SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
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)
(704) 825-8146
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicated 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, no par value, outstanding
at September 11, 2002 .............................................. 25,878,082
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
FACE SHEET 1
INDEX 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
July 31, 2002 and April 30, 2002 3
Consolidated Statements of Income
Three Months Ended July 31, 2002 and 2001 4
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended July 31, 2002 and 2001 5
Consolidated Statements of Cash Flows
Three Months Ended July 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9-13
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
July 31, 2002 April 30, 2002
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 139,186 $ 216,042
Accounts receivable, less allowance for doubtful
accounts of $65,316 at July 31, 2002 and $65,000
at April 30, 2002 1,007,263 1,072,935
Inventory 1,432,195 1,419,342
Prepaid expenses 23,732 44,832
------------ ------------
TOTAL CURRENT ASSETS 2,602,376 2,753,151
Property and equipment, net 725,876 764,628
Property held for sale, net 300,000 300,000
Due from officer, net 21,426 41,067
Other assets 63,178 64,749
Patents 144,712 148,796
------------ ------------
TOTAL ASSETS $ 3,857,568 $ 4,072,391
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 623,173 $ 658,123
Short-term debt 800,000 1,000,000
Current portion of long-term debt 1,368,594 1,485,878
------------ ------------
TOTAL CURRENT LIABILITIES 2,791,767 3,144,001
Long-term debt 3,265,356 3,233,913
------------ ------------
TOTAL LIABILITIES 6,057,123 6,377,914
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized 100,000,000 shares;
issued and outstanding; 25,878,082 shares at July 31, 2002
and 25,769,684 at April 30, 2002 22,240,710 22,132,312
Paid in capital 365,288 461,412
Accumulated other comprehensive income (loss) (56,131) (68,168)
Accumulated deficit (24,725,220) (24,806,900)
Less - Notes receivable for common stock 24,202 24,179
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (2,199,555) (2,305,523)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,857,568 $ 4,072,391
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended July 31,
------------------------------
2002 2001
------------ ------------
REVENUE:
Sales $ 2,265,907 $ 2,208,655
------------ ------------
COSTS AND EXPENSES:
Cost of sales 1,274,968 1,543,044
General and administrative 516,877 665,883
Selling 237,069 402,738
Depreciation and depletion 77,521 75,010
Amortization of patents and goodwill 10,994 63,749
------------ ------------
TOTAL COSTS AND EXPENSES 2,117,429 2,750,424
------------ ------------
INCOME (LOSS) FROM OPERATIONS 148,478 (541,769)
------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 58,555 118,993
Interest expense (125,353) (119,868)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (66,798) (875)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 81,680 (542,644)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ 81,680 $ (542,644)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ .00 $ (.02)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 25,831,949 24,904,823
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated Subscribed
Other Stock
Comprehensive Retained Common Paid in Less Note
Total Income (Loss) Earnings Stock Capital Receivable
------------ ------------ ------------ ------------ ------------ ------------
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) (542,644) -- (542,644) -- -- --
Foreign currency
translation adjustment 20,173 20,173 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive
income (loss) (522,471) -- -- -- -- --
Change in subscribed stock, net 1,145 -- -- -- -- 1,145
------------ ------------ ------------ ------------ ------------ ------------
Balance, July 31, 2001 $ 2,007,029 $ (88,408) $(20,186,498) $ 21,267,448 $ 1,044,473 $ (29,986)
============ ============ ============ ============ ============ ============
Balance, April 30, 2002 $ (2,305,523) $ (68,168) $(24,806,900) $ 22,132,312 $ 461,412 $ (24,179)
Comprehensive income -
Net income 81,680 -- 81,680 -- -- --
Foreign currency
translation adjustment 12,037 12,037 -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total comprehensive
income 93,717 -- -- -- -- --
Common stock issued 12,274 -- -- 108,398 (96,124) --
Change in subscribed stock, net (23) -- -- -- -- (23)
------------ ------------ ------------ ------------ ------------ ------------
Balance, July 31, 2002 $ (2,199,555) $ (56,131) $(24,725,220) $ 22,240,710 $ 365,288 $ (24,202)
============ ============ ============ ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended July 31,
---------------------------
2002 2001
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 81,680 $(542,644)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and depletion 77,521 75,010
Amortization of patents and goodwill 10,994 63,749
Increase in allowance for doubtful accounts 316 --
Other (5,655) 3,043
Decrease in valuation adjustment 19,641 3,571
--------- ---------
184,497 (397,271)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 65,672 (8,134)
Inventory (12,853) 207,202
Prepaid expenses 21,100 1,053
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (34,950) 87,460
--------- ---------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 223,466 (109,690)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (38,769) (6,627)
--------- ---------
CASH USED IN INVESTING ACTIVITIES (38,769) (6,627)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 12,274 --
Repayment on notes payable - Long-term debt (85,841) (4,653)
Repayment on notes payable - Short-term debt (200,000) --
Subscriptions receivable (23) 1,145
Amounts borrowed under short-term debt -- 100,000
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (273,590) 96,492
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 12,037 20,173
--------- ---------
NET INCREASE (DECREASE) IN CASH (76,856) 348
CASH AND CASH EQUIVALENTS, beginning of period 216,042 43,620
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 139,186 $ 43,968
========= =========
Supplemental Cash Flow Information
Interest paid $ 49,728 $ 51,118
Income taxes paid $ -- $ --
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cox Technologies, Inc. and its wholly owned subsidiary, Vitsab Sweden, AB,
a Swedish corporation, and Cox Recorders Australia, Ltd., Pty., a 95% owned
Australian distribution company (collectively "the Company"), engage in the
business of producing and distributing transit temperature recording
instruments, both in the United States and internationally.
The accompanying unaudited consolidated financial statements and notes
should be read in conjunction with the audited consolidated financial statements
and notes included in the Cox Technologies, Inc. 2002 Annual Report on Form
10-K. In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair statement of the results of
operations for the interim periods have been recorded. Certain amounts
previously reported have been reclassified to conform with the current period's
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued two
Statements of Financial Accounting Standards ("SFAS"), SFAS No. 142, "Goodwill
and Other Intangible Assets" (SFAS No. 142) and SFAS No. 143, "Accounting for
Asset Retirement" (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. 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. The Company
expects to adopt the provisions of SFAS No. 143 effective May 1, 2003. The
Company believes the adoption of the provisions of this statement will not have
a significant effect on its financial position or results of operations.
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 of
SFAS No. 144 were adopted effective May 1, 2002. There was no significant effect
on financial position or results of operations as a result of adopting these
provisions.
NOTE A - INVENTORY
Inventory at the respective balance sheet dates consists of the following:
July 31, 2002 April 30, 2002
------------- --------------
Raw materials $ 395,965 $ 377,478
Work-in-progress 155,503 143,339
Finished goods 880,727 898,525
---------- ----------
$1,432,195 $1,419,342
========== ==========
7
NOTE B - DEBT
On July 13, 2000 the Company entered into a five-year term loan ("Term
Loan") with its primary lender, RBC Centura Bank ("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 $22,312.50, 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, 2002, 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
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.
The Company had 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%
8
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.
Effective July 31, 2002, the Company executed documents with Centura that
extended the maturity date of all three notes to October 31, 2002 and decreased
the amount available on the line of credit from $1,000,000 to the then
outstanding balance of $800,000. The Company is currently in discussions with
Centura and other asset-based lenders in an attempt to modify all loan
agreements before October 31, 2002 to extend the maturity dates. As a result,
these loans have been classified as current portion of long-term debt.
NOTE C - 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 July 31, 2002, the principal and
accrued interest of $3,100,625 would be converted into 2,480,500 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 for their services
they each were to 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 10
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
$0.59 per share for a period of up to 10 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 were to receive compensation of $100,000 annually, payable quarterly in
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. During fiscal 2003, Mr.
Fletcher and Mr. Reid each have been compensated $15,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF OPERATIONS FOR 2003 AND 2002
The Company operates in one reporting segment that involves the production
and distribution of temperature recording and monitoring devices, including the
Cox1 graphic temperature recorder, DataSource(R) and Tracer(R) electronic data
loggers, Vitsab(R) visual indicator tags and probes and related products
(referred to as "Temperature Recorder Operations" as a group).
TEMPERATURE RECORDER OPERATIONS
Revenues from sales increased $57,252, or 3%, for the three-month period
ended July 31, 2002 as compared to the same period as last year. This increase
is primarily due to an increase in the sales of DataSource(R), Tracer(R) and
Vitsab(R)
9
products, offset by a decrease in Cox1 product sales and a decrease in average
sales price for each of these products. Sales of Cox1 units decreased 11% for
the three-month period ended July 31, 2002 as compared to the same period last
year and the average sales price decreased 3%. Sales of DataSource(R) units
increased 96% for the three-month period ended July 31, 2002 as compared to the
same period last year, slightly offset by a 6% decrease in average sales price.
Sales of Tracer(R) units increased 63% for the three-month period ended July 31,
2002 as compared to the same period last year and the average sales price
decreased 4%. Vitsab(R) unit sales increased 90% for the three-month period
ended July 31, 2002 as compared to the same period last year and the average
sales price increased 144%. The sale of graphic recorders represented $1,651,304
or 73% of total revenues for the three-month period ended July 31, 2002 as
compared to $1,911,959 or 87% in the same period last year. The sales of
electronic data loggers represented $492,386 or 22% of total revenues for the
three-month period ended July 31, 2002 as compared to $276,001 or 12% in the
same period last year. The sale of Vitsab(R) products represented $45,204 or 2%
of total revenues for the three-month period ending July 31, 2002 as compared to
$9,774 or less than 1% in the same period last year. The sale of probes and
related products represented $30,535 or 1% for the three-month period ended July
31, 2002 as compared to $40,482 or 2% in the same period last year. The sale of
oil and other miscellaneous products represented the balance. 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
units sales for its primary products to remain constant, or in the case of
electronic data loggers, increase in future periods.
Cost of sales for the three-month period ended July 31, 2002 decreased
$268,076, or 17% as compared to the same period last year. The decrease is due
to decreasing labor and benefit costs, supplies used in the manufacturing
process and a reduction in the price that the Company now pays for raw material
components and labor costs, offset slightly by increased shipping expenses and
retriever fees.
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. 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 plans 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 the three months ended July 31,
2002 decreased $149,006, or 22%, as compared to the same period last year. The
decrease is due to lower costs associated with legal fees, professional
services, insurance and benefits expenses and salaries, partially offset by
increases in accounting services and servicing securities.
Selling expense decreased $165,669, or 41% for the three months ended July
31, 2002 as compared to the same period last year. The decrease in the
three-month period is primarily due to lower sales salaries, insurance and
benefits expenses, commissions, trade shows, partially offset by increases in
travel expenses.
Depreciation and depletion expense increased $2,511, or 3% for the
three-month period as compared to the same period last year due to increased
equipment purchases. All depletion expenses associated with the oilfield
operations were written off as a loss on impairment in the fourth quarter of
fiscal 2001. As a result, no additional depletion expense is being recorded.
Amortization of patents and goodwill decreased $52,755, or 83% for the
three months ended July 31, 2002 as compared to the same period last year. This
decrease resulted from all goodwill related to the acquisition of Vitsab Sweden,
AB being evaluated and written off as a loss on impairment in the fourth quarter
of fiscal 2002.
Other income decreased $60,438, or 51% for the three months ended July 31,
2002 as compared to the same period last year. This decrease is primarily
related to the decrease in the amount of the payments received as a result of a
revision in 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. The details of this agreement are more fully
discussed in Liquidity and Capital Resources. During the three months ended July
31, 2002, the Company recorded as other income a $25,000 non-refundable deposit
received for executing a purchase and sale agreement for the oil well subleases
as discussed later in this section.
Interest expense increased $5,485, or 5% for the three-month period as
compared to the same period last year. The
10
MANAGEMENT'S DISCUSSION (CONTINUED)
primary reason for this increase is the interest accrued on 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 and notes with RBC Centura Bank, offset
slightly by a decrease in interest related to leased equipment.
The decrease in property and equipment of $38,752, net of depreciation, is
primarily due to depreciation, partially offset by the purchase of tooling,
machinery and equipment, and leasehold improvements.
LIQUIDITY AND CAPITAL RESOURCES
The Company derives cash from operations, equity sales, 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 general working capital needs.
On July 13, 2000 the Company entered into a five-year term loan ("Term
Loan") with its primary lender, RBC Centura Bank ("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 $22,312.50, 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, 2002, 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
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.
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
11
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.
Effective July 31, 2002, the Company executed documents with Centura that
extended the maturity date of all three notes to October 31, 2002 and decreased
the amount available on the line of credit from $1,000,000 to the then
outstanding balance of $800,000. The Company is currently in discussions with
Centura and other asset-based lenders in an attempt to modify all loan
agreements before October 31, 2002 to extend the maturity dates. As a result,
these loans have been classified as current portion of long-term debt.
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 the
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.
As discussed in the Form 10-K for the fiscal year ended April 30, 2002, the
Company's entire Vitsab(R) operation is largely dependent on one customer and
that management could not, at that time, predict whether that customer's pilot
program would be successful or if that customer would continue to use the
Vitsab(R) product. On September 5, 2002 the Company received notification from
that customer it was not going to continue with the pilot program. The Company
also received notification from the largest user of Vitsab(R) products in that
customer's pilot program that they will continue to purchase and use the
Vitsab(R) product in their operations. Although the Company continues to
manufacture and sell the Vitsab(R) products to the largest user in the pilot
program and other smaller-volume customers, management cannot predict
12
MANAGEMENT'S DISCUSSION (CONTINUED)
how long it will continue to manufacture and sell 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.
As previously disclosed in other documents, the Company owns working
interests in oil well subleases in Kern County, California, named the Mitchel
and Bacon Hills subleases. In the fourth quarter of fiscal 2001, the Company
recognized a loss on impairment of $3,062,196 leaving $300,000 of net assets
related to the subleases as property held for sale. 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.
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 the transaction
will have a material impact on the earnings or financial position of the
Company.
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. Cox Technologies undertakes no obligation to update forward-looking
statements to reflect events or circumstances after the date hereof. Such risks
and uncertainties with respect to Cox Technologies 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, Cox Technologies may include forward-looking statements in oral
statements or other written documents.
13
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following is unregistered stock issued during the three months ended
July 31, 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 10,000 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K:
The Company filed on September 10, 2002 a Current Report on Form 8-K
disclosing that the Company had received notification from the
customer conducting the pilot program with regards to the Company's
Vitsab(R) product that the customer was not going to continue using
the Company's Vitsab(R) product in its operations. The Company also
received notification from the largest user of the Vitsab(R) products
in that customer's pilot program that they will continue to purchase
and use the Vitsab(R) product in their operations.
14
SIGNATURES
Pursuant to the requirements 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)
Date: 9-16-02 /s/ James L. Cox
------- -----------------------------
James L. Cox
Chairman, President and
Chief Executive Officer
Date: 9-16-02 /s/ Jack G. Mason
------- ----------------------------
Jack G. Mason
Chief Financial Officer
and Secretary
15
CERTIFICATE OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
This Certificate is being delivered pursuant to the requirements of Section
1350 of Chapter 63 (Mail Fraud) of Title 18 (Crimes and Criminal Procedures) of
the United States Code and shall not be relied on by any person for any other
purpose.
The undersigned, who are the Chief Executive Officer and Chief Financial
Officer and Secretary, respectively, of Cox Technologies, Inc. (the "Company"),
hereby each certify as follows:
The Quarterly Report on Form 10-Q of the Company (the "Report"), which
accompanies this Certificate, fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, and all information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated this 16th day of September, 2002.
/s/ James L. Cox
---------------------------
James L. Cox
Chairman, President and
Chief Executive Officer
/s/ Jack G. Mason
---------------------------
Jack G. Mason
Chief Financial Officer
and Secretary