australia, Pty. Ltd. remain. The Company will operate Cox Recorders
and Vitsab as operational divisions.
The core business of the Company is to provide reliable temperature
monitoring products and develop new and technologically advanced monitoring
systems. The Company produces and distributes transit temperature recording
instruments, including electronic "loggers," graphic temperature recorders and
visual indicator tags, both in the United States and internationally. Transit
temperature recording instruments create a strip chart record of temperature
changes over time, or record temperatures electronically according to a present
interval ("logging"). The Company sells and manufactures both types of transit
monitoring products, and has established an international market presence and
reputation for reliable temperature recording products.
The Company has expended funds to further the development of enzyme-based
"smart labels" that detect temperature abuse in packages of perishable goods.
The Company has introduced this new technology, known as Vitsab(R), to the food
and pharmaceutical industries as a monitoring label applied to packages of
temperature sensitive products. Initial reactions from potential customers have
been encouraging.
The Company previously had two current operating segments that involved the
(1) production and distribution of temperature recording and monitoring devices,
including electronic "loggers," graphic temperature recorders and visual
indicator tags (referred to as "Temperature Recorder Operations" as a group) and
(2) oilfield operations and other, which included all economic activity related
to the oil production and the holding of the oil subleases and the operation of
its Phoenix office. The Company closed its Phoenix office effective October 31,
2000. The activities performed in Phoenix were transferred to the Corporate
Office in Belmont, North Carolina. The Company entered into an agreement with a
group in Dallas, Texas, to sell the subleases on behalf of the Company. The
group contacted and solicited potential buyers to make purchase offers to the
Company for the subleases. The Company terminated the agreement in April 2001
after receiving no purchase offers from potential buyers. As a result of the
inability of the Company to attract a potential buyer, the high cost and
difficulty in producing crude oil of the type found in the field and losses
incurred in the oilfield operations, the Company evaluated the recoverability of
the carrying amount of the oilfield net assets. In analyzing expected future
cash flows from potential offers, the Company is of the opinion that $300,000 of
net assets should be accounted for as property held for sale. As a result, the
Company recognized a loss on impairment of $3,062,196 in the fourth quarter of
fiscal 2001. The Company now operates in one reporting segment of Temperature
Recorder Operations.
TEMPERATURE RECORDER OPERATIONS
The Company's temperature recorder activities include production and
distribution of graphic temperature recording instruments, the sale and
distribution of electronic temperature recorders (sold for non-transit quality
monitoring purposes as well as for transit monitoring) and production and
distribution of visual indicator tags. The Company also performs contract
manufacturing.
The graphic temperature recording instruments, known as temperature
recorders, are self-contained, battery-powered and designed to create a
graphical "time vs. temperature" record. The electronic temperature recorders
3
are battery-powered devices that record temperature in a computer memory chip.
The data is later retrieved by transferring the information to a personal
computer. The Company also sells digital thermometers as adjuncts to their
primary temperature recorder activity.
The graphic recorders are marketed under the trade name Cox Recorders and
produce a record which is documentary proof of temperature conditions useful for
compliance with governmental regulations, the monitoring performance of
refrigerated carriers, and for claims in the transport of valuable perishables
such as produce, meat, pharmaceuticals, chemicals, live plants and animal
material. The electronic temperature recording products are used for the same
purpose, but also are used for internal checking of temperature conditions in
storage and processing. The visual indicator tag product determines the exposure
of a stored or shipped temperature-sensitive commodity.
In previous years, the Company manufactured two separate graphic recorders.
The Cox1 and Cobra(R) record the air temperature in a truck or container. Both
are used primarily in transit monitoring of temperature variations. Manufacture
of the Cobra(R) design was halted during fiscal 2001 due to a declining demand
for the product.
The Company produces two different types of electronic "data loggers"
through an exclusive contract arrangement with a New Zealand manufacturer. The
Tracer(R) product line, which can record data for both temperature and humidity,
is a research-grade instrument used in a broad variety of laboratory,
environmental, process control, and quality assurance applications. A lower cost
electronic data logger, the DataSource(R), is used exclusively for transit
temperature monitoring and recording. Both loggers deliver their data via a
cable link to a personal computer using specialized software maintained by the
New Zealand manufacturer.
During fiscal 2002, a large grocery store chain started requiring its
shippers to use the DataSource(R) product exclusively when shipping perishable
products to its distribution centers. This is the second large retail customer
that uses the DataSource(R) product. The Company recently received notice that
another large grocery store chain will begin requiring its shippers to use the
DataSource(R) product in fiscal 2003. The Company is currently in discussions
with other retail and wholesale distributors that have shown interest in using
the DataSource(R) product in their operations. Management is encouraged by the
recent increase in sales of this product and has hired additional sales
personnel to introduce the DataSource(R) product to other large retailers.
Management cannot predict whether the current users of the DataSource(R) product
will continue using it nor can they predict if the current discussions will
result in adding additional users of the DataSource(R) product.
The Company purchases for resale the TempList(R), which is a data
collection or "listing" temperature recorder that is used for
point-of-measurement recording. The TempList(R) delivers the data via a cable
link to a personal computer using specialized software. The Company also
purchases digital thermometers with penetration probes for resale from a variety
of manufacturers.
The Cox1 product accounts for 78% of the Company's revenues. The balance is
accounted for through the sale of electronic data loggers, probes and other
temperature monitoring products.
During fiscal 2002, the Company contracted with a third party to
manufacture and assemble certain base versions of the Cox1 units at an offshore
location. At the end of fiscal 2002, this location is supplying approximately
50% of the total number of units being utilized by the Company. Because of this
manufacturing arrangement, the Company has realized significant cost savings on
units manufactured in both the offshore and Belmont, North Carolina facilities.
The Company's current plans are to continue assembling special-use Cox1 units in
the Belmont facility. The Belmont facility will also continue to manufacture and
assemble a certain percentage of the base Cox1 units. If necessary, the
production capabilities of the Belmont facility can easily be expanded to meet
the total demand for all Cox1 units. The Company has identified certain risks
and uncertainties that are associated with offshore production that include, but
are not limited to, political issues, transportation risks and the availability
of raw materials. The Company will not experience foreign currency exchange
risks as all transactions are denominated in U.S. dollars.
The source and availability of raw materials are not critical or
significant factors in the temperature recorder operations of the Company. The
temperature recorder operations of the Company are non-seasonal. The Company
does and is required to carry significant amounts of inventory for its
temperature recorder operations and neither Company nor industry practices
provide extended payment terms to customers.
The temperature recorder operations of the Company are not dependent upon a
single or a few customers. However, the Company does have business relationships
with several large retail customers and foreign distributors that, if those
4
relationships were severed, could have a material adverse effect upon the
earnings or the financial position of the Company. Backlog of orders is not a
major factor in the temperature recorder operations of the Company.
The Company is a major competitor in the temperature recording industry
with regards to its production and distribution activities. The Company
encounters significant competition from a variety of companies in all major
areas of its business activity. The Company competes primarily on product
performance and price. Reliability, technology, customer service and company
reputation are also important competitive factors.
The Company generally does not maintain company owned distribution
entities. However, in 1999, the Company established Cox Recorders Australia,
Pty. Ltd. to retain its market share and presence in this geographic area.
Except for this subsidiary, all distributors are contracted, including major
distributors located in Copenhagen, Denmark; Singapore; and Santiago, Chile. All
other distribution and sales operations are through individual sales persons
operating on salary, sales commission basis or salary plus incentive basis.
VITSAB(R) PRODUCT
Vitsab(R) is a new technology which employs enzymatic color indicators
inside a transparent label to show the amount of temperature exposure of a
stored or shipped temperature-sensitive commodity. The enzyme indicator reaction
is activated at the beginning of the monitoring period by applying pressure on a
plastic bubble strip that is a structure part of the label. This strip contains
sealed packets of non-toxic liquids that are broken by pressure. These non-toxic
liquids mix to form the indicating solution.
These tags are programmable devices that run as a "biological clock"
parallel to the biological clock of the product it is set to monitor. They
integrate both time and temperature and give a visual indication when parallel
processes with the monitored food or drug product has reached a certain
definable state. This device is known as a TTI (time-temperature integrator).
The Company produces two distinct Vitsab(R) TTI configurations: a "three
dot" indicator (for wholesale distribution of perishables) and a "one dot"
indicator (primarily for food safety and consumer packages). Each product is
produced on high-speed automated machinery.
The Company is in the final stages of the development, production and
marketing of the Vitsab(R) TTI. Final development of this technology continues
to require substantial effort to refine the manufacturing procedures to achieve
a reliable and consistent product delivery. In addition, the chemical
formulation of the tag itself, including the specific chemical nature of the
enclosure, continues to require testing and validation. During fiscal 2002, the
Vitsab(R) line of products generated approximately 1% of the Company's total
revenues.
The source and availability of certain raw materials may be a critical and
significant factor for Vitsab(R) TTI if it begins production in significant
volumes. The Company's current plans are to manufacture the Vitsab(R) TTI at two
locations: Belmont, North Carolina and Malmo, Sweden. The preparation of
solutions and product manufacturing are currently being conducted in Belmont,
North Carolina. Preliminary production operations have been periodically started
and stopped in Malmo, Sweden as development progresses.
The Company maintains both company owned distribution entities and certain
contract distributors associated with the Company's temperature recorder
operations. The Company plans to use these same distribution entities for
Vitsab(R) outlets.
In April 2001 the Company executed an agreement with its Copenhagen
distributor ("Purchaser") for an option to purchase all of the shares and assets
of the Company's wholly owned subsidiary, Vitsab Sweden, AB. The option
agreement gives the Purchaser until November 30, 2001 to exercise the option. In
return for the option, the Purchaser paid the Company $20,000 a month beginning
March 2001 and ending November 2001. During the option period, the Company
cannot sell, transfer, pledge, mortgage or otherwise dispose of nor issue new
shares in Vitsab Sweden, AB without the prior written approval by the Purchaser.
The stated purchase price in the agreement for all of the shares in, and assets
of, Vitsab Sweden, AB is $1.00. In addition, the Purchaser must make monthly
payments of $6,000 to the Company beginning the month after the option is
exercised and ending with the final payment in June 2004. If the Purchase option
is executed, the Purchaser will have the exclusive right for ten years to
manufacture, sell and distribute the Vitsab(R) product in certain countries
designated in the agreement. The Company will be paid a minimum annual royalty
based on the volume of Vitsab(R) products sold.
On October 18, 2001 the Company entered into a verbal agreement with
Purchaser to extend the agreement through February 2002, and then on a
month-to-month basis, with a requirement that each party provide a two month
notice to cancel the agreement. Additionally, the Purchaser will pay $17,000 a
5
month in return for the extension beginning December 1, 2001. All of the other
terms and conditions in the agreement remain the same. On April 15, 2002, the
Purchaser notified the Company that he was terminating the agreement effective
June 15, 2002. During May 2002, the Purchaser rescinded the termination notice
and both parties agreed verbally to extend the agreement until September 15,
2002, and then on a month-to-month basis, with a requirement that each party
provide a 30-day notice to cancel the agreement. The Purchaser will continue to
pay the Company $17,000 a month while the agreement is in place. All of the
other terms and conditions in the agreement remain the same. If the Purchaser
does not execute the purchase option by the end of the option period, the
Company will retain ownership of all shares and assets of Vitsab Sweden, AB. In
March 2002, the Company notified the landlord in Sweden that it would not be
renewing its lease that expires on December 31, 2002.
The Company's entire Vitsab(R) operation is largely dependent on one
customer. This customer is testing these products for use in the distribution of
their perishable products. Management cannot predict when the customer will
complete their pilot program. Once the pilot program is complete, the customer
will then decide whether to expand the use of the Vitsab(R) products throughout
their entire distribution system or discontinue using the products. If the
customer decides to use the Vitsab(R) products, management cannot predict how
quickly they will expand their use. If the customer decides not to use the
Vitsab(R) products, the Company will then have to decide whether it is
financially feasible to continue producing the products for testing or for sale.
Management cannot predict at this time whether the pilot program will be
successful or if the customer will continue to use the Vitsab(R) products.
The Company's existing manufacturing equipment located in Belmont has the
capacity to produce enough of the Vitsab(R) products to meet the currently
projected demands of the current customer base. The labels have consistently
proved to perform as effective time-temperature monitors, but certain technical
issues in production have resulted in delayed delivery of labels and in the
inconsistent performance of equipment for activating and dispensing the labels.
These issues are related to certain chemical and physical properties of the film
raw material and the way these characteristics affect the physical properties of
the finished product when manufactured with different pressure and temperature
settings in the manufacturing equipment. In some cases, there are combinations
of raw material properties and machine operating settings that cause performance
inconsistencies of the finished product when deployed in the Company's automated
Vitsab(R) activator-dispensers. Resolving these technical issues has created
delays in reaching full productive capacity. Despite substantial progress in the
improvement and perfection of these technical aspects of label production, the
Company is seeking no new customers for its Vitsab(R) product line until the
issues are fully resolved.
The Company's visual indicator tag operations previously included the
development, production and distribution of FreshTag(TM) food spoilage
indicators. FreshTag(TM) is based on a licensed and patented technology
developed by the U.S. Food and Drug Administration (FDA), that enables the
detection of specific chemical compounds that signal the incipient spoilage of
seafood and other food types. Effective April 10, 2002 the Company terminated
the Patent License Agreement. The Company had no significant operations related
to the FreshTag(TM) product.
OILFIELD OPERATIONS
The Company owns working interests in developed oil and gas properties
located in California. These developed properties contain drilled wells that are
capable of producing crude oil or natural gas. The Company's oil and gas
properties are the Mitchel and Bacon Hills subleases.
The Mitchel subleases and the Bacon Hills sublease are located in the
Chico-Martinez field, Kern County, California. Together they comprise one entire
section of land. The Mitchel subleases were acquired in 1969 and consist of 380
acres in which the Company has interests to a depth of 2,000 feet on 320 acres
and to a depth of 2,500 feet on 60 acres. The Bacon Hills sublease was acquired
in December 1980 and consists of 260 acres, in which the Company has interests
to the depth of 2,250 feet. The Company owns all of the working interest in both
these subleases that equates to a 78.33 percent revenue interest. There are 62
completed oil wells that produce from the 500 to 1,600 foot levels on these
subleases. The oil produced is heavy crude of approximately 12.7 API gravity.
The Company has no drilling requirements under these subleases, which are held
for an indefinite term by production. The sublessor has a 21.67 percent royalty
revenue interest in these subleases.
As previously disclosed in prior years, the sublessor had declared this
sublease in default due to the failure by the Company to meet certain well
drilling requirements. In May 2000, the Company paid the sublessor $50,000 to
cure the default. By agreement and amendment to the sublease, the sublessor
acknowledged that all drilling requirements had been fulfilled, that the Company
had no further obligation to drill any additional wells, that any and all
notices of default were canceled, and that the sublease was in full force and
effect.
6
The latest independent petroleum studies and reports for the leases were by
a respected petroleum engineer as follows: (1) Comprehensive Reservoir
Engineering Study, dated February 1986, which estimated the recoverable oil
reserves at 21,103,341 barrels, and (2) a Steam Flood Development Plan, dated
June 1987, which sets forth a plan including drilling and production costs for
recovery of the oil reserves. The Company has not filed any reports concerning
oil and gas reserve estimates with any regulatory authorities or agencies other
than the Securities and Exchange Commission. The petroleum engineer confirmed
the level of reserves in a letter issued July 2000.
The oil subleases have not produced in any significant volume. The Company
entered into an agreement with an independent oilfield operator in April 1999.
The primary function of the operator has been to increase production by
overhauling the surface equipment, establishing steam and hot water injection
operations and improving field conditions at the property. In July 2000, the
Company entered into a new agreement with the operator that replaced the
previous agreement. Under the terms of the new agreement the Company intended to
increase production more rapidly. The new agreement would also allow the Company
to buyout the operator at any time. It was the Company's strategy that
productive activity at the field would help to increase the revenues while
establishing a greater asset value, thus making the Company's sublease holdings
more attractive to a potential buyer.
In June 2000, the Company entered into an exclusive agreement with a group
in Dallas, Texas, to sell the subleases on behalf of the Company. The group
contacted and solicited potential buyers to make purchase offers to the Company
for the subleases. The Company terminated the agreement in April 2001 after
receiving no purchase offers from potential buyers. As a result of the inability
of the Company to attract a potential buyer, the high cost and difficulty in
producing crude oil of the type found in the field and losses incurred in the
oilfield operations, the Company evaluated the recoverability of the carrying
amount of the oilfield net assets. In analyzing expected future cash flows from
potential offers, the Company is of the opinion that $300,000 of net assets
should be recognized as property held for sale. As a result, the Company
recognized a loss on impairment of $3,062,196 in the fourth quarter of fiscal
2001. The Company has determined that no change in the valuation of this asset
is necessary for fiscal 2002.
The Company has attempted to sell the subleases for nearly two years.
Despite continued efforts, no sale has been completed. In August 2001 the
Company received an offer to purchase the subleases and received a good faith
deposit. After due diligence was completed, the potential purchaser determined
the Company may not have good title to the subleases due to an extended period
of non-production during the 1990's. With their uncertainty about the Company
being able to deliver good title, the potential purchaser canceled the offer and
the deposit was refunded in November 2001.
The Company hired legal counsel and a title insurance company to perform a
title search on the subleases and to research any title issues that were found.
The title insurance company issued a policy for $1,000,000 of title coverage on
the subleases. One of the exceptions listed in the title policy relates to a
lien filed by the operator on July 31, 2001. In the Company's opinion, the lien
filed by the operator is without merit and is clearly in violation of the
agreement dated June 30, 2000 between the Company and the operator. The
agreement supersedes all previous agreements and states that 120% of the
operator's capital investment at the date of the agreement will be repaid from
50% of the net profit generated from the operations of the subleases or proceeds
from the sale of the subleases. At April 30, 2002, the Company accrued $90,000,
which is the balance of capital and related interest that the operator invested
into the subleases under a previous agreement.
Due to the increasing cost of maintaining and operating the oil wells and
the related decrease in oil produced, along with a decrease in the market price
for the type of crude oil found on the subleases, the operations did not
generate any net profit during fiscal 2002. The Company recognizes that the
operation of the subleases is not related to its core business, and is exploring
every opportunity to sell the subleases. Consequently, the Company is not
pursuing further development of the subleases. The Company intends to continue
to maintain the lease in good standing and take whatever steps necessary to sell
the subleases. Because of these factors, the operator has not been reimbursed
for any of his capital investment during fiscal 2002. On January 29, 2002, the
operator filed a lawsuit against the Company, two of its current officers and a
former officer claiming breach of contract, fraud and damages totaling
approximately $87,000. Under the current agreement, the Company owes the
operator certain funds and intends to pay such funds out of the proceeds from
the sale of the subleases. However, the Company believes the lawsuit is without
merit and will take all legal actions necessary to defend the Company, its
current officers, its former officer, and the agreement signed by the operator
and the Company.
On March 21, 2002, the Company received an offer from a group, which
includes the operator of the subleases, to purchase the oil subleases for
approximately $362,000. The lien filed by the operator would be paid out of the
7
proceeds in order to have the lien filed on the subleases released. The offer
was accepted on March 25, 2002, and the parties began to draft the definitive
purchase and sale agreement. The purchase and sale agreement was executed by
both parties on June 3, 2002. The purchaser was required to deposit $50,000 into
an escrow account within two business days upon execution of the agreement.
These funds were never deposited into the escrow account by the purchaser. In a
letter dated June 20, 2002, the Company notified the purchaser that they were in
default of the purchase and sale agreement and therefore the agreement had been
terminated. On July 11, 2002, the Company executed an addendum to the original
purchase and sale agreement with the same purchaser after receiving a $25,000
non-refundable deposit. The closing of the transaction is projected to take
place on or before September 16, 2002. All other terms and conditions of the
original agreement remain the same. The Company does not believe the transaction
will have a material impact on the earnings or financial position of the
Company.
For further information, reference is made to Note 3 of the notes to
consolidated financial statements.
EDS(TM)/SOFTWARE PROJECT
The Company initiated a major new design effort to develop the EDS(TM)
temperature logger. The EDS(TM) is a slim product approximately the size of a
credit card and less than a quarter of an inch thick. A large LCD screen
displays detailed information about the temperature recording and the user can
scroll to display additional items of information. This "smart card" design
departs from the normal configuration for such products in that it is small in
size, inexpensive and displays much of the information that the users of graphic
transit temperature instruments now obtain from a visual inspection of a paper
chart.
On February 2, 2001, the Company filed a Current Report on Form 8-K
announcing that the Company reached an agreement with Sensitech Inc. and Ryan
Instruments to settle two lawsuits relating to alleged restrictions on the
employment of two of the Company's former employees and to an alleged
infringement of certain patents. As a result of this agreement, the Company
agreed to delay the market introduction of the EDS(TM) products until at least
November 2002.
INTELLECTUAL PROPERTY
The Company owns a number of patents, trademarks, trade secrets and other
intellectual property directly related to, and important to, the Company's
business. Although the conduct of business involves the manufacture of various
products that are covered by patents, the Company does not believe that any one
single existing patent or group of patents is material to the success of the
business as a whole.
RESEARCH AND DEVELOPMENT
No research and development expenses were incurred during fiscal 2002 due
to the Company reaching the final development stages of the Vitsab(R) product
and the halt in the development of the EDS(TM) product. Research and development
expenses were $345,393 and $409,362 and for the fiscal years ended 2001and 2000,
respectively. The decrease in fiscal 2001 as compared to fiscal 2000 is due to
the Company reaching the final development stages of the Vitsab(R) product and
the halt in the development of the EDS(TM) product
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any
governmental agency other than rules and regulations that apply to businesses
generally and any export controls and import controls, which may apply to our
products. Many of our customers' products, however, are subject to extensive
regulation by agencies such as the FDA. The Company designs and manufactures its
products to ensure that its customers are able to satisfy a variety of
regulatory requirements and protocols established to, among other things, avoid
the spoiling of perishable goods such as produce, meat, pharmaceuticals and
chemicals.
The regulatory environment in which customers operate is subject to changes
due to political, economic and technical factors. In particular, as use of
temperature recording and monitoring technology expands and as national
governments continue to develop regulations for this technology, customers may
need to comply with new regulatory standards. The failure to comply with current
or future regulations or changes in the interpretation of existing regulations
could result in the suspension or cessation of sales by the Company or its
customers.
EMPLOYEES
At June 1, 2002, the Company had 78 full-time employees compared to 117 at
June 1, 2001. This 33% decrease in full-time employees is due primarily to 29
assembly employees terminated during the period as the Company outsourced a
8
large portion of its Cox1 manufacturing to a third party. The balance of the
decrease was due to the consolidation of certain corporate and sales activities
previously performed in other locations to the Corporate Office in Belmont,
North Carolina. None of the Company's employees are covered by collective
bargaining agreements. Relations between the Company and its employees are
generally considered good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Date Elected
Name and Age (1) Title (1) An Officer
- ---------------- --------- ----------
Dr. James L. Cox Chairman, President and 08/01/95
Age - 57 Chief Executive Officer
David K. Caskey President - Cox Recorders Division 11/01/97
Age - 40
Brian D. Fletcher Chief Operating Officer 03/10/00
Age - 40
Jack G. Mason Chief Financial Officer 07/31/00
Age - 44 and Secretary
James R. McCue President - Vitsab Division 03/12/00
Age - 44
Kurt C. Reid Chief Operating Officer 03/10/00
Age - 42
Robert L. Thornton Controller and Assistant Treasurer 11/03/00
Age - 42
- ----------
(1) As of June 30, 2002
The present terms of all officers extend to August 30, 2002, the date of
the next annual meeting of shareholders and the annual meeting of the Board of
Directors, or until their successors are elected and qualified.
Dr. James L. Cox and David K. Caskey are the only executive officers that
have served in their current executive positions with the Company for the past
five years.
Brian D. Fletcher was employed by the Company as Chief Operating Officer on
March 10, 2000. Prior to joining the Company, he was a private investor for more
than the previous three years. Prior to that, he was employed as an investment
representative for Edward Jones Co.
Jack G. Mason was employed by the Company as Chief Financial Officer on
July 1, 2000. On November 3, 2000 he was named Chief Financial Officer and
Secretary. Prior to joining the Company, he was the Chief Financial Officer of
PSNC Energy for more than the previous three years.
James R. McCue was employed by the Company as President of Vitsab on March
21, 2000. Prior to joining the Company, he was employed in marketing with
Hill-Rom Company, a division of Hillenbrand Industries for more than the
previous three years.
Kurt C. Reid was employed by the Company as Chief Operating Officer on
March 10, 2000. Prior to joining the Company, he was a private investor for more
than the previous three years. Prior to that, he was employed as an investment
representative for Edward Jones Co.
Robert L. Thornton was employed by the Company as Controller on August 21,
2000. On November 3, 2000 he was named Controller and Assistant Treasurer. Prior
to joining the Company, he was the Director - Investor Relations and Financial
Projects of PSNC Energy for more than the previous four years.
9
ITEM 2. PROPERTIES
The Company has leased manufacturing facilities located in Belmont, North
Carolina and Malmo, Sweden. The facility in Belmont serves as the Corporate
Office, manufacturing and distributing of time temperature recording devices and
directing the oilfield operations. The Belmont facility also manufactures the
Vitsab(R) product. The Malmo facility is used for the limited production of the
Vitsab(R) product. The lease on the Malmo facility, which expires on December
31, 2002, was not renewed. The Company closed the office in Phoenix, Arizona,
which was primarily used for directing the oilfield operations. The Company also
leases office space in Upland, California, to support the sales and distribution
functions.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, but the Company does
not believe these proceedings could have a material impact on the results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's security holders
during the three months ended April 30, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the nationwide over-the-counter
market and is listed under the symbol "coxt.ob" on the electronic bulletin board
provided by the National Quotation Bureau, Inc.
The table below presents the reported high and low common stock sale prices
for each quarter of fiscal 2002 and 2001. The Company has not declared any
dividends during the last two fiscal years.
2002 2001
--------------- ---------------
High Low High Low
----- ----- ----- -----
First Quarter $0.45 $0.27 $0.69 $1.88
Second Quarter $0.38 $0.20 $0.47 $1.38
Third Quarter $0.29 $0.52 $0.31 $0.94
Fourth Quarter $0.07 $0.28 $0.28 $0.50
At July 10, 2002, the Company had approximately 2,061 holders of record of
the Company's common stock.
The table below presents the information related to the equity compensation
plans that have been previously approved by shareholders and equity compensation
plans not approved by shareholders, as of April 30, 2002.
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding for future issuance
outstanding options, options, warrants under equity
warrants and rights and rights compensation plans
------------------- ---------- ------------------
Equity compensation plans
approved by security holders
(2000 Stock Incentive Plan) 4,880,000 $.2022 2,396,972
Equity compensation plans
not approved by security holders
(Non-Qualified Stock Option
Agreements) 6,652,500 $.6568 --
---------- ------ ---------
Total 11,532,500 $.4644 2,396,972
========== ====== =========
The payment of cash dividends by the Company is restricted by a debt
covenant in the loan agreements with RBC Centura ("Centura"), which requires the
consent of Centura to declare or pay a cash dividend. Since its inception, the
10
Company has not paid any cash dividends on its common stock and does not
anticipate paying such dividends in the foreseeable future. The Company intends
to use earnings, if any, to finance a portion of its operations.
The following is a list of all unregistered stock issued during the last three
fiscal years.
Fiscal 2002
Pursuant to an April 10, 2001 agreement between the Company and BEN
Acquisition, LLC, under which they agreed to amend for consideration an
agreement dated June 23, 2000, the Company issued 9,500 shares of restricted
stock to each of the three partners. The shares were issued under the exemption
set forth in Rule 506 of Regulation D of the Securities Act of 1933.
Pursuant to an April 30, 2001 agreement between the Company and McManus
Financial Consultants, Inc., under which they provided consulting services
related to investor relations, the Company issued 41,667 and 41,666 shares of
restricted stock, respectively, to the two partners. The shares were issued
under the exemption set forth in Rule 506 of Regulation D of the Securities Act
of 1933.
Pursuant to a February 15, 2002 agreement between the Company and Stock
Enterprises, Inc., under which Mr. James R. Stock, president, agreed to cancel
for consideration an investor relations services agreement dated November 1,
2002, the Company issued to Mr. Stock 30,000 shares of restricted stock. The
shares were issued under the exemption set forth in Rule 506 of Regulation D of
the Securities Act of 1933.
Fiscal 2001
Pursuant to an agreement between the Company and Mr. Jens Rask, under which
Mr. Rask provided consulting services, the Company issued to Mr. Rask 50,000
shares of restricted stock, respectively, to Mr. Rask. The shares were issued
under the exemption set forth in Rule 701 of the Securities Act of 1933.
Pursuant to an agreement between the Company and Mr. Jayanth Prabhakar,
under which Mr. Prabhakar provided engineering consulting services, the Company
issued to Mr. Prabhaker a 43,000 shares of restricted stock. The shares were
issued under the exemption set forth in Rule 701 of the Securities Act of 1933.
Pursuant to a March 28, 2000 agreement between the Company and Strategic
Equity Marketing, LLC, under which they would provide consulting services
related to investor relations, the Company issued to Strategic Equity Marketing,
LLC a total of 12,013 shares of restricted stock. The shares were issued under
the exemption set forth in Section 4(2) of the Securities Act of 1933.
Pursuant to an agreement between the Company and Mr. Jack Wright, under
which Mr. Wright provided engineering consulting services, the Company issued to
Ms. M. Jean Wright 500 shares of restricted stock. The shares were issued under
the exemption set forth in Rule 701 of the Securities Act of 1933.
Pursuant to a September 12, 2000 engagement letter between the Company and
McGuireWoods, LLP, under which they would provide legal services, the Company
issued to McGuireWoods, LLP a total of 97,500 shares of restricted stock. The
shares were issued under the exemption set forth in Section 4(2) of the
Securities Act of 1933.
Pursuant to an August 30, 2000 agreement between the Company and Mr. Steven
J. Inguillo, an employee, the Company issued to Mr. Inguillo 7,720 shares of
restricted stock for compensation. The shares were issued under the exemption
set forth in Rule 701 of the Securities Act of 1933.
Pursuant to an August 1, 2000 employment acceptance agreement between the
Company and Mr. Robert L. Thornton, the Company issued to Mr. Thornton 2,500
shares of restricted stock. The shares were issued under the exemption set forth
in Rule 701 of the Securities Act of 1933.
Pursuant to an April 6, 2000 agreement between the Company and Mr. Steve
Otwell, under which Mr. Otwell would provide consulting services, the Company
issued to Mr. Otwell a total of 33,878 shares of restricted stock. The shares
were issued under the exemption set forth in Rule 701 of the Securities Act of
1933.
Pursuant to an April 6, 2000 agreement between the Company and Mr.
Frederick W. Leak, under which Mr. Leak would provide consulting services, the
Company issued to Mr. Leak a total of 33,878 shares of restricted stock. The
shares were issued under the exemption set forth in Rule 701 of the Securities
Act of 1933.
Pursuant to a September 13, 2000 agreement between the Company and Mr. John
W. Farquhar, under which Mr. Farquhar would provide consulting services, the
Company issued to Mr. Farquhar 2,400 shares of restricted stock. The shares were
issued under the exemption set forth in Rule 701 of the Securities Act of 1933.
11
Pursuant to an September 20, 2000 agreement between the Company and Ms.
Mary R. Norris, an employee, the Company issued to Ms. Norris 5,000 shares of
restricted stock for compensation. The shares were issued under the exemption
set forth in Rule 701 of the Securities Act of 1933.
Pursuant to an October 23, 2000 agreement between the Company and New Hope
Electrical Services, LLC, under which they would provide consulting services,
the Company issued to New Hope Electrical Services, LLC 5,008 shares of
restricted stock. The shares were issued under the exemption set forth in
Section 4(2) of the Securities Act of 1933.
Pursuant to a subscription agreement dated November 29, 2000 between the
Company and Ronald H. and Marijke W. Smith, under which they agreed to purchase
$66,600 of restricted stock at $.666 per share, the Company issued to Ronald H.
and Marijke W. Smith 100,000 shares of restricted stock. The shares were issued
under the exemption set forth in Rule 506 of Regulation D of the Securities Act
of 1933.
Pursuant to an August 16, 2000 agreement between the Company and Mr. Peter
H. Ronnow, an employee, the Company issued to Mr. Ronnow 16,600 shares of
restricted stock for compensation. The shares were issued under the exemption
set forth in Rule 701 of the Securities Act of 1933.
Pursuant to a June 13, 2000 agreement between the Company and Hilary Kaye
Associates, Inc. under which they would provide consulting services related to
public relations, the Company issued to Hilary Kaye Associates, Inc. 6,862
shares of restricted stock. The shares were issued under the exemption set forth
in Section 4(2) of the Securities Act of 1933.
Pursuant to a November 16, 2000 engagement letter between the Company and
Danielson Harrigan & Tollefson, LLP, under which they would provide legal
services, the Company issued to Danielson Harrigan & Tollefson, LLP a total of
48,547 shares of restricted stock. The shares were issued under the exemption
set forth in Section 4(2) of the Securities Act of 1933.
Pursuant to a December 5, 2000 agreement between the Company and by Remote,
Incorporated under which they would provide consulting services, the Company
issued to by Remote, Incorporated 15,129 shares of restricted stock. The shares
were issued under the exemption set forth in Section 4(2) of the Securities Act
of 1933.
Pursuant to a November 14, 2000 engagement letter between the Company and
Gilmore, Rees & Carlson, P.C., under which they would provide legal services,
the Company issued to Gilmore, Rees & Carlson, P.C. 7,946 shares of restricted
stock. The shares were issued under the exemption set forth in Section 4(2) of
the Securities Act of 1933.
Fiscal 2000
Pursuant to a July 18, 1999 agreement between the Company and VITSAB AG, a
Swiss holding company, the Company issued to VITSAB AG 527,462 shares of
restricted stock to purchase their minority interest of 12.5% in Vitsab USA,
Inc., a subsidiary of the Company. The shares were issued under the exemption
set forth in Section 4(2) of the Securities Act of 1933.
Pursuant to a June 23, 1999 subscription agreement between Vitsab, Inc. a
wholly owned subsidiary of the Company, and Vincent Gann, under which he loaned
Vitsab, Inc. $100,000, the Company issued to Mr. Gann 20,000 shares of
restricted stock as additional consideration for the loan. The shares were
issued under the exemption set forth in Rule 506 of Regulation D of the
Securities Act of 1933.
Pursuant to a June 26, 1999 subscription agreement between Vitsab, Inc. a
wholly owned subsidiary of the Company, and James B. Norman, under which he
loaned Vitsab, Inc. $20,000, the Company issued to Mr. Norman 4,000 shares of
restricted stock as additional consideration for the loan. The shares were
issued under the exemption set forth in Rule 506 of Regulation D of the
Securities Act of 1933.
Pursuant to an agreement between the Company and David McIntosh, under
which he purchased 34,577 shares of treasury stock at $2.50 per share, the
Company issued to Mr. McIntosh 20,000 shares of restricted stock as additional
consideration. The shares were issued under the exemption set forth in Rule 506
of Regulation D of the Securities Act of 1933.
Pursuant to a February 11, 2000 subscription agreement between Vitsab, Inc.
a wholly owned subsidiary of the Company, and Coastal Investors, under which
they loaned Vitsab, Inc. $203,840, the Company issued to Coastal Investors a
total of 138,859 shares of restricted stock when they immediately converted the
12
$175,000 promissory note at $1.442 per share and the accompanying 17,500
warrants at $1.648 per share into restricted stock of the Company. The shares
were issued under the exemption set forth in Section 4(2) of the Securities Act
of 1933.
Pursuant to a January 31, 2000 subscription agreement between Vitsab, Inc.
a wholly owned subsidiary of the Company, and Ronald M. and Ratha S. Needham,
under which they loaned Vitsab, Inc. $50,000, the Company issued to Ronald M.
and Ratha S. Needham a total of 40,714 shares of restricted stock when they
immediately converted the $50,000 promissory note at $1.40 per share and the
accompanying 5,000 warrants at $1.60 per share into shares of restricted stock
of the Company. The shares were issued under the exemption set forth in Rule 506
of Regulation D of the Securities Act of 1933.
Pursuant to a January 31, 2000 subscription agreement between Vitsab, Inc.
a wholly owned subsidiary of the Company, and Michael J. and Margaret U. Fields,
under which they loaned Vitsab, Inc. $10,000, the Company issued to Michael J.
and Margaret U. Fields a total of 8,143 shares of restricted stock when they
immediately converted the $10,000 promissory note at $1.40 per share and the
accompanying 1,000 warrants at $1.60 per share into shares of restricted stock
of the Company. The shares were issued under the exemption set forth in Rule 506
of Regulation D of the Securities Act of 1933.
Pursuant to a January 31, 2000 subscription agreement between Vitsab, Inc.
a wholly owned subsidiary of the Company, and Steven Otwell, under which he
loaned Vitsab, Inc. $10,000, the Company issued to Mr. Otwell a total of 8,143
shares of restricted stock when he immediately converted the $10,000 promissory
note at $1.40 per share and the accompanying 1,000 warrants at $1.60 per share
into shares of restricted stock of the Company. The shares were issued under the
exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933.
Pursuant to a January 31, 2000 subscription agreement between Vitsab, Inc.
a wholly owned subsidiary of the Company, and Frederick W. Leak, under which he
loaned Vitsab, Inc. $10,000, the Company issued to Mr. Leak a total of 8,143
shares of restricted stock when he immediately converted the $10,000 promissory
note at $1.40 per share and the accompanying 1,000 warrants at $1.60 per share
into shares of restricted stock of the Company. The shares were issued under the
exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933.
Pursuant to a March 2, 2000 employment acceptance agreement between the
Company and Mr. James R. McCue, the Company issued to Mr. McCue 11,000 shares of
restricted stock. The shares were issued under the exemption set forth in Rule
701 of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
information as of and for each of the fiscal years, which have been derived
from, and should be read together with, the audited consolidated financial
statements and the related notes, which are included elsewhere in this report.
The information presented below should also be read together with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Fiscal Years Ended April 30, 2002 2001 2000 (2) 1999 1998
- ---------------------------- ------------ ------------ ------------ ------------ ------------
Sales $ 8,627,103 $ 9,709,561 $ 9,710,976 $ 8,954,544 $ 8,138,756
Income (loss) from operations $ (4,826,969) $ (6,149,417) $ (1,955,191) $ 163,292 $ 1,095,451
Basic and diluted net income
(loss) per average common
share $ (.20) $ (.27) $ (.09) $ .01 $ .15
Weighted average number of
common shares outstanding 25,360,071 24,661,104 24,222,547 21,368,188 20,041,562
Total assets $ 4,072,391 $ 8,654,189 $ 14,369,529 $ 12,877,192 $ 9,766,536
Stockholders' equity $ (2,305,523) $ 2,528,355 $ 9,041,805 $ 10,025,938 $ 8,565,711
Long-term debt (1) $ 3,233,913 $ 3,090,044 $ 2,908,359 $ 581,374 $ 280,706
- ----------
(1) Excludes current maturities
(2) As restated
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL 2002
Prior to fiscal 2002, the Company had two current operating segments that
involved the (1) production and distribution of temperature recording and
monitoring devices, including electronic "loggers," graphic temperature
recorders and visual indicator tags (referred to as "Temperature Recorder
Operations" as a group) and (2) oilfield operations and other, which included
all economic activity related to the oil production and the holding of the oil
subleases and the operation of its Phoenix office. The Company closed its
Phoenix office effective October 31, 2000. The activities performed in its
Phoenix office were transferred to the Corporate Office in Belmont, North
Carolina. The Company entered into an agreement with a group in Dallas, Texas,
to sell the subleases on behalf of the Company. The group contacted and
solicited potential buyers to make purchase offers to the Company for the
subleases. The Company terminated the agreement in April 2001 after receiving no
purchase offers from potential buyers. As a result of the inability of the
Company to attract a potential buyer, the high cost and difficulty in producing
crude oil of the type found in the field and losses incurred in the oilfield
operations, the Company evaluated the recoverability of the carrying amount of
the oilfield net assets. In analyzing expected future cash flows from potential
offers, the Company is of the opinion that $300,000 of net assets should be
accounted for as property held for sale. As a result, the Company recognized a
loss on impairment of $3,062,196 in the fourth quarter of fiscal 2001. The
Company has determined that no change in the valuation of this asset is
necessary for fiscal 2002. The Company now operates in one reporting segment of
Temperature Recorder Operations.
TEMPERATURE RECORDER OPERATIONS
Revenue from sales decreased $1,082,458, or 11% in fiscal 2002 as compared
to fiscal 2001, due to a 13% decrease in the number of Cox1 units sold as a
result of decreased demand and a 4% decrease in average sales price. Sales of
DataSource(R) units increased 129%, slightly offset by a 4% decrease in average
sales price during fiscal 2002. During fiscal 2002, a large grocery store chain
started requiring its shippers to use the DataSource(R) units exclusively. The
Company has recently reached an agreement with another large grocery store chain
that will require their shippers to use the DataSource(R) unit exclusively.
Fiscal 2002 reflects a 22% decrease in the number of Tracer(R) products sold and
a 4% decrease in average sales price. Management believes that the Company will
continue to experience a decrease in average sales price for all products due to
competitive price pressure, but expects unit sales for its primary products to
remain constant or, in the case of electronic loggers, increase in future
periods. During fiscal 2002, the sale of graphic recorders represented
$6,751,000 or 78% of total revenues, the sale of electronic data loggers
represented $1,472,000 or 17%, the sale of probes and related products
represented $129,000 or 2%, and the sale of Vitsab(R) products represented
$112,000 or 1%. The sale of oil and other miscellaneous products represented the
balance.
Cost of sales for fiscal 2002 increased $85,162, or 2% as compared to
fiscal 2001. The increase is due to a reduction in the price the Company now
pays for raw material components and labor costs, increased retriever fees,
shipping costs and supplies used in the manufacturing process, partially offset
by decreased purchases of raw materials, decreasing labor and benefits costs and
postage expenses.
During fiscal 2002, the Company contracted with a third party to
manufacture and assemble certain base versions of the Cox1 units at an offshore
location. At the end of fiscal 2002, this location is supplying approximately
50% of the total number of units being utilized by the Company. Because of this
manufacturing arrangement, the Company has realized significant cost savings on
units manufactured in both the offshore and Belmont, North Carolina facilities.
The Company's current plans are to continue assembling special-use Cox1 units in
the Belmont facility. The Belmont facility will also continue to manufacture and
assemble a certain percentage of the base Cox1 units. If necessary, the
production capabilities of the Belmont facility can easily be expanded to meet
the total demand for all Cox1 units. The Company has identified certain risks
and uncertainties that are associated with offshore production that include, but
are not limited to, political issues, transportation risks and the availability
of raw materials. The Company will not experience foreign currency exchange
risks as all transactions are denominated in U.S. dollars.
General and administrative expenses for fiscal 2002 decreased $2,014,515,
or 44% as compared to fiscal 2001. This decrease is due to lower costs
associated with legal fees, professional services, salaries, payroll taxes and
employee benefits, partially offset by increases in outside services and other
general expenses.
Selling expenses for fiscal 2002 decreased $551,400, or 30% as compared to
fiscal 2001. The decrease is due to lower sales salaries, commissions, trade
shows and travel expenses.
14
No research and development costs were incurred during fiscal 2002 as the
Company reached the final development stages of the Vitsab(R) product and halted
the development of the EDS(TM) product in fiscal 2001.
Depreciation and depletion expense in fiscal 2002 decreased $90,422, or 18%
as compared to fiscal 2001. There was no depletion expense associated with the
oilfield operations recorded in fiscal 2002 as a result of the impairment of the
oilfield operations, as discussed in Note 3 to the consolidated financial
statements.
Amortization of patents and goodwill increased $36,261, or 17% in fiscal
2002 as compared to fiscal 2001. This increase is related to the additional
goodwill recognized from the acquisition of Vitsab Sweden, AB. In fiscal 2002,
the Company evaluated the fair value of goodwill from the acquisition of Vitsab
Sweden, AB and determined the goodwill to be impaired and has recognized an
impairment loss of $2,695,689 in the fourth quarter of fiscal 2002, as discussed
in Note 8 to the consolidated financial statements.
Other income increased $317,335, or 248% in fiscal 2002 as compared to
fiscal 2001. This increase is related primarily to the payments received as a
result of the agreement between the Company and its Copenhagen distributor for
an option to purchase all of the shares and assets of the Company's wholly owned
subsidiary, Vitsab Sweden, AB, as discussed in Note 1 to the consolidated
financial statements.
Interest expense increased $28,820, or 6% in fiscal 2002 as compared to
fiscal 2001. Reasons for this increase include the increase in interest accrued
on the note payable to Technology Investors, LLC dated March 10, 2000 in the
amount of $2,500,000, interest on the Revolving Loan with RBC Centura Bank
("Centura") and the reclassification of interest paid on progress payments made
by Centura, on behalf of the Company, from deposits to interest expense.
The decrease in inventory of $509,824 is related to the decrease in the
number of units in finished goods inventory and a decrease in work-in-progress
inventory. The Company has also lowered its costs of purchasing raw materials
through negotiations with vendors. Decreased direct labor and benefits costs and
overheads incurred in the production of the Cox1 units resulted in a decrease in
the valuation of finished goods and an increase in cost of goods sold by an
equal amount.
The decrease in property and equipment, net of $397,836 is primarily due to
depreciation. There were no significant additions or deletions to property and
equipment in fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company derives cash from operations and borrowing from long- and
short-term lending sources to meet its cash requirements. At present, the cash
flow from operations is not adequate to meet cash requirements and commitments
of the Company. The Company may enter into equity, debt or other financing
arrangements to meet its further financial needs for expansion into food safety
control products and to provide for general working capital needs.
On July 13, 2000 the Company entered into a secured five-year term loan
("Term Loan") with its primary lender, Centura in the amount of $1,190,000. The
Company used the proceeds of the Term Loan to retire short-term debt of
approximately $1,177,000 and the remainder was used for working capital.
Initial principal payments of $9,920, in addition to accrued interest, were
due monthly from August 2, 2000 to July 2, 2001. The rate of interest on the
Term Loan is Centura's prime rate plus .625% per annum. Thereafter, principal
payments of $22,313, in addition to accrued interest, are due monthly until July
13, 2005.
The Company has established a revolving line of credit with Centura for
working capital in the amount of up to $1,000,000 ("Revolving Loan"), subject to
a maximum percentage of eligible trade accounts receivable and inventories. The
rate of interest on the Revolving Loan is Centura's prime rate plus .25% per
annum and is due monthly beginning in August 2000.
The principal of the Revolving Loan was due on September 2, 2001. On
October 30, 2001 the Company executed a note modification agreement with Centura
that extended the maturity date of the Revolving Loan to November 2, 2001. On
November 29, 2001, the Company executed (a) an amendment to the original
Revolving Loan agreement, (b) a new security agreement and (c) a note
modification agreement for the Term Note and for the Revolving Loan that were
effective October 30, 2001 (collectively "Modified Agreements"). These Modified
Agreements extended the maturity date of the Revolving Loan to January 31, 2002
and changed the rate that interest will accrue on the Term Note and the
Revolving Loan from prime rate plus .625% per annum and prime rate plus .25% per
annum, respectively, to 30-day LIBOR plus 500 basis points per annum. These
Modified Agreements also stated that Centura would forbear exercise of its
rights and remedies under the Modified Agreements until January 31, 2002, so
15
long as the Company continues to pay the principal and interest on the Term Note
and pay interest on the Revolving Loan. On February 21, 2002 the Company
executed documents with Centura, effective January 31, 2002, that amended the
Modified Agreements to extend the maturity dates of the Revolving Loan and the
Term Loan to July 31, 2002. As a result, these loans have been classified as
current portion of long-term debt. Centura will continue to meet periodically
with Company management to review its financial results and determine whether to
extend the maturity date of the Revolving Loan and the Term Loan past July 31,
2002. On July 24, 2002, Centura informed the Company that they were extending
the maturity date of the three loans to October 31, 2002, and decreasing the
Company's line of credit from $1,000,000 to the current amount outstanding of
$800,000.
The Company has borrowed $1,000,000 related to this line of credit at April
30, 2002. On June 7, 2002, the Company paid $200,000 down on the amount
outstanding on this line of credit, leaving a balance of $800,000.
The Company has agreed to certain covenants, including prohibiting the
payment of cash dividends, with respect to both the Term Loan and the Revolving
Loan.
Centura has also agreed to finance the lease of two major pieces of
production equipment related to the manufacturing of the Vitsab(R) product. The
Company has advanced approximately $842,000 in progress payments on the cost of
both pieces of equipment, of which $464,000 has been advanced directly by
Centura. Through January 31, 2002, the Company had accrued and paid
approximately $57,000 of interest related to the progress payments made by
Centura on behalf of the Company. Pursuant to the lease agreement relating to
the equipment, the Company was to receive the amount of its progress payments
upon delivery and acceptance of the equipment and the closing of the lease. If
needed, Centura had agreed to loan the Company the total amount of progress
payments made by the Company for a minimum of 90 days at an interest rate of
prime plus 1% per annum.
In November 2001, the Company met with representatives of the engineering
firm that designed, and is in the later stages of constructing, the new
production equipment for manufacturing the Vitsab(R) product. In that meeting,
the engineering firm stated it was still having technical problems with the
production equipment. These problems prevent the engineering firm from
delivering a machine that meets the Company's production requirements at the
agreed upon fees. It was also noted that the engineering firm could not continue
to work on the technical problems without the infusion of approximately $300,000
of additional funds by the Company. It was agreed by both parties that the
design and construction of the new production equipment would be put on hold
indefinitely. It was also agreed that the Company could have possession and/or
title to the equipment at its current state of development. The date of
completion of the new production equipment, if ever, will be determined at a
later date. Management is currently evaluating the current and future value of
the production equipment. The engineering firm also offered the use of its
engineering staff to increase the efficiency of the Company's existing two units
of production equipment and improve the quality of the Vitsab(R) product being
produced. If needed, the Company has two units of production equipment, located
at its plant in Malmo, Sweden, to support the Vitsab(R) production requirements.
The cost of the equipment related to the first lease is approximately
$1,000,000, with monthly lease payments of $17,040, including interest at
approximately 9.35% for a period of 84 months. The cost of the equipment related
to the second lease is approximately $80,000, with monthly lease payments of
$1,685, including interest at approximately 10.4% for a period of 60 months.
Both leases were to commence upon the delivery of the equipment. Effective March
13, 2001, the Company and Centura agreed to combine both leases into one lease
agreement. The combined lease was to commence upon the delivery of the
equipment. As a result of the indefinite delay in the design and construction of
the equipment, the Company and Centura agreed to execute documents on February
21, 2002 that converted the $464,000 advanced under the lease by Centura to a
five-year note payable, effective January 31, 2002. The executed documents also
incorporated the note into the Modified Agreements. The interest rate on the
note is the 30-day LIBOR plus 500 basis points per annum, with monthly payments
of $7,700 plus accrued interest. The maturity date of the note is July 31, 2002.
In April 2001 the Company executed an agreement with its Copenhagen
distributor ("Purchaser") for an option to purchase all of the shares and assets
of the Company's wholly owned subsidiary, Vitsab Sweden, AB. The option
agreement gives the Purchaser until November 30, 2001 to exercise the option. In
return for the option, the Purchaser paid the Company $20,000 a month beginning
March 2001 and ending November 2001. During the option period, the Company
cannot sell, transfer, pledge, mortgage or otherwise dispose of nor issue new
shares in Vitsab Sweden, AB without the prior written approval by the Purchaser.
The stated purchase price in the agreement for all of the shares in, and assets
of, Vitsab Sweden, AB is $1.00. In addition, the Purchaser must make monthly
payments of $6,000 to the Company beginning the month after the option is
exercised and ending with the final payment in June 2004. If the Purchase option
is executed, the Purchaser will have the exclusive right for ten years to
16
manufacture, sell and distribute the Vitsab(R) product in certain countries
designated in the agreement. The Company will be paid a minimum annual royalty
based on the volume of Vitsab(R) products sold.
On October 18, 2001 the Company entered into a verbal agreement with
Purchaser to extend the agreement through February 2002, and then on a
month-to-month basis, with a requirement that each party provide a two month
notice to cancel the agreement. Additionally, the Purchaser will pay $17,000 a
month in return for the extension beginning December 1, 2001. All of the other
terms and conditions in the agreement remain the same. On April 15, 2002, the
Purchaser notified the Company that he was terminating the agreement effective
June 15, 2002. During May 2002, the Purchaser rescinded the termination notice
and both parties agreed verbally to extend the agreement until September 15,
2002, and then on a month-to-month basis, with a requirement that each party
provide a 30-day notice to cancel the agreement. The Purchaser will continue to
pay the Company $17,000 a month while the agreement is in place. All of the
other terms and conditions in the agreement remain the same. If the Purchaser
does not execute the purchase option by the end of the option period, the
Company will retain ownership of all shares and assets of Vitsab Sweden, AB. In
March 2002, the Company notified the landlord in Sweden that it would not be
renewing its lease that expires on December 31, 2002.
The Company's entire Vitsab(R) operation is largely dependent on one
customer. This customer is testing these products for use in the distribution of
their perishable products. Management cannot predict when the customer will
complete their pilot program. Once the pilot program is complete, the customer
will then decide whether to expand the use of the Vitsab(R) products throughout
their entire distribution system or discontinue using the products. If the
customer decides to use the Vitsab(R) products, management cannot predict how
quickly they will expand their use. If the customer decides not to use the
Vitsab(R) products, the Company will then have to decide whether it is
financially feasible to continue producing the products for testing or for sale.
Management cannot predict at this time whether the pilot program will be
successful or if the customer will continue to use the Vitsab(R) products.
The Company's existing manufacturing equipment located in Belmont has the
nominal capacity to produce enough of the Vitsab(R) products to meet the
currently projected demands of the current customer base. The labels have
consistently proved to perform as effective time-temperature monitors, but
certain technical issues in production have resulted in delayed delivery of
labels and in the inconsistent performance of equipment for activating and
dispensing the labels. These issues are related to the interaction of raw
material properties with manufacturing protocol and consequent performance
inconsistencies of the finished product when deployed in the Company's automated
Vitsab(R) activator-dispensers. Resolving these technical issues has created
delays in reaching full productive capacity. Despite substantial progress in the
improvement and perfection of these technical aspects of label production, the
Company is seeking no new customers for its Vitsab(R) product line until the
issues are fully resolved.
FISCAL 2001
The Company has two current operating segments that involve the (1)
production and distribution of temperature recording and monitoring devices,
including graphic temperature recorders, electronic "loggers," and visual
indicator tags (referred to as "Temperature Recorder Operations" as a group) and
(2) oilfield operations and other, which include all economic activity related
to the oil production and the holding of the oil subleases and the operation of
its Phoenix, Arizona office. The Company closed its Phoenix office effective
October 31, 2000. The activities performed in Phoenix have been transferred to
the Corporate Office in Belmont, North Carolina.
17
Fiscal Years Ended April 30, 2001 2000 2001 2000
- ---------------------------- ----------- ----------- ----------- -----------
Temperature
Temperature Recorder Oilfield Oilfield
Recorder Operations Operations Operations
Operations (as restated) and Other and Other
----------- ----------- ----------- -----------
Sales $ 9,637,075 $ 9,700,282 $ 72,486 $ 10,694
----------- ----------- ----------- -----------
Cost of sales 5,042,539 5,256,403 308,480 21,248
General and administrative 4,508,233 3,565,514 46,962 133,333
Selling 1,812,052 1,649,247 -- --
Research and development 345,393 409,362 -- --
Depreciation and depletion 513,820 433,508 -- --
Amortization of goodwill 219,303 197,552 -- --
Loss on impairment -- -- 3,062,196 --
----------- ----------- ----------- -----------
Income (loss) from operations (2,804,265) (1,811,304) (3,345,152) (143,887)
Other income (expense) (128,150) 43,396 -- (78,424)
Interest expense (496,442) (170,263) -- --
Income taxes -- 41,754 -- --
----------- ----------- ----------- -----------
Net income (loss) ($3,428,857) ($1,979,925) ($3,345,152) ($ 222,311)
=========== =========== =========== ===========
TEMPERATURE RECORDER OPERATIONS
Sales decreased $63,207, or 1% in fiscal 2001 as compared to fiscal 2000,
due to a decrease in the number of units sold, lower unit selling prices and an
increase in the amount of returned units. Cost of sales for fiscal 2001
decreased $213,864, or 4% as compared to fiscal 2000 due primarily to decreased
purchases of recorder units and data loggers, partially offset by increased
labor costs, retriever fees, shipping costs and supplies used in the
manufacturing process. During fiscal 2001, the sale of graphic recorders
represented $8,252,000 or 85% of total revenues, the sale of electronic data
loggers represented $1,019,000 or 10%, the sale of probes and related products
represented $164,000 or 2%, and the sale of Vitsab(R) products represented
$4,000 or less than 1%. The sale of oil and other miscellaneous products
represented the balance.
General and administrative expenses for fiscal 2001 increased $942,719, or
26% as compared to fiscal 2000. The increase is due to salaries, outside
services, insurance, payroll taxes, legal fees and rent. Also included in fiscal
2001 was approximately $288,000 of non-recurring charges and write-offs related
to a technology investment, the closing of the Phoenix office, an increase in
the allowance for bad debts and to legal fees discussed in more detail later.
Offsets to the increase include decreases in travel expenses, professional
services and office supplies. Fiscal 2000 includes a prior period adjustment of
$600,000 related to compensation expense associated with stock options, as
discussed more fully in Note 12 to the consolidated financial statements.
Selling expenses for fiscal 2001 increased $162,805, or 10%, as compared to
fiscal 2000. The increase is due to increases in sales salaries related to the
EDS(TM) product (which is subject to the EDS(TM) settlement, as discussed on
page 7 of this annual report), commissions and travel expenses, partially offset
by decreases in trade show expenses and professional services.
Research and development expenses are related to costs incurred for both
the EDS(TM) and Vitsab(R) products. Research and development expenses decreased
$63,969, or 16%, in fiscal 2001 as compared to fiscal 2000, due to the Company
reaching the final development stages of the Vitsab(R) product and the halt in
the development of the EDS(TM) product.
Depreciation and depletion expense in fiscal 2001 increased $80,312, or
19%, as compared to fiscal 2000 primarily due to asset additions. Fiscal 2000
reflects the restatement of $349,713 recorded as a prior period adjustment, as
discussed more fully in Note 13 to the consolidated financial statements. All
depletion expenses associated with the oilfield operations were written off as a
loss on impairment, as discussed in Note 3 to the consolidated financial
statements.
18
Amortization of goodwill increased $21,751, or 11% in fiscal 2001 as
compared to fiscal 2000. This increase is related to the increase in the amount
of goodwill resulting from the acquisition of Vitsab Sweden, AB.
Included in costs and expenses are the costs associated with the
development of the EDS(TM) and Vitsab(R) products. During fiscal 2001, the
Company incurred $3,044,583 of costs related to the development of these new
products.
Other expenses increased $171,546, or 395%, in fiscal 2001 as compared to
fiscal 2000 primarily due to a valuation adjustment related to the note due from
officer.
Interest expense increased $326,179, or 192%, in fiscal 2001 as compared to
fiscal 2000. The primary reason for this increase is the interest cost related
to the note payable to Technology Investors, LLC dated March 10, 2000 in the
amount of $2,500,000 and interest on the revolving line of credit with, and
interest accrued on progress payments made by, Centura.
The decrease in accounts receivable is due to the lower sales during the
fiscal year and enhanced collection efforts on past due receivables.
The increase in inventory is related to the continued production of
recorder units in order to increase on-hand inventory and to purchases of raw
material related to the production of the Vitsab(R) product.
OILFIELD OPERATIONS AND OTHER
There were limited oil production operations conducted during fiscal 2001.
The Company maintained certain insurance and other compliance matters pertaining
to the oilfield operations during this fiscal year. The Company recognized
$3,062,196 of the oilfield operations net assets as a loss on impairment in the
fourth quarter of fiscal 2001.
The other expenses relate to the Phoenix, Arizona office operations, that
functioned as a management office for certain of the overall affairs of the
Company, the center for administration of oilfield activities and transactions,
and as a location for aspects of software development. Effective August 31,
2000, the Company ceased all software development in this office. The Company
wrote off this investment in software development of approximately $155,000 in
fiscal 2001. Effective October 31, 2000, the Company closed the Phoenix office
and transferred the activities of this office to the Corporate Office in
Belmont, North Carolina.
FISCAL 2000
Fiscal Years Ended April 30, 2001 2000 2001 2000
- ---------------------------- ----------- ----------- ----------- -----------
Temperature
Temperature Recorder Oilfield Oilfield
Recorder Operations Operations Operations
Operations (as restated) and Other and Other
----------- ----------- ----------- -----------
Sales $ 9,700,282 $ 8,953,116 $ 10,694 $ 1,428
----------- ----------- ----------- -----------
Cost of sales 5,256,403 4,397,078 21,248 13,130
General and administrative 3,565,514 2,307,732 133,333 160,467
Selling 1,649,247 1,388,232 -- --
Research and development 409,362 407,044 -- --
Depreciation and depletion 433,508 80,873 -- --
Amortization of goodwill 197,552 36,696 -- --
----------- ----------- ----------- -----------
Income (loss) from operations (1,811,304) 335,461 (143,887) (172,169)
Other income (expense) 43,396 7,031 (78,424) 241,322
Interest expense (170,263) (150,414) -- (2,716)
Income taxes 41,754 42,119 -- 19,491
----------- ----------- ----------- -----------
Net income (loss) ($1,979,925) $ 149,959 ($ 222,311) $ 46,946
=========== =========== =========== ===========
19
TEMPERATURE RECORDER OPERATIONS
Sales increased $747,166, or 8% for fiscal 2000 as compared to fiscal 1999.
Cost of sales as a percent of sales for fiscal 2000 and 1999 were 54% and 49%,
respectively. This change was primarily due to increased material and labor
costs. During fiscal 2000, the sale of graphic recorders represented $8,595,000
or 89% of total revenues, the sale of electronic data loggers represented
$690,000 or 7%, the sale of probes and related products represented $168,000 or
2%, and the sale of Vitsab(R) products represented $3,000 or less than 1%. The
sale of oil and other miscellaneous products represented the balance.
During fiscal 2000, the sale of graphic recorders generated approximately
80% of revenues, the sale of electronic loggers generated approximately 17% of
revenues, the sale of probes generated 2% of revenues and the sale of Vitsab(R)
products generated 1% of revenues.
General and administrative expenses increased $1,257,782, or 55 % for
fiscal 2000 as compared to fiscal 1999. Fiscal 2000 includes the prior period
adjustments of $600,000 related to compensation expense for stock options and
$349,713 related to depreciation. Expressed as a percent of sales, the general
and administrative expenses for fiscal 2000 and 1999 were 37% and 26%,
respectively.
Selling expenses increased $261,015, or 19% in fiscal 2000 as compared to
fiscal 1999. As a percent of sales, these expenses for fiscal 2000 and 1999 were
17% and 16%, respectively.
OILFIELD OPERATIONS AND OTHER
There were no oil production operations conducted directly by the Company
during fiscal 2000. However, financial results from the farm-out arrangement are
reflected in the figures presented. The Company maintained certain insurance and
other compliance matters pertaining to the oilfield operations during this
period, and these expenses are reflected in the schedule above.
Subsequent to the end of fiscal 2000, by mutual agreement, the
aforementioned farm-out arrangement was terminated and replaced by a new
agreement.
The other expenses relate to the Phoenix, Arizona office of the Company,
which has functioned as a management office for certain of the overall affairs
of the Company, the center for administration of oilfield activities and
transactions, and as a location for aspects of software development.
FORWARD-LOOKING STATEMENTS
Statements contained in this document, which are not historical in nature,
are forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements give our current expectations of
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such
as "estimate," "intend," "plan," and other words and terms of similar meaning in
connection with any discussion of future operating and financial performance.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements. The Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances after the date hereof. Such risks
and uncertainties with respect to the Company include, but are not limited to,
its ability to successfully implement internal performance goals, performance
issues with suppliers, regulatory issues, competition, the effect of weather on
customers, exposure to environmental issues and liabilities, variations in
material costs and general and specific economic conditions. From time to time,
the Company may include forward-looking statements in oral statements or other
written documents.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 2002 April 30, 2001
-------------- --------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 216,042 $ 43,620
Accounts receivable, less allowance for
doubtful accounts of $65,000 at April 30,
2002 and $61,810 at April 30, 2001 1,072,935 1,141,308
Inventory 1,419,342 1,929,166
Notes receivable - current portion -- 19,230
Prepaid expenses 44,832 30,493
------------ ------------
TOTAL CURRENT ASSETS 2,753,151 3,163,817
Property and equipment, net 764,628 1,162,464
Property held for sale, net 300,000 300,000
Non-depreciable asset -- 813,305
Goodwill -- 2,976,622
Due from officer, net 41,067 53,566
Other assets 64,749 --
Patents 148,796 184,415
------------ ------------
TOTAL ASSETS $ 4,072,391 $ 8,654,189
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 658,123 $ 602,778
Short-term debt 1,000,000 1,211,452
Current portion of long-term debt 1,485,878 1,221,560
------------ ------------
TOTAL CURRENT LIABILITIES 3,144,001 3,035,790
Long-term debt 3,233,913 3,090,044
------------ ------------
TOTAL LIABILITIES 6,377,914 6,125,834
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized
100,000,000 shares; issued and outstanding;
25,769,684 shares at April 30, 2002 and
24,904,823 shares at April 30, 2001 22,132,312 21,267,448
Paid in capital 461,412 1,044,473
Accumulated other comprehensive income (loss) (68,168) (108,581)
Accumulated deficit (24,806,900) (19,643,854)
Less - Notes receivable for common stock 24,179 31,131
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (2,305,523) 2,528,355
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,072,391 $ 8,654,189
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended April 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
(as restated)
REVENUE:
Sales $ 8,627,103 $ 9,709,561 $ 9,710,976
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 5,436,181 5,351,019 5,277,651
General and administrative 2,540,680 4,555,195 3,698,847
Selling 1,260,652 1,812,052 1,649,247
Research and development -- 345,393 409,362
Depreciation and depletion 423,398 513,820 433,508
Loss on impairment 3,537,597 3,062,196 --
Amortization of patents and goodwill 255,564 219,303 197,552
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 13,454,072 15,858,978 11,666,167
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (4,826,969) (6,149,417) (1,955,191)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 189,185 (128,150) (35,028)
Interest expense (525,262) (496,442) (170,263)
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (336,077) (624,592) (205,291)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (5,163,046) (6,774,009) (2,160,482)
Provision for income taxes -- -- 41,754
------------ ------------ ------------
NET INCOME (LOSS) $ (5,163,046) $ (6,774,009) $ (2,202,236)
============ ============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ (.20) $ (.27) $ (.09)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 25,360,071 24,661,104 24,222,547
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Subscribed
Other Stock
Comprehensive Retained Common Paid in Less Note Treasury
Total Income (Loss) Earnings Stock Capital Receivable Stock
----- ------------- -------- ----- ------- ---------- -----
Balance, April 30, 1999 $ 10,025,938 $ -- ($10,667,609) $20,306,098 $ 420,982 $ 12,387 ($45,920)
Net income (loss), as
restated (2,202,236) -- (2,202,236) -- -- -- --
Sale of treasury stock 45,920 -- -- -- -- -- 45,920
Common stock issued 562,369 -- -- 562,369 -- -- --
Compensation related to
grant of stock options,
as restated 600,000 -- -- -- 600,000 -- --
Subscribed stock issued 9,814 -- -- -- -- 9,814 --
------------ --------- ------------ ----------- ----------- -------- --------
Balance, April 30, 2000
as restated 9,041,805 -- (12,869,845) 20,868,467 1,020,982 22,201 --
Comprehensive income (loss) -
Net income (loss) (6,774,009) -- (6,774,009) -- -- -- --
Foreign currency
translation adjustment (108,581) (108,581) -- -- -- -- --
------------
Total comprehensive -
income (loss) (6,882,590) -- -- -- -- -- --
Change in subscribed stock,
net (53,332) -- -- -- -- (53,332) --
Common stock issued 422,472 -- -- 398,981 23,491 -- --
------------ --------- ------------ ----------- ----------- -------- --------
Balance, April 30, 2001 2,528,355 (108,581) (19,643,854) 21,267,448 1,044,473 (31,131) --
Comprehensive income (loss) -
Net income (loss) (5,163,046) -- (5,163,046) -- -- -- --
Foreign currency
translation adjustment 40,413 40,413 -- -- -- -- --
------------
Total comprehensive
income (loss) (5,122,633) -- -- -- -- -- --
Payment on subscribed stock 6,952 -- -- -- -- 6,952 --
Common stock issued 281,803 -- -- 864,864 (583,061) -- --
------------ --------- ------------ ----------- ----------- -------- --------
Balance, April 30, 2002 ($ 2,305,523) ($ 68,168) ($24,806,900) $22,132,312 $ 461,412 ($24,179) $ --
============ ========= ============ =========== =========== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended April 30,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
(as restated)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ($5,163,046) ($6,774,009) ($2,202,236)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and depletion 423,398 513,820 433,508
Amortization of patents and goodwill 255,564 219,303 197,552
Loss on impairment 3,537,597 3,062,196 --
Loss on disposal of property and equipment 2,242 22,628 --
Allowance for doubtful accounts 3,190 33,286 (140)
Other (63,209) 21,783 (669)
Decrease in valuation adjustment 12,499 211,787 --
----------- ----------- -----------
(991,765) (2,689,206) (1,571,985)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 65,183 483,425 (28,382)
Inventory 509,824 (303,551) (82,952)
Prepaid expenses (14,339) (27,380) 62,747
Notes receivable and investments 19,230 8,586 2,414
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 55,345 (329,673) 349,909
Income taxes payable -- -- (34,720)
----------- ----------- -----------
CASH USED IN OPERATING ACTIVITIES (356,522) (2,857,799) (1,302,969)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (25,562) (81,039) (380,793)
Equipment under development 28,603 (689,176) (100,437)
Acquisition of business -- -- (469,475)
Patents -- -- (203,208)
Other -- -- 51,211
----------- ----------- -----------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,041 (770,215) (1,102,702)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 281,803 422,472 1,162,369
Sale of treasury stock -- -- 45,920
Repayment on notes payable - Long-term debt (370,813) (1,273,669) (1,325,563)
Subscriptions receivable 6,952 4,768 9,814
Amounts borrowed under short-term debt 252,548 1,211,452 --
Amounts borrowed under long-term debt 315,000 1,190,000 3,487,513
----------- ----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 485,490 1,555,023 3,380,053
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 40,413 (108,581) --
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 172,422 (2,181,572) 974,382
CASH AND CASH EQUIVALENTS, beginning of period 43,620 2,225,192 1,250,810
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 216,042 $ 43,620 $ 2,225,192
=========== =========== ===========
Supplemental Cash Flow Information
Interest paid $ 250,262 $ 246,442 $ 170,263
Income taxes paid $ -- $ -- $ 17,356
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 30, 2002, 2001, AND 2000
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is engaged in the business of producing and distributing
transit temperature recording instruments, including electronic "loggers,"
graphic temperature recorders and visual indicator tags, both in the United
States and internationally. Transit temperature recording instruments work
by creating a strip chart record of temperature changes over time, or
record temperatures electronically according to a preset interval
("logging"). The Company has been involved in the sale and manufacture of
both types of transit monitoring products, and has established an
international market presence and reputation for reliable temperature
recording products.
In April 2001 the Company executed an agreement with its Copenhagen
distributor ("Purchaser") for an option to purchase all of the shares and
assets of the Company's wholly owned subsidiary, Vitsab Sweden, AB. The
option agreement gives the Purchaser until November 30, 2001 to exercise
the option. In return for the option, the Purchaser paid the Company
$20,000 a month beginning March 2001 and ending November 2001. During the
option period, the Company cannot sell, transfer, pledge, mortgage or
otherwise dispose of nor issue new shares in Vitsab Sweden, AB without the
prior written approval by the Purchaser. The stated purchase price in the
agreement for all of the shares in, and assets of, Vitsab Sweden, AB is
$1.00. In addition, the Purchaser must make monthly payments of $6,000 to
the Company beginning the month after the option is exercised and ending
with the final payment in June 2004. If the Purchase option is executed,
the Purchaser will have the exclusive right for ten years to manufacture,
sell and distribute the Vitsab(R) product in certain countries designated
in the agreement. The Company will be paid a minimum annual royalty based
on the volume of Vitsab(R) products sold.
On October 18, 2001 the Company entered into a verbal agreement with
Purchaser to extend the agreement through February 2002, and then on a
month-to-month basis, with a requirement that each party provide a two
month notice to cancel the agreement. Additionally, the Purchaser will pay
$17,000 a month in return for the extension beginning December 1, 2001. All
of the other terms and conditions in the agreement remain the same. On
April 15, 2002, the Purchaser notified the Company that he was terminating
the agreement effective June 15, 2002. During May 2002, the Purchaser
rescinded the termination notice and both parties agreed verbally to extend
the agreement until September 15, 2002, and then on a month-to-month basis,
with a requirement that each party provide a 30-day notice to cancel the
agreement. The Purchaser will continue to pay the Company $17,000 a month
while the agreement is in place. All of the other terms and conditions in
the agreement remain the same. If the Purchaser does not execute the
purchase option by the end of the option period, the Company will retain
ownership of all shares and assets of Vitsab Sweden, AB. In March 2002, the
Company notified the landlord in Sweden that it would not be renewing its
lease that expires on December 31, 2002.
The Company's entire Vitsab(R) operation is largely dependent on one
customer. This customer is testing these products for use in the
distribution of their perishable products. Once the pilot program is
complete, the customer will then decide whether to expand the use of the
Vitsab(R) products throughout their entire distribution system or
discontinue using the products. If the customer decides to use the
Vitsab(R) products, management cannot predict how quickly they will expand
their use. If the customer decides not to use the Vitsab(R) products, the
Company will then have to decide whether it is financially feasible to
continue producing the products for testing or for sale. Management cannot
predict at this time whether the pilot program will be successful or if the
customer will continue to use the Vitsab(R) products.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Cox Technologies, Inc. (the Company) and its wholly owned
subsidiary companies, Vitsab Sweden, AB and Cox Recorders Australia, Pty.
Ltd., a 95% owned Australian distribution company. In July 2001 all
domestic subsidiaries were merged into the parent company, Cox
Technologies, Inc. All material intercompany transactions and balances
among the Company and its subsidiary companies have been eliminated in the
accompanying consolidated financial statements.
25
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation for property and equipment is provided on a combination
of straight-line and accelerated cost recovery methods over the respective
estimated lives over a range of five to twenty years. Depreciation and
depletion expense for oilfield operations was not recorded for fiscal 2000
as the oilfield assets were idle. Depletion expense for fiscal 2001 was
based on production.
GOODWILL
Goodwill represents the excess of the cost of companies acquired over
the fair value of their net assets at dates of acquisition and is being
amortized on the straight-line method over a range of six to seventeen
years (see Note 8 to the consolidated financial statements). Amortization
expense charged to operations totaled $220,094, $200,910 and $197,552 for
fiscal 2002, 2001 and 2000, respectively.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and investments with a maturity of three months or
less.
PATENTS
The Company owns a number of patents directly related to and important
to the Company's business. The costs of obtaining patents are capitalized
and amortized over the average lives of the patents. Amortization expense
charged to operations totaled $35,470, $18,793 and $0 for fiscal 2002, 2001
and 2000, respectively.
INVENTORY
Inventories are stated at the lower of cost determined by the FIFO
(first-in, first-out) method or market. Inventory consists primarily of raw
material, work-in-process and finished goods related to the transit
temperature recording segment.
INCOME TAXES
The Company accounts for income taxes pursuant to the Statement of
Financial Accounting Standards (SFAS) No. 109, which requires a liability
method of accounting for income taxes. Under this method, the deferred tax
liability represents the tax effect of temporary differences between the
financial statement and tax bases of assets and liabilities and is measured
using current tax rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents, accounts
receivable, notes receivable, accounts payable, accrued expenses,
short-term debt and long-term debt. The amounts reported for financial
instruments other than long-term debt are considered to be reasonable
approximations of their fair values due to their short-term nature. Based
on borrowing rates currently available to the Company for bank loans with
similar terms and maturities, the fair value of the Company's long-term
debt approximates the carrying value.
COMPREHENSIVE INCOME (LOSS)
The Company recorded a foreign currency translation adjustment in
fiscal 2002 and fiscal 2001 of $40,413 and ($108,581), respectively. As a
result, total comprehensive loss was ($5,122,633) as compared to a net loss
of ($5,163,046) for fiscal 2002 and ($6,882,590) as compared to a net loss
of ($6,774,009) for fiscal 2001. There were no significant items of
comprehensive income (loss) for fiscal 2000.
LONG-LIVED ASSETS
Long-lived assets held and used by the Company are reviewed for
impairment whenever changes in circumstances indicate that the carrying
value of the asset may not be recoverable.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" (APB No. 25),
and related interpretations in accounting for its employee stock options.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement defines a fair
value method of accounting for stock options or similar equity instruments.
26
SFAS No. 123 permits companies to continue to account for stock-based
compensation awards under APB No. 25, but requires disclosure in a note to
the financial statements of the pro forma net income and earnings per share
as if the Company had adopted the new method of accounting.
RESEARCH AND DEVELOPMENT COSTS
The costs of research and development activities are charged to
operations as incurred.
BASIC AND DILUTED EARNINGS PER SHARE
Earnings per share have been calculated in conformity with SFAS No.
128, "Earnings Per Share." The Company has a complex capital structure with
significant potential common shares. However, basic earnings per common
share is based on the weighted average number of common shares outstanding
during each year. Potential common shares from the Senior Subordinated
Convertible Promissory Note with Technology Investors, LLC and stock option
grants are anti-dilutive for fiscal 2002, 2001 and 2000 and have been
excluded for the earnings per share calculations.
RECLASSIFICATIONS
Certain amounts previously reported on the consolidated financial
statements have been reclassified to conform with the current period's
presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions. These affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
three Statements of Financial Accounting Standards ("SFAS"), SFAS No. 141,
"Business Combinations" (SFAS No. 141), SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142) and SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). In August 2001, the FASB issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS No. 144).
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations,"
and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations in the scope of SFAS No. 141 are to
be accounted for using one method, the purchase method. The provisions of
SFAS No. 141 apply to all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method for those business
combinations is prohibited. The provisions of SFAS No. 141 also apply to
all business combinations accounted for by the purchase method for which
the date of acquisition is July 1, 2001, or later.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. SFAS No. 142 also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. Under SFAS No. 142, goodwill and
intangible assets that have indefinite useful lives will not be amortized
but rather will be tested at least annually for impairment. Intangible
assets that have finite useful lives will continue to be amortized over
their useful lives, but without the constraint of the 40-year maximum life
required by SFAS No. 142. The provisions of SFAS No. 142 were adopted
effective May 1, 2002. However, as the Company had recognized a loss on
impairment of goodwill during the fourth quarter of fiscal 2002, the
adoption of the provisions of SFAS No. 142 had no significant effect.
SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The provisions of SFAS No. 143
are required to be applied starting with fiscal years beginning after June
15, 2002.
27
SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The provisions SFAS No. 144 are required to be applied
starting with fiscal years beginning after December 15, 2001.
The Company has adopted the provisions of SFAS No. 144 effective May
1, 2002. There was no significant effect on financial position or results
of operations as a result of adopting these provisions. The Company expects
to adopt the provisions of SFAS No. 143 effective May 1, 2003, and the
Company believes the adoption of the provisions of SFAS No. 143 will not
have a significant effect on its financial position or results of
operations.
2. INVENTORIES
Inventory at April 30, 2002 and 2001 consists of the following:
2002 2001
---------- ----------
Raw materials $ 377,478 $ 377,470
Work-in-process 143,339 528,687
Finished goods 898,525 1,023,009
---------- ----------
Total $1,419,342 $1,929,166
========== ==========
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at cost, by major
classification, less accumulated depreciation at April 30, 2002 and 2001:
2002 2001
---------- ----------
MANUFACTURING PROPERTY AND EQUIPMENT
Tooling $ 495,507 $ 474,639
Machinery and equipment 1,558,060 1,641,645
Office furniture and equipment 167,538 162,366
Leasehold improvements 293,635 266,253
---------- ----------
2,514,740 2,544,903
Less: Accumulated depreciation 1,750,112 1,382,439
---------- ----------
Total manufacturing property and equipment 764,628 1,162,464
---------- ----------
PROPERTIES HELD FOR SALE:
OIL AND GAS PROPERTIES AND EQUIPMENT
Intangible drilling costs 883,023 883,023
Lease and well equipment 1,828,881 1,828,881
Leasehold improvements 715,891 715,891
Undeveloped leases 72,167 72,167
Repurchased participating units 2,608,640 2,608,640
Other 24,600 24,600
---------- ----------
6,133,202 6,133,202
Less: Accumulated depreciation and depletion 2,771,006 2,771,006
Allowance for loss on impairment 3,062,196 3,062,196
---------- ----------
Total oil and gas properties and equipment 300,000 300,000
---------- ----------
Total property and equipment $1,064,628 $1,462,464
========== ==========
The Company holds oil subleases in California (the Chico-Martinez
field), but the field has not produced any significant volume. The Company
entered into an agreement with an independent oilfield operator in April
1999. The primary function of the operator has been to increase production
by overhauling the surface equipment, establishing steam and hot water
injection operations and improving field conditions at the property. In
July 2000, the Company entered into a new agreement with the operator that
28
replaced the previous agreement. Under the terms of the new agreement the
Company intended to increase production more rapidly. The new agreement
would also allow the Company to buyout the operator at any time. It was the
Company's strategy that productive activity at the field would help to
increase the revenues while establishing a greater asset value, thus making
the Company's sublease holdings more attractive to a potential buyer. In
June 2000, the Company entered into an exclusive agreement with a group in
Dallas, Texas, to sell the subleases on behalf of the Company. The group
contacted and solicited potential buyers to make purchase offers to the
Company for the subleases. The Company terminated the agreement in April
2001 after receiving no purchase offers from potential buyers. As a result
of the inability of the Company to attract a potential buyer, the high cost
and difficulty in producing crude oil of the type found in the field and
losses incurred in the oilfield operations, the Company evaluated the
recoverability of the carrying amount of the oilfield net assets. In
analyzing expected future cash flows from potential offers, the Company is
of the opinion that $300,000 of net assets should be recognized as property
held for sale. As a result, the Company recognized a loss on impairment of
$3,062,196 in the fourth quarter of fiscal 2001. The Company has determined
that no change in the valuation of this asset is necessary for fiscal 2002.
On March 21, 2002, the Company received an offer from a group, which
includes the operator of the subleases, to purchase the oil subleases for
approximately $362,000. The lien filed by the operator would be paid out of
the proceeds in order to have the lien filed on the subleases released. The
offer was accepted on March 25, 2002, and the parties began to draft the
definitive purchase and sale agreement. The purchase and sale agreement was
executed by both parties on June 3, 2002. The purchaser was required to
deposit $50,000 into an escrow account within two business days upon
execution of the agreement. These funds were never deposited into the
escrow account by the purchaser. In a letter dated June 20, 2002, the
Company notified the purchaser that they were in default of the purchase
and sale agreement and therefore the agreement had been terminated. On July
11, 2002, the Company executed an addendum to the original purchase and
sale agreement with the same purchaser after receiving a $25,000
non-refundable deposit. The closing of the transaction is projected to take
place on or before September 16, 2002. All other terms and conditions of
the original agreement remain the same. The Company does not believe this
transaction will have a material impact on the earnings or financial
position of the Company.
29
4. DEBT
The following is a summary of long-term debt obligations and lease
contracts payable at April 30, 2002 and 2001:
2002 2001
----------- -----------
10% Senior Subordinated Convertible
Promissory Note due March 2005 (from
related party, see Note 5) (principal
amount of the note and accrued
interest are convertible into the
Company's no par common stock at a
conversion price of $1.25 per share) $3,025,000 $2,750,000
Note payable to bank, secured by
general business assets, due in monthly
installments of $22,313 plus accrued
interest at 30-day LIBOR plus 500 basis
points per annum through July 2005. 870,148 1,090,800
Unsecured note payable to a vendor in
24 monthly installments of $2,000. 36,000 --
Note payable to bank, secured by
equipment, due in monthly installments
of $7,700 plus accrued interest at
30-day LIBOR plus 500 basis points per
annum through February 2007. 448,600 --
Capital leases secured by equipment,
expiring in various years, with terms
ranging from 36 months to 60 months,
due in monthly installments ranging
from $496 to $5,467 340,043 470,804
----------- -----------
4,719,791 4,311,604
Less: Current maturities 1,485,878 1,221,560
----------- -----------
Total long-term debt $ 3,233,913 $ 3,090,044
=========== ===========
On July 13, 2000 the Company entered into a five-year term loan ("Term
Loan") with its primary lender, Centura in the amount of $1,190,000. The
Company used the proceeds of the Term Loan to retire short-term debt of
approximately $1,177,000 from its previous lender and the remainder was
used for working capital.
Initial principal payments of $9,920, in addition to accrued interest,
were due monthly from August 2, 2000 to July 2, 2001. The rate of interest
on the Term Loan is Centura's prime rate plus .625% per annum. Thereafter,
principal payments of $22,313, in addition to accrued interest, are due
monthly until July 13, 2005.
The Company has established a revolving line of credit with Centura
for working capital in the amount of up to $1,000,000 ("Revolving Loan"),
subject to a maximum percentage of eligible trade accounts receivable and
inventories. The rate of interest on the Revolving Loan is Centura's prime
rate plus .25% per annum and is due monthly beginning in August 2000.
The principal of the Revolving Loan was due on September 2, 2001. On
October 30, 2001 the Company executed a note modification agreement with
Centura that extended the maturity date of the Revolving Loan to November
2, 2001. On November 29, 2001, the Company executed (a) an amendment to the
original Revolving Loan agreement, (b) a new security agreement and (c) a
note modification agreement for the Term Note and for the Revolving Loan
that were effective October 30, 2001 (collectively "Modified Agreements").
These Modified Agreements extended the maturity date of the Revolving Loan
to January 31, 2002 and changed the rate that interest will accrue on the
Term Note and the Revolving Loan from prime rate plus .625% per annum and
30
prime rate plus .25% per annum, respectively, to 30-day LIBOR plus 500
basis points per annum. These Modified Agreements also stated that Centura
would forbear exercise of its rights and remedies under the Modified
Agreements until January 31, 2002, so long as the Company continues to pay
the principal and interest on the Term Note and pay interest on the
Revolving Loan. On February 21, 2002 the Company executed documents with
Centura, effective January 31, 2002, that amended the Modified Agreements
to extend the maturity dates of the Revolving Loan and the Term Loan to
July 31, 2002. As a result, these loans have been classified as current
portion of long-term debt. Centura will continue to meet periodically with
Company management to review its financial results and determine whether to
extend the maturity date of the Revolving Loan and the Term Loan past July
31, 2002. On July 24, 2002, Centura informed the Company that they were
extending the maturity date of the three loans to October 31, 2002, and
decreasing the Company's line of credit from $1,000,000 to the current
amount outstanding of $800,000.
The Company has borrowed $1,000,000 related to this line of credit at
April 30, 2002. On June 7, 2002, the Company paid $200,000 down on the
amount outstanding on this line of credit, leaving a balance of $800,000.
The Company has agreed to certain covenants, including prohibiting the
payment of dividends, with respect to both the Term Loan and the Revolving
Loan.
Centura has also agreed to finance the lease of two major pieces of
production equipment related to the manufacturing of the Vitsab(R) product.
The Company has advanced approximately $842,000 in progress payments on the
cost of both pieces of equipment, of which $464,000 has been advanced
directly by Centura. Through January 31, 2002, the Company had accrued and
paid approximately $57,000 of interest related to the progress payments
made by Centura on behalf of the Company. Pursuant to the lease agreement
relating to the equipment, the Company was to receive the amount of its
progress payments upon delivery and acceptance of the equipment and the
closing of the lease. If needed, Centura had agreed to loan the Company the
total amount of progress payments made by the Company for a minimum of 90
days at an interest rate of prime plus 1% per annum.
In November 2001, the Company met with representatives of the
engineering firm that designed, and is in the later stages of constructing,
the new production equipment for manufacturing the Vitsab(R) product. In
that meeting, the engineering firm stated it was still having technical
problems with the production equipment. These problems prevent the
engineering firm from delivering a machine that meets the Company's
production requirements at the agreed upon fees. It was also noted that the
engineering firm could not continue to work on the technical problems
without the infusion of approximately $300,000 of additional funds by the
Company. It was agreed by both parties that the design and construction of
the new production equipment would be put on hold indefinitely. It was also
agreed that the Company could have possession and/or title to the equipment
at its current state of development. The date of completion of the new
production equipment, if ever, will be determined at a later date. The
engineering firm also offered the use of its engineering staff to increase
the efficiency of the Company's existing two units of production equipment
and improve the quality of the Vitsab(R) product being produced. If needed,
the Company has two units of production equipment, located at its plant in
Malmo, Sweden, to support the Vitsab(R) production requirements.
The cost of the equipment related to the first lease is approximately
$1,000,000, with monthly lease payments of $17,040, including interest at
approximately 9.35% for a period of 84 months. The cost of the equipment
related to the second lease is approximately $80,000, with monthly lease
payments of $1,685, including interest at approximately 10.4% for a period
of 60 months. Both leases were to commence upon the delivery of the
equipment. Effective March 13, 2001, the Company and Centura agreed to
combine both leases into one lease agreement. The combined lease was to
commence upon the delivery of the equipment. As a result of the indefinite
delay in the design and construction of the equipment, the Company and
Centura agreed to execute documents on February 21, 2002 that converted the
$464,000 advanced under the lease by Centura to a five-year note payable,
effective January 31, 2002. The executed documents also incorporated the
note into the Modified Agreements. The interest rate on the note is the
30-day LIBOR plus 500 basis points per annum, with monthly payments of
$7,700 plus accrued interest. The maturity date of the note is July 31,
2002.
31
Capital leases consist primarily of manufacturing property and
equipment with a capitalized cost of approximately $672,000 and accumulated
depreciation of approximately $403,000 and $269,000 as of April 30, 2002
and 2001, respectively.
Following are maturities of long-term debt for each of the next five
fiscal years ended April 30:
2003 $1,485,878
2004 170,778
2005 3,063,135
2006 --
2007 --
----------
Total $4,719,791
==========
5. RELATED PARTY TRANSACTIONS
In March 2000 the Company entered into an agreement with Technology
Investors, LLC ("TI") whereby the Company issued to TI a 10% subordinated
convertible promissory note due March 10, 2005 in the amount of $2,500,000
for cash. The principal amount of the note and interest accrued thereon are
convertible, at the option of holder into shares of the Company's Common
Stock at a conversion price of $1.25 per share. At April 30, 2002, the
principal and accrued interest of $3,025,000 would be converted into
2,420,000 shares of the Company's Common Stock. Mr. Fletcher and Mr. Reid
serve as the sole managers of TI and share voting and dispositions power
with respect to the Common Stock issuable upon conversion of the note.
In addition, Mr. Fletcher and Mr. Reid were named directors of the
Company. The Company has agreed to nominate Mr. Fletcher and Mr. Reid for
three consecutive terms on the Board of Directors. Mr. Fletcher and Mr.
Reid were also both retained as consultants to the Company. In connection
with their services they each will receive compensation of $1 annually and
a one-time grant of immediately exercisable options to purchase 300,000
shares of the Company's Common Stock at an exercise price of $1.25 per
share for a period of up to ten years. In fiscal 2001, Mr. Fletcher and Mr.
Reid each received stock options to purchase 2,000,000 shares of the
Company's Common Stock at an exercise price of $.59 per share for a period
of up to ten years. In fiscal 2002, Mr. Fletcher and Mr. Reid each received
stock options to purchase 800,000 shares of the Company's Common Stock at
an exercise price of $.11 per share for a period of up to seven years. On
July 23, 2001, the Board of Directors approved an increase in compensation
for Mr. Fletcher and Mr. Reid. Retroactive to January 1, 2001, they each
will receive annual compensation of $100,000, payable quarterly in
unrestricted shares of the Company's Common Stock valued at the average
daily closing price during the quarter. During fiscal 2002, Mr. Fletcher
and Mr. Reid were paid $75,000 of salary in unrestricted shares of the
Company's Common Stock at an average market price of $.35 per share under
this structure. Approved by the Board of Directors on December 7, 2001, Mr.
Fletcher and Mr. Reid agreed to a decrease in their annual compensation to
$1 effective October 1, 2001.
On March 15, 2002, the Compensation Committee of the Board of
Directors approved a compensation structure, effective March 1, 2002,
whereby Mr. Fletcher and Mr. Reid will be compensated based on the actual
monthly cash flow and quarterly net income generated by the Company. The
maximum annual compensation will be capped at $210,000 each. During fiscal
2002, Mr. Fletcher and Mr. Reid were compensated $7,500 each under this
structure.
6. STOCK OPTION PLANS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Awards of Stock-Based Compensation to Employees."
This statement defines a fair value method of accounting for stock options
or similar equity instruments. SFAS No. 123 permits companies to continue
to account for stock-based compensation awards under existing accounting
rules, but requires disclosure in a note to the financial statements of the
pro forma net income and earnings per share as if the Company had adopted
the new method of accounting.
The Company has two nonqualified stock option plans, the Stock Option
Agreements By and Between Cox Technologies, Inc. and Certain Executives
("Executive Plan") and the 2000 Stock Incentive Plan ("2000 Plan"). In
accordance with the Executive Plan, options to purchase an aggregate of up
to 6,652,500 shares of the Company's common stock were granted to certain
executives of the Company. Options were granted at the fair market value of
the Company's common stock determined on the date of the grant. Certain of
32
the options were granted at an exercise price below fair market value, and
a prior period adjustment of $600,000 related to compensation expense was
charged to operations in fiscal 2000, as discussed in Note 12 to the
consolidated financial statements. As a result of the remaining options
being granted at the fair market value, no compensation expense is
recorded. Options from the Executive Plan are exercisable on various dates
and expire on various dates. All options under the Executive Plan have been
granted. In accordance with the 2000 Plan, up to 8,000,000 shares of the
Company's common stock can be issued through the use of stock-based
incentives to employees, consultants and non-employee members of the Board
of Directors. The exercise price of options granted through the 2000 Plan
cannot be less than 85% of the fair market value of the Company's common
stock on the date of the grant. All outstanding options have been granted
at the fair market value, therefore no compensation expense has been
recorded. Options from the 2000 Plan are exercisable on various dates from
the date of the grant and expire on various dates. Exceptions to the
exercise date for both plans are allowed upon the retirement, disability or
death of a participant. An exception is also allowed upon a change in
control as defined in both plans.
Options granted, exercised and canceled under both plans for the three
years ended April 30, 2002 were as follows:
Options Weighted-Average
Outstanding Exercise Price
----------- --------------
April 30, 1999 -- --
Granted 600,000 $1.25
Exercised -- --
Canceled -- --
----------
April 30, 2000 600,000 $1.25
Granted 7,310,000 $ .58
Exercised -- --
Canceled -- --
----------
April 30, 2001 7,910,000 $ .63
Granted 3,742,500 $ .12
Exercised -- --
Canceled (120,000) $ .38
----------
April 30, 2002 11,532,500 $ .47
==========
The Company applies APB No. 25 in accounting for both Plans.
Accordingly, no compensation cost has been recognized for the 2000 Plan in
fiscal 2001. For fiscal 2000, $600,000 was recorded as a prior period
adjustment. Had compensation cost for both Plans been determined consistent
with the fair value method for compensation expense encouraged under SFAS
No. 123, the Company's net income and earnings per share (EPS) would have
been the pro forma amounts shown below for the fiscal years ended April 30.
For purposes of pro forma disclosures, the estimated fair value of options
is recorded in its entirety in the year granted.
2002 2001 2000
------------ ------------ ------------
Net income (loss) As reported $ (5,163,046) $ (6,774,009) $ (2,202,236)
Net income (loss) Pro forma $ (5,189,377) $ (7,036,503) $ (2,603,635)
Basic and diluted EPS As reported $ (.20) $ (.27) $ (.09)
Basic and diluted EPS Pro forma $ (.20) $ (.29) $ (.11)
For purposes of pro forma disclosure, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions used for nonqualified stock
option grants in fiscal 2002, 2001 and 2000, respectively:
2002 2001 2000
------------- ------------- --------
Risk free interest rate(s) 4.8% to 5.2% 4.8% to 6.0% 5.3%
Volatility factor(s) 224% to 249% 98% to 243% 41%
Expected life 7 to 10 years 4 to 10 years 10 years
The weighted average fair value of nonqualified stock options granted
during fiscal 2002, 2001 and 2000 was $.12, $.55 and $1.67, respectively.
Options outstanding at April 30, 2002 have exercise prices ranging from
$.11 to $1.25, and a weighted average remaining contractual life of 8.2
33
years. The number of shares and weighted average exercise price of those
shares exercisable at the end of each fiscal year were 67,500 shares at
$.34 for 2002, 2,697,501 shares at $.55 for 2001 and 600,000 shares at
$1.25 for 2000.
During fiscal 2002, 723,028 shares of restricted stock were issued out
of the 2000 Plan to consultants and employees in lieu of cash payments. At
April 30, 2002, there were 2,396,972 shares reserved for issuance under the
2000 Plan.
7. RETIREMENT PLAN
The Company maintains a 401(k) plan that covers substantially all
employees, including subsidiary companies. The Company matches 50% of
employee contributions up to 4% of gross earnings. Effective January 1,
2002, the Company elected to discontinue matching contributions. The
Company's matching amounted to approximately $15,400, $33,000 and $31,000,
respectively, for fiscal 2002, 2001 and 2000.
8. IMPAIRMENT OF ASSETS
During fiscal 2002 goodwill and non-depreciable assets were determined
to be impaired and these amounts were recognized as a loss on impairment of
$3,537,597 in the fourth quarter of fiscal 2002.
Goodwill originated primarily from the acquisition of Vitsab, AB (see
Note 14 to the consolidated financial statements) during fiscal 1999. At
April 30, 2002 the Company evaluated the fair value of goodwill, which was
determined by reference to the present value of estimated future cash
inflows and a significant change in technology to get the product to
market. Due to the significant change in technology and projected future
cash flows for this product, management has determined goodwill from the
Vitsab(R) product to be impaired and has recognized an impairment loss of
$2,695,689 in the fourth quarter of fiscal 2002.
The non-depreciable asset represents machinery for the high-speed
production of the Vitsab(R) product (see Note 4 to the consolidated
financial statements). Since the machinery will not be completed and not
produce any positive future cash flows and has a minimal scrap value,
management has determined the equipment to be impaired and has recognized a
loss on impairment of $841,908 in the fourth quarter of fiscal 2002.
9. INCOME TAXES
The Company and its subsidiaries file consolidated federal income tax
returns. There is an aggregate federal net operating loss carryforward of
$7,909,361 available to reduce future federal taxable income of the parent
company. These net operating loss carryforwards will expire in various
amounts between fiscal 2003 and fiscal 2022.
The provisions for income taxes consists of the following for the
fiscal years ended April 30,
2002 2001 2000
------- ------- -------
Current:
Federal $ -- $ -- $ --
State -- -- 14,754
------- ------- -------
-- -- 14,754
------- ------- -------
Deferred:
Federal -- -- 27,000
State -- -- --
------- ------- -------
-- -- 27,000
------- ------- -------
Total $ -- $ -- $41,754
======= ======= =======
34
The reconciliation of income tax computed at federal and state
statutory rates to the income tax provision is as follows for the fiscal
years ended April 30,
2002 2001 2000
----------- ----------- -----------
Income (loss) before income taxes $(5,163,046) $(6,774,009) $(2,160,482)
Statutory federal income tax rate: 34% 34% 34%
Expected federal income tax
expense at statutory rate $ -- $ -- $ --
Other -- -- 41,754
Utilization of net operating loss
Carryforward -- -- --
----------- ----------- -----------
Provision for income taxes $ -- $ -- $ 41,754
=========== =========== ===========
The following is a summary of the significant components of the
Company's deferred tax assets for the fiscal years ended April 30,
2002 2001 2000
---------- ---------- ----------
Deferred tax assets:
Net operating loss carryforwards $2,978,000 $3,960,000 $2,890,000
Impairment on long-lived assets 1,600,000 1,285,000 --
Other 322,000 149,000 --
---------- ---------- ----------
4,900,000 5,394,000 2,890,000
Less: Valuation allowance 4,900,000 5,394,000 2,890,000
---------- ---------- ----------
Net deferred tax asset $ -- $ -- $ --
========== ========== ==========
The valuation allowance primarily represents the tax benefits of
certain operating loss carryforwards and other deferred tax assets that may
expire without being utilized. During fiscal 2002, 2001 and 2000, the
valuation allowance (decreased) increased ($494,000), $2,504,000 and
$533,000, respectively.
The unused net operating loss carryforwards, which may provide future
tax benefits, expire at the end of each fiscal year as follows:
Unused Net Operating
Fiscal Year of Expiration Loss Carryforward Amount
------------------------- ------------------------
2003 $ 699,952
2004 282,100
2005 649,916
2006 410,888
2007 252,810
Remaining years 5,613,695
-----------
Total $ 7,909,361
===========
35
10. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents certain financial information for each
quarter during the fiscal years ended April 30,
2002
--------------------------------------------------------
Fourth Third Second First
----------- ----------- ----------- -----------
Sales $ 2,158,846 $ 2,045,969 $ 2,213,633 $ 2,208,655
Income (loss) from
operations (3,818,566) (206,114) (260,520) (541,769)
Net income (loss) (3,940,428) (339,258) (340,716) (542,644)
Basic and diluted net
income (loss) per
average common
share (.16) (.01) (.01) (.02)
2001
--------------------------------------------------------
Fourth Third Second First
----------- ----------- ----------- -----------
Sales $ 2,274,975 $ 2,302,426 $ 2,708,379 $ 2,423,781
Income (loss) from
operations (3,737,403) (1,651,791) (322,127) (438,096)
Net income (loss) (4,080,927) (1,716,913) (426,819) (549,350)
Basic and diluted net
income (loss) per
average common
share (.16) (.07) (.02) (.02)
11. SEGMENT INFORMATION
Prior to fiscal 2002, the Company had two current operating segments
that involved the (1) production and distribution of temperature recording
and monitoring devices, including electronic "loggers", graphic temperature
recorders and visual indicator tags (referred to as "Temperature Recorder
Operations" as a group) and (2) oilfield operations and other, which
included all economic activity related to the oil production and the
holding of the oil leases and the operation of its Phoenix, Arizona office.
The Company closed its Phoenix office effective October 31, 2000. The
activities performed in Phoenix were transferred to the Corporate Office in
Belmont, North Carolina. The Company now operates in one reporting segment
of Temperature Recorder Operations. Therefore, no segment information is
required to be reported for fiscal 2002.
36
Fiscal Years Ended April 30, 2001 2000
---------------------------- ----------- -----------
Revenues:
Temperature Recorder Operations $ 9,637,075 $ 9,700,282
Oilfield Operations and Other 72,486 10,694
----------- -----------
$ 9,709,561 $ 9,710,976
=========== ===========
Net income (loss):
Temperature Recorder Operations $(3,428,857) $(1,979,925)
Oilfield Operations and Other (1) (3,345,152) (222,311)
----------- -----------
$(6,774,009) $(2,202,236)
=========== ===========
Identifiable assets:
Temperature Recorder Operations $ 4,377,067 $ 5,219,141
Oilfield Operations and Other (1) 300,000 3,519,790
----------- -----------
$ 4,677,067 $ 8,738,931
=========== ===========
Capital expenditures:
Temperature Recorder Operations $ 84,388 $ 371,554
Oilfield Operations and Other -- 9,239
----------- -----------
$ 84,388 $ 380,793
=========== ===========
Depreciation, depletion and amortization:
Temperature Recorder Operations $ 733,123 $ 631,060
Oilfield Operations and Other (1) -- --
----------- -----------
$ 733,123 $ 631,060
=========== ===========
Interest expense:
Temperature Recorder Operations $ 496,442 $ 170,263
Oilfield Operations and Other -- --
----------- -----------
$ 496,442 $ 170,263
=========== ===========
(1) The Company recognized $3,062,196 of the oilfield operations net
assets as a loss on impairment in the fourth quarter of fiscal 2001.
Information on the Temperature Recorder Operations by domestic and
international is presented in the following table.
Fiscal Years Ended April 30, Domestic International Total
---------------------------- ----------- ------------- -----------
Revenues:
2002 $ 5,719,605 $ 2,907,498 $ 8,627,103
2001 $ 6,461,359 $ 3,175,716 $ 9,637,075
2000 $ 7,497,224 $ 2,203,058 $ 9,700,282
Net income (loss):
2002 $(3,456,703) $(1,706,343) $(5,163,046)
2001 $(2,298,835) $(1,130,022) $(3,428,857)
2000 $(1,530,259) $ (449,666) $(1,979,925)
Identifiable assets:
2002 $ 993,738 $ 70,890 $ 1,064,628
2001 $ 1,370,091 $ 92,373 $ 1,462,464
2000 $ 4,912,310 $ 144,737 $ 5,057,047
37
12. PRIOR PERIOD ADJUSTMENT
As reported in the Company's fiscal 2001 annual report, the Company
has restated its consolidated financial statements for fiscal 2000. This
action was taken to recognize compensation expense related to the issuance
of stock options with an exercise price below fair market value in the
amount of $600,000. The Company also made an adjustment to increase
depreciation expense in the amount of $349,713 as a correction of an error.
These adjustments combined had an earnings per share effect of ($.04) in
fiscal 2000.
13. LEASES
The Company leases its corporate office, sales office and
manufacturing facilities under non-cancelable operating leases. Rental
expense for fiscal 2002, 2001 and 2000 was $110,578, $174,723 and $158,306,
respectively. At April 30, 2002, future minimum rental payments for
non-cancelable operating leases are approximately $115,000 for fiscal 2003,
and $28,000 for fiscal 2004.
14. BUSINESS COMBINATION
In November 1997, the Company acquired a nominal interest in Vitsab,
AG (Vitsag), a corporation formed under the laws of the Country of
Switzerland, for $300,000. In June 1998, the Company acquired all of the
outstanding shares of Visual Indicator Tag Systems, AB (Vitsab), a
corporation formed under the laws of the Country of Sweden, and a wholly
owned subsidiary of Vitsag. The acquisition was accomplished by the
issuance of 3,375,734 shares of the Company's unregistered common stock,
950,000 shares of the common stock of Vitsab USA, Inc., a wholly owned
subsidiary of the Company, in the formation stage, with 4,750,000 issued
shares of common stock outstanding, and the assumption of certain debt owed
by Vitsab to an unrelated company. In an agreement dated July 18, 1999, the
Company purchased their minority interest in Vitsab USA, Inc. through the
issuance of 527,458 shares of the Company's unregistered common stock. The
transaction has been accounted for as a purchase and the results of
Vitsab's operations have been included in the accompanying consolidated
financial statements since the date of the acquisition, which was June 30,
1998. The cost of the acquired enterprise was approximately $2,600,000,
including debt assumed of approximately $1,750,000. At acquisition, the
fair value of liabilities assumed exceeded the fair value of assets
acquired, and the excess plus the cost of acquisition were recorded as
goodwill. During fiscal 2000, the Company adjusted the initial purchase
price allocation that resulted in additional goodwill of approximately
$469,000. Goodwill was being amortized over the average estimated useful
life of 16 years. The Company determined goodwill to be impaired and
recognized an impairment loss of $2,695,689 in the fourth quarter of fiscal
2002.
15. GOING CONCERN CONSIDERATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
sustained substantial operating losses in recent years. In addition, the
Company has used substantial amounts of working capital in its operations.
Further, at April 30, 2002, current liabilities exceed current assets by
$390,850 and total liabilities exceed total assets by $2,305,523. The
Company is currently in violation of certain loan covenants (see Note 4)
and has entered into note modification agreements with Centura, effective
January 31, 2002 that extend the maturity dates of all three loans to July
31, 2002. Centura will continue to meet with Company management to review
the financial results and determine whether to extend the maturity date of
all three loans past July 31, 2002.
In view of these matters, realization of a major portion of the assets
in the accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to meet
its financing requirements, and the success of its future operations.
Management believes that actions presently being taken to revise the
Company's operating and financial requirements provide the opportunity for
the Company to continue as a going concern.
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Cox Technologies, Inc.
Belmont, North Carolina
We have audited the accompanying consolidated balance sheets of Cox
Technologies, Inc. and subsidiaries as of April 30, 2002 and 2001 and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cox Technologies,
Inc. and subsidiaries as of April 30, 2002 and 2001 and the results of their
operations and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred a net loss of $5,163,046 for 2002 and
has incurred substantial losses for each of the past three years. At April 30,
2002 current liabilities exceeded current assets by $390,850, and total
liabilities exceeded total assets by $2,305,523. The Company is currently in
violation of certain loan covenants (see Note 4) and has entered into note
modification agreements with its lender, effective January 31, 2002 that
extended the maturity dates of the loans to July 31, 2002. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Gastonia, North Carolina
July 3, 2002, except for Note 3,
as to which the date is July 12, 2002,
and Note 4, as to which the date
is July 24, 2002
39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Cox Technologies, Inc.
Belmont, North Carolina
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and of cash flows for the year ended April 30, 2000. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cox Technologies,
Inc., at April 30, 2000, in conformity with generally accepted accounting
principles.
/s/ Bedinger & Company
Bedinger & Company
Certified Public Accountants
Walnut Creek, California
June 14, 2000
(Except Note O, which is July 13, 2000,
Note E, which is July 19, 2000, and
Note 13, which is July 5, 2001)
40
SUPPLEMENTARY DATA
The information for this item is contained in Note 10 entitled "SUMMARY OF
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) on page 36 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information for this item is set forth in the sections entitled
"Election of Directors" and "The Board of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in Cox Technologies' proxy
statement dated July 29, 2002, relating to the August 30, 2002 annual
meeting of shareholders, which section is incorporated herein by reference.
EXECUTIVE OFFICERS
The information for this item is set forth on page 8 of this annual
report.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item is set forth in the sections entitled
"Executive Compensation," "Performance Graph" and "Report of Board of Directors
on Executive Compensation" in Cox Technologies' proxy statement dated July 29,
2002, relating to the August 30, 2002 annual meeting of shareholders, which
section is incorporated herein by reference (specifically excluding disclosures
in such sections relating to Items 402(k) and (1) of Regulation S-K).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information for this item is set forth in the section entitled "Common
Stock Ownership by Certain Beneficial Owners and Management" in Cox
Technologies' proxy statement dated July 29, 2002, relating to the August 30,
2002 annual meeting of shareholders, which section is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information for this item is set forth on page 32 of this annual report
and in the sections entitled "Election of Directors" and "Certain Relationships
and Related Transactions" in Cox Technologies' proxy statement dated July 29,
2002, relating to the August 30, 2002 annual meeting of shareholders, which
sections are incorporated herein by reference.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
PAGE
(a) 1. Financial statements -
Consolidated Balance Sheets at April 30, 2002 and 2001 21
Consolidated Statements of Income for the
Fiscal Years Ended April 30, 2002, 2001 and 2000 22
Consolidated Statements of Changes in Stockholders'
Equity for the Fiscal Years Ended April 30, 2002,
2001 and 2000 23
Consolidated Statements of Cash Flows for the
Fiscal Years Ended April 30, 2002, 2001 and 2000 24
Notes to Consolidated Financial Statements for the
Fiscal Years Ended April 30, 2002, 2001 and 2000 25-38
Report of Independent Public Accountants 39-40
2. Financial statement schedules -
The following financial statement schedules are included herein:
Supplemental Schedules:
Report of Independent Public Accountants 43
Schedule II - Valuation and Qualifying Accounts for the
Fiscal Years Ended April 30, 2002, 2001 and 2000 44
All other financial statement schedules are omitted as not applicable, not
required, or the required information is included in the consolidated financial
statements and notes thereto.
3. Exhibits -
23.1 - Consent of Cherry, Bekaert & Holland, L.L.P.
23.2 - Consent of Bedinger & Company
4. Reports on Form 8-K -
A Form 8-K was filed on February 11, 2002 that included a President's
Letter to Shareholders. This letter was mailed to all shareholders of
record on or about February 8, 2002.
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Cox Technologies, Inc.
Belmont, North Carolina
Under date of July 3, 2002, except for Note 3 as to which the date is July 12,
2002, and Note 4 as to which the date is July 24, 2002, we reported on the
consolidated balance sheets of Cox Technologies, Inc. and subsidiaries as of
April 30, 2002 and 2001, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended, which are
included in this annual report on Form 10-K. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
accompanying consolidated financial statement schedules. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Our report on the consolidated financial statements referred to factors that
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statement schedules do not include any
adjustments that might be necessary if the Company cannot continue in existence.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Gastonia, North Carolina
July 3, 2002
43
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
------------------------------
Charged to Other
Balance at Charged to Other Changes - Add Balance
Fiscal Beginning of Costs and Accounts - (Deduct) - at End of
Year Description Fiscal Year Expenses Describe (1) Describe (2) Fiscal Year
---- ----------- ----------- -------- ------------ ------------ -----------
2002 Allowance for
doubtful accounts $ 61,810 $ 23,898 $ -- $ (20,708) $ 65,000
Impairment loss 3,062,196 3,537,597 -- -- 6,599,793
Deferred tax assets 5,394,000 -- (494,000) -- 4,900,000
----------- ----------- ------------ ----------- -----------
$ 8,518,006 $ 3,561,495 ($ 494,000) ($ 20,708) $11,564,793
=========== =========== ============ =========== ===========
2001 Allowance for
doubtful accounts $ 28,524 $ 33,286 $ -- $ -- $ 61,810
Impairment loss -- 3,062,196 -- -- 3,062,196
Deferred tax assets 2,890,000 -- 2,504,000 -- 5,394,000
----------- ----------- ------------ ----------- -----------
$ 2,918,524 $ 3,095,482 $ 2,504,000 $ -- $ 8,518,006
=========== =========== ============ =========== ===========
2000 Allowance for
doubtful accounts $ 28,664 -- -- $ (140) $ 28,524
Deferred tax asset 2,357,000 -- 533,000 -- 2,890,000
----------- ----------- ------------ ----------- -----------
$ 2,385,664 $ -- $ 533,000 ($ 140) $ 2,918,524
=========== =========== ============ =========== ===========
- ----------
(1) Deferred tax valuation allowance offsets gross deferred assets.
(2) Write-off of accounts considered to be uncollectible.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COX TECHNOLOGIES, INC.
(Registrant)
July 29, 2002 /s/ James L. Cox
----------------------------------------
James L. Cox
Chairman, President and
Chief Executive Officer
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 the capacities indicated on July 29, 2002.
/s/ James L. Cox /s/ Jack G. Mason
----------------------------- -----------------------------
James L. Cox Jack G. Mason
Chairman, President and Chief Financial Officer
Chief Executive Officer and Secretary
(Principal executive officer) (Principal financial and
accounting officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on July 29, 2002.
/s/ James L. Cox
------------------------------------
James L. Cox
Chairman, President and
Chief Executive Officer
/s/ Brian D. Fletcher
------------------------------------
Brian D. Fletcher
Chief Operating Officer and Director
/s/ George M. Pigott
------------------------------------
George M. Pigott
Director
/s/ Kurt C. Reid
------------------------------------
Kurt C. Reid
Chief Operating Officer and Director
/s/ Ben R. Rudisill, II
------------------------------------
Ben R. Rudisill, II
Director
/s/ Robert D. Voigt
------------------------------------
Robert D. Voigt
Director
45