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 October 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 December 12, 2002 ............................................... 25,889,094
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
FACE SHEET 1
INDEX 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
October 31, 2002 and April 30, 2002 3
Consolidated Statements of Income (Unaudited)
Three Months and Six Months Ended October 31, 2002 and 2001 4 - 5
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) Six Months Ended October 31, 2002 and 2001 6
Consolidated Statements of Cash Flows (Unaudited)
Three Months and Six Months Ended October 31, 2002 and 2001 7 - 8
Notes to Consolidated Financial Statements 9 - 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 - 17
ITEM 4. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 19
CERTIFICATION OF CHIEF FINANCIAL OFFICER 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, 2002 April 30, 2002
---------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 162,475 $ 216,042
Accounts receivable, less allowance for doubtful
accounts of $59,682 at October 31, 2002 and $65,000
at April 30, 2002 820,295 1,072,935
Inventory 1,432,631 1,419,342
Notes receivable 175,000 --
Prepaid expenses 21,176 44,832
------------ ------------
TOTAL CURRENT ASSETS 2,611,577 2,753,151
Property and equipment, net 670,427 764,628
Property held for sale, net -- 300,000
Due from officer, net 10,713 41,067
Other assets 62,207 64,749
Patents 137,023 148,796
------------ ------------
TOTAL ASSETS $ 3,491,947 $ 4,072,391
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 540,753 $ 658,123
Short-term debt 800,000 1,000,000
Current portion of long-term debt 1,257,786 1,485,878
------------ ------------
TOTAL CURRENT LIABILITIES 2,598,539 3,144,001
Long-term debt 3,295,661 3,233,913
------------ ------------
TOTAL LIABILITIES 5,894,200 6,377,914
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized 100,000,000 shares; issued
and outstanding; 25,889,094 shares at October 31, 2002 and
25,769,684 at April 30, 2002 22,251,722 22,132,312
Paid in capital 355,406 461,412
Accumulated other comprehensive income (loss) (49,691) (68,168)
Accumulated deficit (24,935,062) (24,806,900)
Less - Notes receivable for common stock 24,628 24,179
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (2,402,253) (2,305,523)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,491,947 $ 4,072,391
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended October 31,
-------------------------------
2002 2001
------------ ------------
REVENUE:
Sales $ 2,040,459 $ 2,213,633
------------ ------------
COSTS AND EXPENSES:
Cost of sales 1,171,233 1,247,633
General and administrative 606,611 737,951
Selling 301,601 337,318
Depreciation and depletion 78,344 87,502
Amortization of patents and goodwill 10,994 63,749
------------ ------------
TOTAL COSTS AND EXPENSES 2,168,783 2,474,153
------------ ------------
INCOME (LOSS) FROM OPERATIONS (128,324) (260,520)
------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 36,202 34,310
Interest expense (117,720) (114,506)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (81,518) (80,196)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (209,842) (340,716)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ (209,842) $ (340,716)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ (.01) $ (.01)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 25,885,423 25,191,936
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended October 31,
-------------------------------
2002 2001
------------ ------------
REVENUE:
Sales $ 4,306,366 $ 4,422,288
------------ ------------
COSTS AND EXPENSES:
Cost of sales 2,446,201 2,790,677
General and administrative 1,123,488 1,403,834
Selling 538,670 740,056
Depreciation and depletion 155,865 162,512
Amortization of patents and goodwill 21,988 127,498
------------ ------------
TOTAL COSTS AND EXPENSES 4,286,212 5,224,577
------------ ------------
INCOME (LOSS) FROM OPERATIONS 20,154 (802,289)
------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 94,757 153,303
Interest expense (243,073) (234,374)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (148,316) (81,071)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (128,162) (883,360)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ (128,162) $ (883,360)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ .00 $ (.04)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 25,858,686 25,048,379
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Other Subscribed
Comprehensive Stock
Income Retained Common Paid in Less Note
Total (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) (883,360) -- (883,360) -- -- --
Foreign currency
translation adjustment 17,195 17,195 -- -- -- --
------------
Total comprehensive
income (loss) (866,165) -- -- -- -- --
Common stock issued 203,700 -- -- 585,041 (381,341) --
Change in subscribed stock, net 5,985 -- -- -- -- 5,985
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2001 $ 1,871,875 $ (91,386) $(20,527,214) $ 21,852,489 $ 663,132 $ (25,146)
============ ============ ============ ============ ============ ============
Balance, April 30, 2002 $ (2,305,523) $ (68,168) $(24,806,900) $ 22,132,312 $ 461,412 $ (24,179)
Comprehensive income -
Net income (loss) (128,162) -- (128,162) -- -- --
Foreign currency
translation adjustment 18,477 18,477 -- -- -- --
------------
Total comprehensive
income (loss) (109,685) -- -- -- -- --
Common stock issued 13,404 -- -- 119,410 (106,006) --
Change in subscribed stock, net (449) -- -- -- -- (449)
------------ ------------ ------------ ------------ ------------ ------------
Balance, October 31, 2002 $ (2,402,253) $ (49,691) $(24,935,062) $ 22,251,722 $ 355,406 $ (24,628)
============ ============ ============ ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
October 31,
-----------------------
2002 2001
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $(209,842) $(340,716)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and depletion 78,344 87,502
Amortization of patents and goodwill 10,994 63,749
Decrease in allowance for doubtful accounts (5,634) --
Non-depreciable asset -- (68,843)
Other 3,300 311
(Increase) decrease in valuation adjustment 10,713 (1,786)
--------- ---------
(112,125) (259,783)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 186,968 (6,381)
Inventory (436) (3,563)
Prepaid expenses 2,556 7,394
Notes receivable (175,000) --
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (82,420) 8,564
--------- ---------
CASH USED IN OPERATING ACTIVITIES (180,457) (253,769)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (22,895) (9,545)
Sale of property held for sale 300,000 --
--------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 277,105 (9,545)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 1,130 203,700
Repayment on notes payable - Long-term debt (80,503) (30,377)
Subscriptions receivable (426) 4,840
Amounts borrowed under short-term debt -- 76,657
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (79,799) 254,820
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,440 (2,978)
--------- ---------
NET INCREASE (DECREASE) IN CASH 23,289 (11,472)
CASH AND CASH EQUIVALENTS, beginning of period 139,186 43,968
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 162,475 $ 32,496
========= =========
Supplemental Cash Flow Information
Interest paid $ 41,977 $ 45,756
Income taxes paid $ -- $ --
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
October 31,
-----------------------
2002 2001
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ($128,162) ($883,360)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and depletion 155,865 162,512
Amortization of patents and goodwill 21,988 127,498
Decrease in allowance for doubtful accounts (5,318) --
Non-depreciable asset -- (68,843)
Other (2,355) 3,354
Decrease in valuation adjustment 30,354 1,785
--------- ---------
72,372 (657,054)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 252,640 (14,515)
Inventory (13,289) 203,639
Prepaid expenses 23,656 8,447
Notes receivable (175,000) --
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (117,370) 96,024
--------- ---------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 43,009 (363,459)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (61,664) (16,172)
Sale of property held for sale 300,000 --
--------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 238,336 (16,172)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 13,404 203,700
Repayment on notes payable - Long-term debt (166,344) (35,030)
Repayment on notes payable - Short-term debt (200,000) --
Subscriptions receivable (449) 5,985
Amounts borrowed under short-term debt -- 176,657
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (353,389) 351,312
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 18,477 17,195
--------- ---------
NET DECREASE IN CASH (53,567) (11,124)
CASH AND CASH EQUIVALENTS, beginning of period 216,042 43,620
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 162,475 $ 32,496
========= =========
Supplemental Cash Flow Information
Interest paid $ 91,705 $ 96,874
Income taxes paid $ -- $ --
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cox Technologies, Inc. and its wholly owned subsidiary, Vitsab Sweden, AB,
a Swedish corporation, and Cox Recorders Australia, Pty., Ltd., 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 Accounting Principles Board
("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 on its financial position or results of operations.
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 the Company's 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:
October 31, 2002 April 30, 2002
---------------- --------------
Raw materials $ 312,087 $ 377,478
Work-in-progress 155,380 143,339
Finished goods 965,164 898,525
---------- ----------
$1,432,631 $1,419,342
========== ==========
9
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 also 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
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.
Centura 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 was 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 was 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
10
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 term
loan ("Lease Loan"), 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 the Term Loan, the Revolving Loan and the Lease
Loan ("Loans") to October 31, 2002 and decreased the amount available on the
Revolving Loan from $1,000,000 to the then outstanding balance of $800,000. The
Company began discussions with Centura and a group of asset-based lenders in an
attempt to modify the Loans before October 31, 2002 to extend the maturity
dates. As a result, the Term Loan and Lease Loan have been classified as current
portion of long-term debt.
Effective October 31, 2002, the Company executed documents with Centura
that extended the maturity date of the Loans to March 15, 2003. Under this new
arrangement, the Company will continue paying the current monthly principal
payments plus accrued interest on the Loans during this forbearance period. This
extension will give the Company additional time to procure additional funding,
either debt or equity, that will allow the Company to decrease the amount owed
to Centura by at least $450,000. The Company is currently in discussions with
various asset-based lenders and private investors in an effort to secure the
required additional funding. Through the monthly principal payments, plus the
additional funding and the receipt of structured payments from the recent sale
of the oilfield subleases, the Company must lower the total amount owed to
Centura to $1,215,000 by March 15, 2003. If this target is obtained, Centura has
agreed to amortize the remaining balance over a fixed period of time so that the
amount of the new monthly principal payments will remain approximately equal to
the total of the current monthly principal payments. Centura has also indicated
their intent to decrease the rate of interest accruing on the new loan as the
Company meets certain target balances.
The Company has agreed to certain covenants, including prohibiting the
payment of dividends, with respect to the Loans.
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 October 31, 2002, the principal and
accrued interest of $3,176,250 would be converted into 2,541,000 shares of the
Company's Common Stock. Brian D. Fletcher and Kurt C. 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 and share the role of Chief
Operating Officer of 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 Board of Directors approved a compensation
structure, effective March 1, 2002, whereby Mr. Fletcher and Mr. Reid would be
compensated based on the actual monthly cash flow and quarterly net income
generated by the Company. The maximum annual compensation would 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 $45,668 under this structure.
11
On November 9, 2002, the Board of Directors approved a revised compensation
structure for Mr. Fletcher and Mr. Reid effective November 1, 2002. Under the
new structure, 50% of the amount owed but not paid under the previous
compensation structure will be paid in equal installments to Mr. Fletcher and
Mr. Reid over the next six months. The amount owed totaled approximately
$104,000. The Board of Directors also fixed the annual salary of Mr. Fletcher
and Mr. Reid at $100,000 each effective November 1, 2002.
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 temperature probes and related
products (referred to as "Temperature Recorder Operations" as a group).
TEMPERATURE RECORDER OPERATIONS
Revenues from sales decreased $173,174, or 8% and $115,922, or 3% for
the three and six months ended October 31, 2002 as compared to the same periods
as last year. Sales of Cox1 units decreased 17% and 14% for the three and six
months ended October 31, 2002 as compared to the same periods last year and the
average sales price decreased 6% and 5%, respectively. Sales of DataSource(R)
units increased 52% and 72% for the three and six months ended October 31, 2002
as compared to the same periods last year and the average sales price decreased
1% and 3% for the same periods. Sales of Tracer(R) units increased 38% and 48%
for the three and six months ended October 31, 2002 as compared to the same
periods last year and the average sales price decreased 16% and 11% for the same
periods. Vitsab(R) unit sales increased 491% and 255% for the three and six
months ended October 31, 2002 as compared to the same periods last year and the
average sales price decreased 9% for the three-month period and increased 42%
for the six-month period. The sale of graphic recorders represented $1,435,708
and $3,087,012, or 70% and 72%, for the three and six months ended October 31,
2002 of total revenues as compared to $1,844,659 and $3,756,618, or 83% and 85%,
in the same periods last year. The sales of electronic data loggers represented
$464,665 and $957,051, or 23% and 22%, for the three and six months periods
ended October 31, 2002 of total revenues as compared to $332,613 and $608,614,
or 15% and 14%, in the same periods last year. The sale of Vitsab(R) products
represented $69,530 and $114,734, or 3%, for the three and six months ended
October 31, 2002 of total revenues as compared to $12,990 and $22,764, or less
than 1%, in the same periods last year. The sale of temperature probes and
related products represented $39,791 and $70,326, or 2%, for the three and six
months ended October 31, 2002 of total revenues as compared to $36,038 and
$76,520, or 2%, in the same periods 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 decreased $76,400 and $344,476, or 6% and 12%, respectively,
for the three and six months ended October 31, 2002 as compared to the same
periods last year. The decrease in both periods 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, offset slightly by
increased repairs and maintenance expense 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 and six months ended
October 31, 2002 decreased $131,340 and $280,346, or 18% and 20%, respectively,
as compared to the same periods last year. The decrease in both periods is due
to lower costs associated with legal fees, professional services and outside
consulting, health insurance, office supplies and
12
MANAGEMENT'S DISCUSSION (CONTINUED)
telephone expenses, partially offset by increases in directors and officers
insurance, computer and postage expenses. The three-month period includes an
increase in salary expense related to the previously mentioned revised
compensation structure for Mr. Fletcher and Mr. Reid.
Selling expense decreased $35,717 and $201,386, or 11% and 27%,
respectively, for the three and six months ended October 31, 2002 as compared to
the same periods last year. The decrease in the both periods is primarily due to
lower sales salaries, health insurance, commissions, automobile expenses,
outside consultants, shipping and telephone expenses, partially offset by
increases in advertising expenses and outside services. The three-month period
also includes an increase in promotional and trade show expenses.
Depreciation and depletion expense decreased $9,158 and $6,647, or 10% and
4%, respectively, for the three and six months ended October 31, 2002 as
compared to the same periods. 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 and $105,510, or
83%, for the three and six-months ended October 31, 2002 as compared to the same
periods 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 increased $1,892, or 6%, for the three months ended October
31, 2002 as compared to the same period last year. This increase is primarily
related to the reversal of the accrued finance charges in the previous year and
the gain of $19,504 related to the disposal of the oilfield subleases, offset by
the reversal of the non-refundable deposit received for executing a purchase and
sale agreement for the oil will subleases as discussed in Liquidity and Capital
Resources. Other income decreased $58,546 or 38% for the six months ended
October 31, 2002 due primarily to a 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. Details of this
agreement are discussed in Liquidity and Capital Resources.
Interest expense increased $3,214 and $8,699, or 3% and 4%, for the three
and six months ended October 31, 2002 as compared to the same periods last year.
The 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 accounts receivable of $252,640, or 24%, is primarily due
to the lower sales during the quarter and enhanced collection efforts related to
past due receivables.
The increase in notes receivable of $175,000 is related to the promissory
note related to the sale of the oilfield subleases as more fully discussed in
Liquidity and Capital Resources.
Property held for sale decreased $300,000 due to the sale of the oilfield
subleases on September 30, 2002. Details of this transaction are discussed in
Liquidity and Capital Resources.
The decrease in property and equipment of $94,201, 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
13
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 also 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
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.
Centura 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 was 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 was 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 term loan ("Lease Loan"), 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.
14
MANAGEMENT'S DISCUSSION (CONTINUED)
Effective July 31, 2002, the Company executed documents with Centura that
extended the maturity date of the Term Loan, the Revolving Loan and the Lease
Loan ("Loans") to October 31, 2002 and decreased the amount available on the
Revolving Loan from $1,000,000 to the then outstanding balance of $800,000. The
Company began discussions with Centura and a group of asset-based lenders in an
attempt to modify the Loans before October 31, 2002 to extend the maturity
dates. As a result, the Term Loan and Lease Loan have been classified as current
portion of long-term debt.
Effective October 31, 2002, the Company executed documents with Centura
that extended the maturity date of the Loans to March 15, 2003. Under this new
arrangement, the Company will continue paying the current monthly principal
payments plus accrued interest on the Loans during this forbearance period. This
extension will give the Company additional time to procure additional funding,
either debt or equity, that will allow the Company to decrease the amount owed
to Centura by at least $450,000. The Company is currently in discussions with
various asset-based lenders and private investors in an effort to secure the
required additional funding. Through the monthly principal payments, plus the
additional funding and the receipt of structured payments from the recent sale
of the oilfield subleases, the Company must lower the total amount owed to
Centura to $1,215,000 by March 15, 2003. If this target is obtained, Centura has
agreed to amortize the remaining balance over a fixed period of time so that the
amount of the new monthly principal payments will remain approximately equal to
the total of the current monthly principal payments. Centura has also indicated
their intent to decrease the rate of interest accruing on the new loan as the
Company meets certain target balances.
The Company has agreed to certain covenants, including prohibiting the
payment of dividends, with respect to the Loans.
In April 2001 the Company executed an Option 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 gave the Purchaser until November 30, 2001 to exercise the option. In
return for the option, the Purchaser agreed to pay the Company $20,000 a month
beginning March 2001 and ending November 2001. During the option period, the
Company could not 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 Company also executed a Share Purchase Agreement ("Purchase
Agreement") whereby the stated purchase price 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 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 Purchase Agreement. The Purchaser also agreed to pay the
Company 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 Option Agreement indefinitely, with a requirement that
each party provide a two month notice to cancel the Option Agreement.
Additionally, the Purchaser will pay $17,000 a month in return for the extension
beginning December 1, 2001. In April 2002 an Amended Agreement was executed to
document this verbal agreement. The Amended Agreement also revised the minimum
annual royalty payments in the Purchase Agreement. All of the other terms and
conditions in the Option Agreement and Purchase Agreement remain the same. On
April 15, 2002, the Purchaser notified the Company that he was terminating the
Option Agreement effective June 15, 2002. During May 2002, the Purchaser
rescinded the termination notice and both parties agreed verbally to extend the
Option 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 Option
Agreement. The Purchaser also agreed to continue paying the Company $17,000 a
month while the Option Agreement is in place. All of the other terms and
conditions in the Option Agreement remained the same. If the Purchaser does not
execute the 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.
On December 10, 2002 the Company executed a Second Amended Agreement with
the Purchaser to extend the option period in the Option Agreement through March
2003. The Purchaser must provide the Company with written notice on or before
March 1, 2003 if the Purchaser plans to exercise the option. The Purchaser will
continue to pay the Company $17,000 a month while the Option Agreement is in
place. If the Purchaser does not execute the option, the Company will retain
ownership of all shares and assets of Vitsab Sweden, AB. The Purchaser has
negotiated with the landlord in Sweden to extend the lease of the facilities
through June 2003. Additionally, the Purchaser has agreed to reimburse the
Company for all lease payments paid by the Company beginning April 1, 2003. All
of the other terms and conditions of the Option Agreement remain the same. The
Second Amended Agreement also changed the minimum annual royalty payments and
other various terms of the Purchase Agreement.
15
As discussed in the Form 10-K for the fiscal year ended April 30, 2002, the
Company's entire Vitsab(R) operation was 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 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. In prior
periods certain technical issues in production resulted in delayed delivery of
labels and in the inconsistent performance of equipment for activating and
dispensing the labels. These issues were 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. However, the Company has recently resolved the
major issues related to the activation and dispensing equipment and the
equipment is performing satisfactorily. The Company continues to improve its
processes to enhance manufacturing efficiency as well as the reliability and
consistency of the product. In the current quarter, the Company has added
several new customers that are now using the Vitsab(R) product as an integral
part of their operations.
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. 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 took place on September
30, 2002. At closing, the Company received an additional $50,000, net of
transaction fees. The balance of the sale price is comprised primarily of a
promissory note in the amount of $175,000 and the $87,000 payment to the
operator of the oilfield subleases that settled the ongoing lawsuit between him
and the Company. The first installment under the note of $100,000 and is due on
January 30, 2003, and the last installment of $75,000 and is due on May 30,
2003. Proceeds from both installments will be reduced by a $9,000 sales
commission paid to a third party.
16
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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, the Company,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (the "Evaluation"). Based upon the
Evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in ensuring
that material information relating to the Company, including its consolidated
subsidiaries, is made known to them by others within the organization,
particularly during the period in which this quarterly report was being
prepared. There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the Evaluation.
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification by James L. Cox, Chairman, President and Chief
Executive Officer, Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification by Jack G. Mason, Chief Financial Officer and
Secretary, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The Company filed on October 2, 2002 a Current Report on Form
8-K disclosing that the Company had completed the sale of the
oilfield subleases on September 30, 2002.
17
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: 12-20-02 /s/ James L. Cox
-------- ----------------------------------------
James L. Cox
Chairman, President and
Chief Executive Officer
Date: 12-20-02 /s/ Jack G. Mason
-------- ----------------------------------------
Jack G. Mason
Chief Financial Officer and Secretary
18
CERTIFICATIONS
I, James L. Cox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cox Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 12-20-02 /s/ James L. Cox
-------- ----------------------------------------
James L. Cox
Chairman, President and
Chief Executive Officer
19
CERTIFICATIONS
I, Jack G. Mason, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cox Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 12-20-02 /s/ Jack G. Mason
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Jack G. Mason
Chief Financial Officer and Secretary
20