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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - FOR THE FISCAL YEAR ENDED APRIL 30, 2003
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the transition period from _______ to ________
Commission file number: 0-8006
COX TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 86-0220617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
69 McADENVILLE ROAD
BELMONT, NORTH CAROLINA 28012-2434
(Address of principal executive offices) (Zip code)
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code: (704) 825-8146
Securities registered pursuant to Section 12 (b) of the Act: (None)
Securities registered pursuant to Section
12 (g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
Estimated aggregate market value of the voting stock held by non-affiliates of
the registrant:
$1,055,126 as of July 29, 2003
- --------------------------------------------------------------------------------
Number of shares of Common Stock, no par value, as of the latest practicable
date:
38,339,094 shares as of July 29, 2003
- --------------------------------------------------------------------------------
Documents incorporated by reference: Portions of the proxy statement dated July
29, 2003, relating to the August 29, 2003 annual meeting of shareholders, are
incorporated by reference into Part III of this annual report.
COX TECHNOLOGIES, INC.
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED APRIL 30, 2003
--------------
TABLE OF CONTENTS
Item Page
PART I
1. Business.......................................................... 1
2. Properties........................................................ 6
3. Legal Proceedings................................................. 6
4. Submission of Matters to a Vote of Security Holders............... 7
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters.......................................................... 7
6. Selected Financial Data........................................... 10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 10
8. Financial Statements and Supplementary Data ...................... 18
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 38
PART III
10. Directors and Executive Officers of the Registrant................ 38
11. Executive Compensation............................................ 38
12. Security Ownership of Certain Beneficial Owners and Management.... 38
13. Certain Relationships and Related Transactions.................... 38
14. Internal Controls and Procedures.................................. 38
PART IV
16. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 39
Signatures........................................................ 42
i
PART I
ITEM 1. BUSINESS
General
Cox Technologies, Inc. (the "Company"), was incorporated as Mericle Oil
Company in July 1968, under the laws of the State of Arizona. The name was
changed to Energy Reserve, Inc. in August 1975. In November 1994, Energy Reserve
acquired Twin-Chart, Inc. and altered its primary business focus from crude oil
operations to temperature recording and monitoring operations. As a result of
this change in focus, the Company changed its name to Cox Technologies, Inc. in
April 1998. The Company reincorporated in the State of North Carolina in
December 2000.
The Company's executive offices and manufacturing facility are located
at 69 McAdenville Road, Belmont, North Carolina 28012-2434; telephone (704)
825-8146. Except where the context otherwise indicates, all references to the
"Company" are to Cox Technologies, Inc., its wholly owned subsidiaries,
Twin-Chart, Inc., Transit Services, Inc., Vitsab Sweden, AB ("Vitsab Sweden"),
Vitsab, Inc., Vitsab USA, Inc., Fresh Tag Research & Manufacturing, Inc.,
Qualtag Engineering, Inc. and Cox Recorders Australia, Pty. Ltd. ("Cox Recorders
Australia"), a 95% owned Australian distribution company. During July 2001, all
domestic subsidiaries were merged into the parent company, Cox Technologies,
Inc. On March 15, 2003, the Company sold all of its shares in its Vitsab Sweden
subsidiary to its Copenhagen distributor. Only the foreign subsidiary, Cox
Recorders Australia, remains. The Company will continue to operate Cox Recorders
Australia as an operational subsidiary.
The core business of the Company is to provide reliable temperature
monitoring products and develop new and technologically advanced monitoring
systems. The Company produces and distributes transit temperature recording
instruments, including electronic "loggers," graphic temperature recorders and
visual indicator labels, both in the United States and internationally. Transit
temperature recording instruments create a strip chart record of temperature
changes over time, or record temperatures electronically according to a preset
interval ("logging"). The Company sells and manufactures both types of transit
monitoring products, and has established an international market presence and
reputation for reliable temperature recording products.
The Company has expended funds to further the development of
enzyme-based "smart labels" that detect temperature abuse in packages of
perishable goods. The Company has introduced this new technology, known as
Vitsab(R), to the food and pharmaceutical industries as a monitoring label
applied to packages of temperature sensitive products.
The Company previously had two current operating segments that involved
the (1) production and distribution of temperature recording and monitoring
devices, including electronic "loggers," graphic temperature recorders and
visual indicator labels (referred to as "Temperature Recorder Operations" as a
group) and (2) oilfield operations and other, which included all economic
activity related to the oil production and the holding of the oil subleases and
the operation of its Phoenix office. The Company closed its Phoenix office
effective October 31, 2000. The activities performed in Phoenix were transferred
to the Corporate Office in Belmont, North Carolina. On September 30, 2002, the
Company concluded the sale of its interest in the oil subleases to an unrelated
third party.
The Company now operates in one reporting segment, Temperature Recorder
Operations.
Temperature Recorder Operations
The Company's temperature recorder activities include production and
distribution of graphic temperature recording instruments, the sale and
distribution of electronic temperature and humidity recorders (sold for
non-transit quality monitoring purposes as well as for transit monitoring),
production and distribution of visual indicator labels, the sale of fixed based
temperature monitoring systems, and the sale and distribution of various
temperature sensing probes and thermometers. The Company also performs contract
manufacturing.
The graphic temperature recording instruments, known as temperature
recorders, are self-contained, battery-powered and designed to create a
graphical "time vs. temperature" record. The electronic temperature recorders
are battery-powered devices that record temperature in a computer memory chip.
The data is later retrieved by transferring the information to a personal
computer.
The graphic recorders are marketed under the trade name Cox Recorders
and produce a record which is documentary proof of temperature conditions useful
for compliance with governmental regulations, the monitoring
1
of performance of refrigerated carriers, and for claims in the transport of
valuable perishables such as produce, meat, pharmaceuticals, chemicals, live
plants and animal material. The electronic temperature recording products are
used for the same purpose, but also are used for internal checking of
temperature conditions in storage and processing. The visual indicator label
product determines the exposure of a stored or shipped temperature-sensitive
commodity.
In previous years, the Company manufactured two separate graphic
recorders. The Cox(1) and Cobra(R) record the air temperature in a truck or
container. Both are used primarily in transit monitoring of temperature
variations. Manufacture of the Cobra(R) design was halted during fiscal 2001 due
to a declining demand for the product.
The Company sells two different types of electronic "data loggers" which
are manufactured by an offshore contractor. The Tracer(R) product line, which
can record data for both temperature and humidity, is a research-grade
instrument used in a broad variety of laboratory, environmental, process
control, and quality assurance applications. A lower cost electronic data
logger, the DataSource(R), is used primarily for transit temperature monitoring
and recording. Both loggers deliver their data via a cable link to a personal
computer using specialized software.
Several large grocery store chains and food wholesale distribution
companies currently either require their shippers to use the DataSource(R)
product exclusively when shipping perishable products to their distribution
centers, or they accept DataSource(R) as well as other data loggers. The Company
is currently in discussions with other retail and wholesale food distributors
that have shown interest in using the DataSource(R) product in their operations
as well as in discussion with manufacturers of temperature sensitive products
about the use of the DataSource(R) product. Management is encouraged by the
recent increase in sales of this product and has hired additional sales
personnel to introduce the DataSource(R) product to other potential users.
Management cannot predict whether the current users of the DataSource(R) product
will continue using it nor can they predict if the current discussions will
result in creating additional users of the DataSource(R) product.
The Company purchases for resale the TempList(R), which is a data
collection or "listing" temperature recorder that is used for
point-of-measurement recording. The TempList(R) delivers the data via a cable
link to a personal computer using specialized software. The Company also
purchases digital thermometers with penetration probes for resale from a variety
of manufacturers.
During fiscal 2003 the Company began selling fixed base temperature
monitoring systems which are designed to monitor facilities such as warehouses,
coolers, processing rooms, as well as other temperature sensitive facilities.
These wireless systems are designed to use multiple permanently mounted
temperature sensors that communicate the temperature by radio frequency to a
server device. The system has an integral software component that automatically
records the temperature and has the ability to send alerts when pre-determined
temperature parameters have been exceeded. Remote access to the data via the
internet is an optional feature. The Company acts as a reseller of these fixed
base systems.
The Cox(1) product accounts for approximately 71% of the Company's
revenues. The balance of revenue is accounted for through the sale of electronic
data loggers, probes and other temperature monitoring products.
During fiscal 2002, the Company contracted with a third party to
manufacture and assemble certain base versions of the Cox(1) units at an
offshore location. During fiscal 2003, that offshore location supplied
approximately 40% of the total number of units 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 Belmont facility will continue to manufacture and assemble a
certain percentage of the base Cox(1) units while increasing the number of units
supplied by its offshore source. If necessary, the production capabilities of
the Belmont facility can be expanded to meet the total demand for all Cox(1)
units. The Company's current plans are to continue assembling special-use Cox(1)
units in the Belmont facility. The Company has identified certain risks and
uncertainties that are associated with offshore production that include, but are
not limited to, political issues, transportation risks and the availability of
raw materials. The Company will not experience foreign currency exchange risks
as all transactions are denominated in U.S. dollars.
The source and availability of raw materials are not critical or
significant factors in the temperature recorder operations of the Company. The
temperature recorder operations of the Company are non-seasonal. The Company
does and is required to carry significant amounts of inventory for its
temperature recorder operations and neither Company nor industry practices
provide extended payment terms to customers.
The temperature recorder operations of the Company are not dependent
upon a single or a few customers. However, the Company does have business
relationships with several large retail customers and foreign distributors
2
that, if severed, could have a material adverse effect upon the earnings or the
financial position of the Company. Backlog of orders is not a major factor in
the temperature recorder operations of the Company.
The Company is a major competitor in the temperature recording industry
with regards to its production and distribution activities. The Company
encounters significant competition from a variety of companies in all major
areas of its business activity. The Company competes primarily on product
performance and price. Reliability, technology, customer service and company
reputation are also important competitive factors.
The Company generally does not maintain company owned distribution
entities. However, in 1999, the Company established Cox Recorders Australia to
retain its market share and presence in this geographic area. Except for this
subsidiary, all distributors are contracted. All other distribution and sales
operations are through individual sales persons operating on salary, sales
commission basis or salary plus incentive basis.
Vitsab(R) Product
Vitsab(R) is a relatively new technology that employs enzymatic color
indicators inside a transparent label to show the amount of temperature exposure
of a stored or shipped temperature-sensitive commodity. The enzyme indicator
reaction is activated at the beginning of the monitoring period by applying
pressure on a plastic bubble strip that is a structural part of the label. This
strip contains sealed packets of non-toxic liquids that are broken by pressure.
These non-toxic liquids mix to form the indicating solution.
These labels are programmable devices that run as a "biological clock"
parallel to the biological clock of the product it is set to monitor. They
integrate both time and temperature and give a visual indication which parallels
the monitored food or drug product as it reaches a certain definable state. This
device is known as a TTI (time-temperature integrator).
The Company produces two distinct Vitsab(R) TTI configurations: a "three
dot" indicator (for wholesale distribution of perishables) and a "one dot"
indicator (primarily for food safety and consumer packages). Each product is
produced on automated machinery.
The Company is in the final stages of the development, production and
marketing of the Vitsab(R) products. Final development of this technology
continues to require substantial effort to refine the manufacturing procedures
to achieve a reliable and consistent product delivery. In addition, the chemical
formulation of the label itself, including the specific chemical nature of the
enclosure, continues to require testing and validation. During fiscal 2003, the
Vitsab(R) line of products generated approximately 3% of the Company's total
revenues.
The source and availability of certain raw materials may be a critical
and significant factor for the Vitsab(R) TTI if it begins production in
significant volumes. The Company's current plans are to manufacture the
Vitsab(R) TTI at the Belmont, North Carolina location.
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. The option agreement
gave the Purchaser until November 30, 2001 to exercise the option. On October
18, 2001 the Company entered into a verbal agreement with Purchaser to extend
the agreement through February 2002, and thereafter on a month-to-month basis.
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. On December 10,
2002, the Company executed an additional amendment with the Purchaser that
extended the option period until March 31, 2003. On March 15, 2003, the Company,
under a Share Purchase Agreement, sold all of its shares in Vitsab Sweden to the
Purchaser. The purchase price for all of the Company's shares in Vitsab Sweden
was $1.00. Additionally, the Purchaser is under an obligation to make monthly
payments of $6,000 to the Company, which obligation commenced on the first month
after the sale and ends in June 2004. Upon completion of these payments by
Purchaser, the Company will transfer title and ownership of certain equipment
located at the Malmo, Sweden location. Should the Purchaser fail to make any
payment within 30 days of its due date, it will forfeit its ownership rights in
the assets, and the Company will be entitled to take immediate possession of
those assets.
In connection with the sale of the Company's shares in Vitsab Sweden to
the Purchaser, the Company granted Vitsab Sweden a ten-year, exclusive,
royalty-bearing license to manufacture, sell and distribute Vitsab(R) products
in certain European countries designated in the agreement. The royalty will be
based on the volume of Vitsab(R) products sold by Vitsab Sweden, and will be
paid to the Company on a quarterly basis. The Company does
3
not anticipate that the sales of Vitsab(R) products through the Vitsab Sweden
license will represent a significant portion of the Company's overall sales of
Vitsab(R) products.
The Company's entire Vitsab(R) operation has been largely dependent on
one customer. That customer has been testing these products for use in the
distribution of their perishable products. On September 5, 2002 the Company
received notification from the customer that 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. The Company
continues to manufacture and sell the Vitsab(R) products to the largest user in
the pilot program and other customers. The Company added several new customers
during the fiscal year.
The Company's existing manufacturing equipment located in Belmont has
the capacity to produce enough of the Vitsab(R) products to meet the currently
projected demands of the current customer base. The labels have proved to
perform as effective time-temperature monitors.
The Company's visual indicator label operations previously included the
development, production and distribution of FreshTag(TM) food spoilage
indicators. FreshTag(TM) is based on a licensed and patented technology
developed by the U.S. Food and Drug Administration ("FDA") that enables the
detection of specific chemical compounds that signal the incipient spoilage of
seafood and other food types. Effective April 10, 2002 the Company terminated
the Patent License Agreement. The Company had no significant operations related
to the FreshTag(TM) product.
Oilfield Operations
Until September 30, 2002, the Company owned working interests through
subleases in developed oil and gas properties located in California. These
developed properties contained drilled wells that were capable of producing
crude oil or natural gas. The Company attempted to manage and improve production
in the fields by employing an independent oilfield operator through several
contractual agreements dating back to 1999.
As previously disclosed in prior years, the sublessor had declared these
subleases in default due to the failure by the Company to meet certain well
drilling requirements. In May 2000, the Company paid the sublessor $50,000 to
cure the default. By agreement and amendment to the subleases, the sublessor
acknowledged that all drilling requirements had been fulfilled, that the Company
had no further obligation to drill any additional wells, that any and all
notices of default were canceled, and that the subleases were in full force and
effect.
As a result of the high cost and difficulty in producing crude oil of
the type found in the field and losses incurred in the oilfield operations, the
Company evaluated the recoverability of the carrying amount of the oilfield net
assets. In analyzing expected future cash flows from potential offers, the
Company was of the opinion that $300,000 of net assets should be recognized as
property held for sale. As a result, the Company recognized a loss on impairment
of $3,062,196 in the fourth quarter of fiscal 2001. The Company determined that
no change in the valuation of this asset was necessary for fiscal 2002.
On July 31, 2001, the operator filed a lien against the subleased
properties. On January 29, 2002, the operator filed a lawsuit (the "Oilfield
Litigation") against the Company, two of its current officers and a former
officer, claiming breach of contract, fraud and damages totaling approximately
$87,000. At April 30, 2002, the Company accrued $90,000, which was the balance
of capital and related interest that the operator invested into the subleases
under an agreement with the Company and to which he had a reasonable claim.
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 it was 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 was comprised primarily of a
promissory note payable to the Company in the amount of $175,000 and a payment
of $87,000 to the operator of the oilfield subleases to settle the Oilfield
Litigation. The operator of the oilfield received the $87,000 payment on
September 30, 2002 and the Oilfield Litigation was settled as of that date. The
4
Company received the first installment under the note in the amount of $100,000
on January 30, 2003, and the last installment in the amount of $75,000 on May
30, 2003. Proceeds from both installments were reduced by a $9,000 sales
commission paid to a third party.
Intellectual Property
The Company owns a number of patents, trademarks, trade secrets and
other intellectual property directly related to, and important to, the Company's
business. Although the conduct of business involves the manufacture of various
products that are covered by patents, the Company does not believe that any one
single existing patent or group of patents is material to the success of the
business as a whole.
Research and Development
No research and development expenses were incurred during fiscal 2003 or
2002 due to the Company reaching the final development stages of the Vitsab(R)
product and the halt in the development of the EDS(TM) product. Research and
development expenses were $345,393 for the fiscal year ended 2001.
Government Regulation
The Company is not currently subject to direct regulation by any
governmental agency other than rules and regulations that apply to businesses
generally and any export controls and import controls, which may apply to our
products. Many of the Company's customers' products, however, are subject to
extensive regulation by agencies such as the FDA. The Company designs and
manufactures its products to ensure that its customers are able to satisfy a
variety of regulatory requirements and protocols established to, among other
things, avoid the spoiling of perishable goods such as produce, meat,
pharmaceuticals and chemicals.
The regulatory environment in which customers operate is subject to
changes due to political, economic and technical factors. In particular, as use
of temperature recording and monitoring technology expands and as national
governments continue to develop regulations for this technology, customers may
need to comply with new regulatory standards. The failure to comply with current
or future regulations or changes in the interpretation of existing regulations
could result in the suspension or cessation of sales by the Company to its
customers.
Employees
On June 1, 2003, the Company had 64 full-time employees compared to 78
on June 1, 2002. A significant portion of this 18% decrease in full-time
employees is due to the termination of seven assembly employees as the Company
outsourced a large portion of its Cox(1) manufacturing to a third party. The
balance of the decrease was due to the attrition and consolidation of certain
corporate and sales activities. None of the Company's employees are covered by
collective bargaining agreements. Relations between the Company and its
employees are generally considered good.
5
EXECUTIVE OFFICERS OF THE REGISTRANT
Date Elected
Name and Age (1) Title (1) An Officer
---------------- --------- ----------
Dr. James L. Cox Chairman, President and 08/01/95
Age - 58 Chief Technology Officer
David K. Caskey President - Cox Recorders Division 11/01/97
Age - 41
Brian D. Fletcher Co-Chief Executive Officer and 03/10/00
Age - 41 Director of Marketing
James R. McCue President - Vitsab Division 03/12/00
Age - 45
Kurt C. Reid Co-Chief Executive Officer and 03/10/00
Age - 43 Chief Operating Officer
John R. Stewart Chief Financial Officer 06/11/03
Age - 55 and Secretary
- ----------
(1) As of June 30, 2003
The present terms of all officers extend to August 29, 2003, the date of
the next annual meeting of shareholders and the annual meeting of the Board of
Directors, or until their successors are elected and qualified.
Dr. James L. Cox has been employed by the Company as President for more
than five years and as Chief Technology Officer since April 1, 2003. Prior
thereto and for more than five years, he was employed by the Company as Chief
Executive Officer. He has served continuously as Chairman for the past five
years.
David K. Caskey has been employed by the Company as President of the Cox
Recorders Division for the past five years.
Brian D. Fletcher has been employed by the Company as Co-Chief Executive
Officer and Director of Marketing since April 1, 2003. Prior thereto and since
March 10, 2000, he was employed as Chief Operating Officer. Prior to joining the
Company, he was a private investor for more than the previous two years.
James R. McCue has been employed by the Company as President of the
Vitsab Division since March 21, 2000. Prior to joining the Company, he was
employed in marketing with Hill-Rom Company, a division of Hillenbrand
Industries for more than the previous two years.
Kurt C. Reid has been employed by the Company as Co-Chief Executive
Officer since April 1, 2003 and Chief Operating Officer since March 10, 2000.
Prior to joining the Company, he was a private investor for more than the
previous two years.
John R. Stewart has been employed by the Company as Chief Financial
Officer and Secretary since June 11, 2003. Prior to joining the Company, he was
self-employed as an independent accounting and financial consultant for more
than the previous five years.
ITEM 2. PROPERTIES
The Company has leased manufacturing facilities located in Belmont,
North Carolina. The Company also had a leased manufacturing facility in Malmo,
Sweden until March 2003. The facility in Belmont serves as the Corporate Office
and in the capacity of manufacturing and distributing the Company's products.
The Malmo facility was used for the limited production of the Vitsab(R) product.
The Company also leases office space in Upland, California, to support the sales
and distribution functions.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings presently.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 20, 2003, the Company entered into a Stock Purchase Agreement
(the "TI Stock Purchase Agreement") with Technology Investors, LLC ("TI"), an
affiliate of certain executive officer and directors of the Company, pursuant to
which TI agreed to purchase and the Company agreed to sell 12,500,000 shares of
the Company's Common Stock at a price of $0.06 per share, for a total purchase
price of $750,000. This transaction was submitted to the Company's shareholders
for their approval at a special meeting of the shareholders on March 12, 2003.
With a quorum of shareholders present, a motion was made and seconded to approve
the TI Stock Purchase Agreement, and the motion was passed by a unanimous vote
of those present in person or represented by proxy. The transaction was
consummated on March 19, 2003. TI, together with Mr. Fletcher and Mr. Reid and
their affiliates, now collectively own and control beneficially an aggregate of
15,594,966 shares of the Company's Common Stock, or approximately 38% of the
Company's issued and outstanding common stock. These figures include the
2,662,000 shares of the Company's Common Stock that TI may obtain by converting
its existing promissory note, but exclude the options that Mr. Fletcher and Mr.
Reid own to purchase, in the aggregate, 3,000,000 shares of the Company's Common
Stock, which options become exercisable on September 12, 2003.
A more detailed description of this transaction can be read in the Proxy
Statement, dated March 12, 2003, which was mailed to shareholders on February 6,
2003.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the nationwide over-the-counter
market and is listed under the symbol "coxt.ob" on the electronic bulletin board
provided by the National Quotation Bureau, Inc.
The table below presents the reported high and low common stock sale
prices for each quarter of fiscal 2003 and 2002. The Company has not declared
any dividends during the last two fiscal years.
2003 2002
-----------------------------------------------------
High Low High Low
---- --- ---- ---
First Quarter $0.30 $0.07 $0.45 $0.27
Second Quarter $0.15 $0.06 $0.38 $0.20
Third Quarter $0.08 $0.02 $0.52 $0.29
Fourth Quarter $0.07 $0.04 $0.28 $0.07
At July 14, 2003, the Company had approximately 2,062 holders of record
of the Company's Common Stock.
The table below presents the information related to the equity
compensation plans that have been previously approved by shareholders and equity
compensation plans not approved by shareholders, as of April 30, 2003.
Number of securities Weighted-average
to be issued upon exercise price of Number of securities
exercise of outstanding remaining available for
outstanding options, options, warrants future issuance under
warrants and rights and rights equity compensation plans
-------------------- ----------------- -------------------------
Equity compensation plans approved by
security holders (2000 Stock Incentive 5,218,000 $ .1885 2,028,972
Plan)
Equity compensation plans not approved by
security holders (Non-Qualified Stock 6,652,500 $ .6568 --
Option Agreements)
-------------------- ----------------- -------------------------
Total 11,870,500 $ .4510 2,028,972
==================== ================= =========================
7
Since its inception, the Company has not paid any cash dividends on its
common stock and does not anticipate paying such dividends in the foreseeable
future.
The following is a list of all unregistered stock issued during the last
three fiscal years.
Fiscal 2003
Pursuant to an April 10, 2001 amendment to an agreement between the
Company and BEN Acquisition, LLC, dated June 23, 2000, the Company issued 10,000
shares of restricted stock to each of the three members of BEN Acquisition, LLC
on July 18, 2002. The shares were issued under the exemption set forth in Rule
506 of Regulation D of the Securities Act of 1933.
Pursuant to the TI Stock Purchase Agreement, the Company issued
12,500,000 shares of restricted stock to TI. The shares were issued under the
exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933.
Fiscal 2002
Pursuant to an April 10, 2001 amendment to an agreement between the
Company and BEN Acquisition, LLC, dated June 23, 2000, the Company issued 9,500
shares of restricted stock to each of the three members of BEN Acquisition, LLC
on November 20, 2001. The shares were issued under the exemption set forth in
Rule 506 of Regulation D of the Securities Act of 1933.
Pursuant to an April 30, 2001 agreement between the Company and McManus
Financial Consultants, Inc., under which they provided consulting services
related to investor relations, the Company issued 41,667 and 41,666 shares of
restricted stock, respectively, to the two partners. The shares were issued
under the exemption set forth in Rule 506 of Regulation D of the Securities Act
of 1933.
Pursuant to a February 15, 2002 agreement between the Company and Stock
Enterprises, Inc., under which Mr. James R. Stock, president, agreed to cancel
for consideration an investor relations services agreement dated November 1,
2002, the Company issued to Mr. Stock 30,000 shares of restricted stock. The
shares were issued under the exemption set forth in Rule 506 of Regulation D of
the Securities Act of 1933.
Fiscal 2001
Pursuant to an agreement between the Company and Mr. Jens Rask, under
which Mr. Rask provided consulting services, the Company issued to Mr. Rask
50,000 shares of restricted stock. The shares were issued under the exemption
set forth in Rule 701 of the Securities Act of 1933.
Pursuant to an agreement between the Company and Mr. Jayanth Prabhakar,
under which Mr. Prabhakar provided engineering consulting services, the Company
issued to Mr. Prabhaker a 43,000 shares of restricted stock. The shares were
issued under the exemption set forth in Rule 701 of the Securities Act of 1933.
Pursuant to a March 28, 2000 agreement between the Company and Strategic
Equity Marketing, LLC, under which they would provide consulting services
related to investor relations, the Company issued to Strategic Equity Marketing,
LLC a total of 12,013 shares of restricted stock. The shares were issued under
the exemption set forth in Section 4(2) of the Securities Act of 1933.
Pursuant to an agreement between the Company and Mr. Jack Wright, under
which Mr. Wright provided engineering consulting services, the Company issued to
Ms. M. Jean Wright 500 shares of restricted stock. The shares were issued under
the exemption set forth in Rule 701 of the Securities Act of 1933.
Pursuant to a September 12, 2000 engagement letter between the Company
and McGuireWoods, LLP, under which they would provide legal services, the
Company issued to McGuireWoods, LLP a total of 97,500 shares of restricted
stock. The shares were issued under the exemption set forth in Section 4(2) of
the Securities Act of 1933.
Pursuant to an August 30, 2000 agreement between the Company and Mr.
Steven J. Inguillo, an employee, the Company issued to Mr. Inguillo 7,720 shares
of restricted stock for compensation. The shares were issued under the exemption
set forth in Rule 701 of the Securities Act of 1933.
Pursuant to an August 1, 2000 employment acceptance agreement between
the Company and Mr. Robert L. Thornton, the Company issued to Mr. Thornton 2,500
shares of restricted stock. The shares were issued under the exemption set forth
in Rule 701 of the Securities Act of 1933.
8
Pursuant to an April 6, 2000 agreement between the Company and Mr. Steve
Otwell, under which Mr. Otwell would provide consulting services, the Company
issued to Mr. Otwell a total of 33,878 shares of restricted stock. The shares
were issued under the exemption set forth in Rule 701 of the Securities Act of
1933.
Pursuant to an April 6, 2000 agreement between the Company and Mr.
Frederick W. Leak, under which Mr. Leak would provide consulting services, the
Company issued to Mr. Leak a total of 33,878 shares of restricted stock. The
shares were issued under the exemption set forth in Rule 701 of the Securities
Act of 1933.
Pursuant to a September 13, 2000 agreement between the Company and Mr.
John W. Farquhar, under which Mr. Farquhar would provide consulting services,
the Company issued to Mr. Farquhar 2,400 shares of restricted stock. The shares
were issued under the exemption set forth in Rule 701 of the Securities Act of
1933.
Pursuant to an September 20, 2000 agreement between the Company and Ms.
Mary R. Norris, an employee, the Company issued to Ms. Norris 5,000 shares of
restricted stock for compensation. The shares were issued under the exemption
set forth in Rule 701 of the Securities Act of 1933.
Pursuant to an October 23, 2000 agreement between the Company and New
Hope Electrical Services, LLC, under which they would provide consulting
services, the Company issued to New Hope Electrical Services, LLC 5,008 shares
of restricted stock. The shares were issued under the exemption set forth in
Section 4(2) of the Securities Act of 1933.
Pursuant to a subscription agreement dated November 29, 2000 between the
Company and Ronald H. and Marijke W. Smith, under which they agreed to purchase
$66,600 of restricted stock at $.666 per share, the Company issued to Ronald H.
and Marijke W. Smith 100,000 shares of restricted stock. The shares were issued
under the exemption set forth in Rule 506 of Regulation D of the Securities Act
of 1933.
Pursuant to an August 16, 2000 agreement between the Company and Mr.
Peter H. Ronnow, an employee, the Company issued to Mr. Ronnow 16,600 shares of
restricted stock for compensation. The shares were issued under the exemption
set forth in Rule 701 of the Securities Act of 1933.
Pursuant to a June 13, 2000 agreement between the Company and Hilary
Kaye Associates, Inc. under which they would provide consulting services related
to public relations, the Company issued to Hilary Kaye Associates, Inc. 6,862
shares of restricted stock. The shares were issued under the exemption set forth
in Section 4(2) of the Securities Act of 1933.
Pursuant to a November 16, 2000 engagement letter between the Company
and Danielson Harrigan & Tollefson, LLP, under which they would provide legal
services, the Company issued to Danielson Harrigan & Tollefson, LLP a total of
48,547 shares of restricted stock. The shares were issued under the exemption
set forth in Section 4(2) of the Securities Act of 1933.
Pursuant to a December 5, 2000 agreement between the Company and by
Remote, Incorporated under which they would provide consulting services, the
Company issued to by Remote, Incorporated 15,129 shares of restricted stock. The
shares were issued under the exemption set forth in Section 4(2) of the
Securities Act of 1933.
Pursuant to a November 14, 2000 engagement letter between the Company
and Gilmore, Rees & Carlson, P.C., under which they would provide legal
services, the Company issued to Gilmore, Rees & Carlson, P.C. 7,946 shares of
restricted stock. The shares were issued under the exemption set forth in
Section 4(2) of the Securities Act of 1933.
9
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated
financial information as of and for each of the fiscal years, which have been
derived from, and should be read together with, the audited consolidated
financial statements and the related notes, which are included elsewhere in this
report. The information presented below should also be read together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Fiscal Years Ended April 30, 2003 2002 2001 2000(2) 1999
- ---------------------------- ---- ---- ---- ------- ----
Sales $ 8,773,852 $ 8,627,103 $ 9,709,561 $ 9,710,976 $ 8,954,544
Income (loss) from operations $ 413,556 ($ 4,826,969) ($ 6,149,417) ($ 1,955,191) $ 163,292
Basic and diluted net income
(loss) per average common
share $ .00 ($ .20) ($ .27) ($ .09) $ .01
Weighted average number of
Common shares outstanding 27,907,224 25,360,071 24,661,104 24,222,547 21,368,188
Total assets $ 3,512,201 $ 4,072,391 $ 8,654,189 $14,369,529 $12,877,192
Stockholders' equity (deficit) ($ 1,500,418) ($ 2,305,523) $ 2,528,355 $ 9,041,805 $10,025,938
Long-term debt (1) $ 4,189,893 $ 3,233,913 $ 3,090,044 $ 2,908,359 $ 581,374
- ----------
(1) Excludes current maturities
(2) As restated
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Fiscal 2003
The Company operates in one reporting segment, Temperature Recorder
Operations. The "Temperature Recorder Operations" segment involves the
production and distribution of temperature recording and monitoring devices,
including electronic "loggers," graphic temperature recorders and visual
indicator labels.
Revenues from sales increased $146,749, or approximately 2% in fiscal
2003 as compared to fiscal 2002. As a whole both unit sales and average selling
price remained relatively flat in fiscal 2003. For fiscal 2003, revenues from
data logger sales increased by approximately $608,000, or approximately 41%,
over revenues from sales of the same product in fiscal 2002, while revenues from
sales of graphic recorders decreased by approximately $491,000, or approximately
7%, over revenues from sales of the same product in fiscal 2002. During fiscal
2003, revenues from the sale of graphic recorders represented approximately
$6,260,000, or approximately 71%, of total revenues, revenues from the sale of
electronic data loggers represented approximately $2,080,000, or approximately
24% of total revenues, revenues from the sale of probes and related products
represented approximately $137,000, or approximately 2%, of total revenues and
revenues from the sale of Vitsab(R) products represented approximately $279,000,
or approximately 3%, of total revenues. Revenues from the sale of other
miscellaneous products represented less than 1% of total revenues.
Cost of sales decreased by $519,133, or approximately 10%, as compared
to fiscal 2002. The decrease was realized principally because of a reduction in
labor costs and related fringe benefits, lower raw material costs, and the lower
cost of units purchased from an offshore contract manufacturer. The Company also
experienced lower cost in the areas of freight and postage and shop supplies
used in manufacturing. These decreases in cost were partially offset by
increased cost of retriever fees.
The Company continues to contract with a third party to manufacture and
assemble certain base versions of the Cox(1) units at an offshore location.
During fiscal 2003, this location supplied approximately 40% of the total number
of units utilized by the Company. Because of this manufacturing arrangement, the
Company has realized significant cost savings on units manufactured in both the
offshore and Belmont, North Carolina facilities. The Company's current plans are
to continue assembling special-use Cox(1) units in the Belmont facility. The
Belmont facility will also continue to manufacture and assemble a certain
percentage of the base Cox(1) units. If necessary, the production capabilities
of the Belmont facility can be expanded to meet the total demand for all Cox(1)
units. The Company has identified certain risks and uncertainties that are
associated with offshore production that include, but
10
are not limited to, political issues, transportation risks and the availability
of raw materials. The Company will not experience foreign currency exchange
risks as all transactions are denominated in U.S. dollars.
General and administrative expenses for fiscal 2003 decreased $494,841,
or approximately 19%, as compared to fiscal 2002. This decrease is due to lower
costs associated with bad debt, labor, legal fees and outside services,
partially offset by increases in insurance premium costs and other general
expenses.
Selling expenses for fiscal 2003 decreased $203,543, or approximately
16%, as compared to fiscal 2002. The decrease is due to lower sales salaries,
commissions, trade show expenses, travel expenses and freight out expense,
partially offset by increases in advertising, temporary labor and outside sales
services expenses.
No research and development costs were incurred during fiscal 2003 as
the Company reached the final development stages of the Vitsab(R) product.
Depreciation expense in fiscal 2003 decreased $117,049, or approximately
27%, as compared to fiscal 2002. The decrease occurred principally because older
assets of the Company are becoming fully depreciated.
Amortization of patents and goodwill decreased $221,613, or
approximately 86%, in fiscal 2003 as compared to fiscal 2002. Amortization of
patents was essentially equal between fiscal 2003 and 2002 and the decrease is
directly related to the impairment of goodwill during fiscal 2002.
Other income (expense) decreased $38,035, or approximately 20%, in
fiscal 2003 as compared to fiscal 2002. The decrease was primarily attributable
to the cessation of option payments for the purchase of the Company's wholly
owned subsidiary, Vitsab Sweden, upon the consummation of the sale of the
subsidiary. Other expenses decreased because the Company is no longer paying
patent licensing fees.
Interest expense decreased $71,004, or approximately 13%, in fiscal 2003
as compared to fiscal 2002. The decrease was primarily attributable to interest
expense in fiscal 2002 related to the construction of manufacturing equipment
that will not be completed, and that did not reoccur in fiscal 2003. Interest
payments to Centura decreased due to the retirement of a portion of the debt
balance payable to Centura. These decreases were substantially offset by the
interest that accrued on the $2,500,000 note payable to TI, dated March 10,
2000, that becomes due in March 2005.
The decrease in inventory of $237,072 is related to the decrease in the
number of units in finished goods inventory and a decrease in work-in-progress
inventory. The Company has also lowered its costs of purchasing raw materials
through negotiations with vendors. Decreased direct labor and benefits costs and
overheads incurred in the production of the Cox(1) units resulted in a decrease
in the valuation of finished goods. The Company also established a $50,000
reserve for slow moving or obsolete inventory in fiscal 2003.
The net decrease in property and equipment of $258,940 is primarily due
to depreciation and the transfer of assets owned by the Company related to
Vitsab Sweden. This decrease was partially offset by the acquisition of
approximately $84,000 of new assets.
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 appears adequate to meet cash
requirements and commitments of the Company during the 2004 fiscal year.
In March 2000, the Company entered into an agreement with TI whereby the
Company issued to TI a 10% subordinated convertible promissory note in the
amount of $2,500,000 (the "TI Note"), the entire principal and interest of which
are due on March 10, 2005. Alternatively, the principal amount of the TI Note
and interest accrued thereon may be converted, at the option of holder, into
shares of the Company's Common Stock at a conversion price of $1.25 per share.
As of April 30, 2003, the principal and accrued interest of $3,327,500 would be
converted into 2,662,000 shares of the Company's Common Stock. Mr. Fletcher and
Mr. Reid serve as the sole managers of TI and share voting and dispositions
power with respect to the Common Stock issuable upon conversion of the TI Note.
The Company's cash flow from operations is currently not adequate to
retire the TI Note, and it is unlikely that cash flow will increase in an amount
sufficient for the Company to meet its obligations under the TI Note when the
principal and accrued interest become due on March 10, 2005. TI has indicated
that, in the event the Company becomes unable to meet its obligations under the
TI Note, TI may be willing to explore alternative financing arrangements,
including a restructuring of the TI Note prior to its due date. Alternatively,
the Company may seek a cash infusion elsewhere, through a separate debt or
equity offering, a strategic partnership or some form of business
11
combination. The Company may consider any or all of these alternatives in the
event it becomes unable to meet its debt obligation to TI, but there can be no
assurance that any deal will be consummated on terms acceptable to both the
Company and TI or another third party. Without such an arrangement, it is highly
likely that the Company would default on its obligations under the TI Note, at
which time TI would be entitled to exercise any and all remedies available to it
under the TI Note and applicable law, including bringing suit against the
Company and its assets. Should TI seek to enforce its right to timely repayment
of the TI Note, there is a risk that the Company will not be able to continue as
a going concern.
On July 13, 2000 the Company entered into a five-year term loan ("Term
Loan") with its primary lender, Centura in the amount of $1,190,000. 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 was
Centura's prime rate plus .625% per annum. Thereafter, principal payments of
$22,313, in addition to accrued interest, were due monthly until July 13, 2005.
On July 13, 2000 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 was Centura's prime
rate plus .25% per annum and was due monthly beginning in August 2000. The
principal of the Revolving Loan was due on September 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 would 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 continued to pay the principal and interest on the Term Note
and pay interest on the Revolving Loan. On February 21, 2002 the Company
executed documents with Centura, effective January 31, 2002, that amended the
Modified Agreements to extend the maturity dates of the Revolving Loan and the
Term Loan to July 31, 2002. As a result, the full balance of theses loans was
classified as current portion of long-term debt at April 30, 2002.
The Company 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 had advanced approximately $842,000 in progress payments on the cost of
both pieces of equipment, of which $464,000 had 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.
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 were preventing the engineering firm
from delivering a machine that would meet the Company's production requirements
at the agreed upon fees. 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.
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 ("Lease Loan"), effective January 31, 2002. The executed
documents also incorporated the note into the Modified Agreements. The interest
rate on the note was 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
was July 31, 2002.
On 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.
12
On December 1, 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 continued paying the current monthly principal payments
plus accrued interest on the Loans during this forbearance period. This
extension gave the Company additional time to procure additional debt or equity
funding to allow the Company to decrease the amount owed to Centura by an
additional $450,000 (the "Loan Reduction"). The Company was required to reduce
the amount of principal outstanding under the Loans to $1,215,000, including the
Loan Reduction, by March 15, 2003. The Loan Reduction was in addition to the
Company's normal monthly principal payments due on the Loans and the $91,000
payment that the Company received on January 30, 2003 from the purchaser of the
oilfield subleases.
On March 19, 2003, the Company executed with Centura: (a) an amendment
to the loan agreement, (b) a promissory note and (c) a security agreement. The
amendment to the loan agreement required among other considerations that the
outstanding Term Loan, Revolving Loan and Lease Loan should not exceed a
combined balance of $1,214,999. Also, under this agreement the aforementioned
notes would be amended and restated to one promissory note. Principal payments
on the note are $30,000 plus accrued interest beginning April 15, 2003 and
continuing each month thereafter through August 19, 2006. The interest rate on
the outstanding principal is calculated at the bank's 30-day LIBOR base rate
plus 4% per annum (5.32% on April 30, 2003). On the first day of the month after
the principal balance has been paid equal to or less than $800,000, the interest
rate will decrease to the bank's 30-day LIBOR base rate plus 3% per annum
provided there is no event of default. Effective October 1, 2003, the Company
will be required to submit a monthly borrowing base calculation in support of
the loan balance and would be required to pay a sufficient principal payment to
reduce the loan balance to the amount supported by such borrowing base. The
borrowing base is defined as the sum of 80% of the eligible accounts receivable
and 35% of the eligible inventory of the Company.
On May 19, 2003, the Company executed a note modification agreement to
modify the note dated March 19, 2003. The effective date of the modification was
established when the Company made a principal payment on the note for $355,000.
The payment was made to Centura on May 21, 2003. The May 19, 2003 modification
reduced the monthly principal payment to $21,000 plus accrued interest beginning
on June 15, 2003 and continuing until July 15, 2006 on which date the balance of
the note will mature. Also, beginning on the effective date of the modification,
the interest rate on the outstanding principal shall be calculated at the bank's
30-day LIBOR base rate plus 2.5% per annum.
Off-Balance Sheet Arrangements
The Company is not a party to or bound by any long-term guaranteed
purchase agreements. The Company procures raw materials used in its
manufacturing process using a standard purchase order form. A small number of
purchase orders may extend out to a life of six months and, on rare occasions,
up to one year. The terms and conditions presented in the purchase order provide
for several situations by which an order could be canceled or stopped during the
fulfillment of the order. The Company would be liable for goods already
delivered under a purchase order or costs incurred by a vendor for unfinished
goods manufactured specifically for the Company that are not standard products
of the vendor, plus a reasonable profit on such unfinished goods. The Company
does not believe the cancellation by the Company of any of its purchase order
agreements would have a material adverse effect on the liquidity or operations
of the Company. Except as set forth above, the Company has not entered into any
financial derivative transactions or other off-balance sheet arrangements for
risk management or financing purposes.
13
Contractual Obligations
The amounts set forth below represent the Company's material contractual
obligations to be paid in future periods:
Payments due by period
----------------------
Less than More than
Contractual obligations Total 1 year 1-3 years 3-5 years 5 years
- ----------------------- ----- ------ --------- --------- -------
10% Senior Subordinated Convertible
Note due March 2005 $3,327,500 $ -- $3,327,500 $ -- $ --
Note payable to bank 1,184,999 360,000 720,000 104,999 --
Unsecured note payable 12,000 12,000 -- -- --
Capital leases 196,172 158,780 37,392 -- --
Operating leases 137,419 119,254 18,165 -- --
Purchase obligations -- -- -- -- --
- --------------------------------------- ---------- ---------- ---------- ---------- ----------
Total $4,858,090 $ 650,034 $4,103,057 $ 104,999 $ --
======================================= ========== ========== ========== ========== ==========
Critical Accounting Policies
The Company's accounting and reporting policies are in accordance with
accounting principles general accepted in the United States of America. The
application of certain of these principles involves a significant amount of
judgment and the use of estimates based on assumptions that involve significant
uncertainty at the time of estimation. We have identified the following policies
as being particularly sensitive to estimate or otherwise critical based on the
potential impact on the financial statements: revenue recognition, asset
impairment, stock options, and income taxes. We periodically review these
policies, the estimation processes involved, and the related disclosures.
Revenue recognition - Revenue is recognized as products are shipped, net
of an allowance for estimated returns.
Asset impairment - Goodwill is evaluated for impairment annually, or
more frequently when there are indications of impairment. Based on an analysis
of acquired goodwill as of April 30, 2002, the goodwill previously recorded was
deemed impaired and was written off as of that date. Specifically identified
intangible assets subject to amortization, such as patents, and long-lived
assets are evaluated for recoverability whenever events or changes in
circumstances indicate that the carrying amount of an asset or asset group may
not be recoverable. During fiscal year 2002, it was determined that the carrying
amount of certain equipment under development was not recoverable, and an
impairment loss was recognized in the period ended April 30, 2002.
Stock options - The Company has adopted the disclosure-only provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure," which
disclosures are presented in Note 1, "Significant Accounting Policies -
Stock-based Compensation." In accordance with this policy, the Company continues
to account for its employee stock-based compensation plans under Accounting
Principles Board (APB) Opinion No. 25 and related interpretations. No
stock-based compensation cost is reflected in net income for options granted
under those plans having an exercise price equal to the market value of the
underlying common stock on the date of grant.
Income taxes - The Company accounts for income taxes using the asset and
liability method. As of April 30, 2003, the Company has approximately $4.3
million of deferred tax assets related principally to net operating loss carry
forwards and impairment losses recognized for financial reporting purposes. A
valuation allowance has been recorded to offset these deferred tax assets. The
ability of the Company to ultimately realize its deferred tax assets will be
contingent upon the Company achieving taxable income. There can be no assurance
that this will occur in amounts sufficient to utilize the deferred tax assets.
Should the Company determine that it would be able to realize some or all of the
deferred tax assets in the future, an adjustment to the deferred tax asset
valuation allowance would increase income in the period such determination was
made.
14
Quantitative and Qualitative Analysis
The Company has identified certain areas that potentially subject it to
significant concentrations of credit risk. These areas for potential risk
include cash and cash equivalents and trade accounts receivable. At times, cash
balances at financial institutions are in excess of FDIC insurance coverage. The
cash balances are maintained at financial institutions with high credit -
quality ratings and the Company believes no significant risk of loss exists with
respect to those balances. Credit risk associated with trade accounts receivable
is generally diversified due to the large number of entities comprising the
customer base. The Company believes that amounts reported for cash and cash
equivalents and trade accounts receivable are considered to be reasonable
approximations of their fair values due to their short term nature.
Fiscal 2002
Prior to fiscal 2002, the Company had two operating segments: (1)
Temperature Recorder Operations and (2) oilfield operations and other, which
included all economic activity related to the oil production and the holding of
the oil subleases and the operation of its Phoenix, Arizona office. The Company
closed its Phoenix office effective October 31, 2000. The activities performed
in its Phoenix office were transferred to the Corporate Office in Belmont, North
Carolina. The Company entered into an agreement with a group in Dallas, Texas,
to sell the subleases on behalf of the Company. The group contacted and
solicited potential buyers to make purchase offers to the Company for the
subleases. The Company terminated the agreement in April 2001 after receiving no
purchase offers from potential buyers. As a result of the inability of the
Company to attract a potential buyer, the high cost and difficulty in producing
crude oil of the type found in the field and losses incurred in the oilfield
operations, the Company evaluated the recoverability of the carrying amount of
the oilfield net assets. In analyzing expected future cash flows from potential
offers, the Company determined that $300,000 of net assets should be accounted
for as property held for sale. As a result, the Company recognized a loss on
impairment of $3,062,196 in the fourth quarter of fiscal 2001. The Company
determined that no change in the valuation of this asset was necessary for
fiscal 2002. The Company sold the oilfield subleases on September 30, 2002 and
now operates in one reporting segment, Temperature Recorder Operations.
Temperature Recorder Operations
Revenues from sales decreased $1,082,458, or approximately 11% in fiscal
2002 as compared to fiscal 2001, due to a 13% decrease in the number of Cox(1)
units sold as a result of decreased demand and a 4% decrease in average sales
price. Sales of DataSource(R) units increased approximately 129%, slightly
offset by a 4% decrease in average sales price during fiscal 2002. During fiscal
2002, a large grocery store chain started requiring its shippers to use the
DataSource(R) units exclusively. Fiscal 2002 reflects a 22% decrease in the
number of Tracer(R) products sold and a 4% decrease in average sales price.
During fiscal 2002, revenues from the sale of graphic recorders represented
$6,751,000 or approximately 78% of total revenues, revenues from the sale of
electronic data loggers represented $1,472,000 or approximately 17%, revenues
from the sale of probes and related products represented $129,000 or
approximately 2%, and revenues from the sale of Vitsab(R) products represented
$112,000 or approximately 1%. Revenues from the sale of oil and other
miscellaneous products represented the balance.
Cost of sales for fiscal 2002 increased $85,162, or approximately 2% as
compared to fiscal 2001. The increase was due to increased retriever fees,
shipping costs and supplies used in the manufacturing process, partially offset
by decreased purchases of raw materials, decreasing labor and benefits costs and
postage expenses.
During fiscal 2002, the Company contracted with a third party to
manufacture and assemble certain base versions of the Cox(1) units at an
offshore location. During fiscal 2002, this location supplied approximately 6%
of the total number of units utilized by the Company. Because of this
manufacturing arrangement, the Company realized significant cost savings on
units manufactured in both the offshore and Belmont, North Carolina facilities.
General and administrative expenses for fiscal 2002 decreased
$2,014,515, or approximately 44% as compared to fiscal 2001. This decrease was
due to lower costs associated with legal fees, professional services, salaries,
payroll taxes and employee benefits, partially offset by increases in outside
services and other general expenses.
Selling expenses for fiscal 2002 decreased $551,400, or approximately
30% as compared to fiscal 2001. The decrease was due to lower sales salaries,
commissions, trade shows and travel expenses.
No research and development costs were incurred during fiscal 2002 as
the Company reached the final development stages of the Vitsab(R) product and
halted the development of the EDS(TM) product in fiscal 2001.
15
Depreciation and depletion expense in fiscal 2002 decreased $90,422, or
approximately 18% as compared to fiscal 2001. There was no depletion expense
associated with the oilfield operations recorded in fiscal 2002 as a result of
the impairment of the oilfield operations, as discussed in Note 3 to the
consolidated financial statements.
Amortization of patents and goodwill increased $36,261, or approximately
17% in fiscal 2002 as compared to fiscal 2001. This increase was related to the
additional goodwill recognized from the acquisition of Vitsab Sweden. In fiscal
2002, the Company evaluated the fair value of goodwill from the acquisition of
Vitsab Sweden and determined the goodwill to be impaired and recognized an
impairment loss of $2,695,689 in the fourth quarter of fiscal 2002, as discussed
in Note 8 to the consolidated financial statements.
Other income increased $317,335, or approximately 248% in fiscal 2002 as
compared to fiscal 2001. This increase was related primarily to the payments
received as a result of the agreement between the Company and its Copenhagen
distributor for an option to purchase all of the shares and assets of the
Company's wholly owned subsidiary, Vitsab Sweden, as discussed in Note 1 to the
consolidated financial statements.
Interest expense increased $28,820, or approximately 6% in fiscal 2002
as compared to fiscal 2001. Reasons for this increase included the increase in
interest accrued on the note payable to TI, dated March 10, 2000, in the amount
of $2,500,000, interest on the Revolving Loan with RBC Centura Bank ("Centura")
and the reclassification of interest paid on progress payments made by Centura,
on behalf of the Company, from deposits to interest expense.
The fiscal 2002 decrease in inventory of $509,824 was related to the
decrease in the number of units in finished goods inventory and a decrease in
work-in-progress inventory. The Company also lowered its costs of purchasing raw
materials through negotiations with vendors. Decreased direct labor and benefits
costs and overheads incurred in the production of the Cox(1) units resulted in a
decrease in the valuation of finished goods and an increase in cost of goods
sold by an equal amount.
The fiscal 2002 decrease in property and equipment, net of $397,836, was
primarily due to depreciation. There were no significant additions or deletions
to property and equipment in fiscal 2002.
Fiscal 2001
The Company had two operating segments in fiscal 2001: (1) Temperature
Recorder Operations and (2) oilfield operations and other. For both fiscal 2001
and fiscal 2000, revenues from sales of temperature recording devices
represented greater than 99% of the Company's consolidated revenues. Revenues
from sales of temperature recording devices were $9,637,075 and $9,700,282 for
fiscal 2001 and fiscal 2000, respectively, while revenues from oilfield
operations and other revenues were $72,486 and $10,694 for fiscal 2001 and
fiscal 2000, respectively.
Temperature Recorder Operations
Sales decreased $63,207, or approximately 1% in fiscal 2001 as compared
to fiscal 2000, due to a decrease in the number of units sold, lower unit
selling prices and an increase in the amount of returned units. Cost of sales
for fiscal 2001 decreased $213,864, or approximately 4% as compared to fiscal
2000 due primarily to decreased purchases of recorder units and data loggers,
partially offset by increased labor costs, retriever fees, shipping costs and
supplies used in the manufacturing process. During fiscal 2001, revenues from
the sale of graphic recorders represented $8,252,000 or approximately 85% of
total revenues, revenues from the sale of electronic data loggers represented
$1,019,000 or approximately 10%, revenues from the sale of probes and related
products represented $164,000 or approximately 2%, and revenues from the sale of
Vitsab(R) products represented $4,000 or less than approximately 1%. Revenues
from the sale of oil and other miscellaneous products represented the balance.
General and administrative expenses for fiscal 2001 increased $942,719,
or approximately 26% as compared to fiscal 2000. The increase was due to
salaries, outside services, insurance, payroll taxes, legal fees and rent. Also
included in fiscal 2001 was approximately $288,000 of non-recurring charges and
write-offs related to a technology investment, the closing of the Phoenix
office, an increase in the allowance for bad debts and to legal fees. Offsets to
the increase include decreases in travel expenses, professional services and
office supplies.
Selling expenses for fiscal 2001 increased $162,805, or approximately
10%, as compared to fiscal 2000. The increase was due to increases in sales
salaries related to the EDS(TM) product, commissions and travel expenses,
partially offset by decreases in trade show expenses and professional services.
16
Research and development expenses were related to costs incurred for
both the EDS(TM) and Vitsab(R) products. Research and development expenses
decreased $63,969, or approximately 16%, in fiscal 2001 as compared to fiscal
2000, due to the Company reaching the final development stages of the Vitsab(R)
product and the halt in the development of the EDS(TM) product.
Depreciation and depletion expense in fiscal 2001 increased $80,312, or
approximately 19%, as compared to fiscal 2000 primarily due to asset additions.
Fiscal 2000 reflects the restatement of $349,713 recorded as a prior period
adjustment. All depletion expenses associated with the oilfield operations were
written off as a loss on impairment, as discussed in Note 3 to the consolidated
financial statements.
Amortization of goodwill increased $21,751, or approximately 11% in
fiscal 2001 as compared to fiscal 2000. This increase was related to the
increase in the amount of goodwill resulting from the acquisition of Vitsab
Sweden.
Included in costs and expenses were the costs associated with the
development of the EDS(TM) and Vitsab(R) products. During fiscal 2001, the
Company incurred $3,044,583 of costs related to the development of these new
products. Without these development costs, net loss in the Temperature Recorder
Operations for fiscal 2001 would have been ($384,274).
Other expenses increased $171,546, or approximately 395%, in fiscal 2001
as compared to fiscal 2000 primarily due to a valuation adjustment related to
the note due from officer.
Interest expense increased $326,179, or approximately 192%, in fiscal
2001 as compared to fiscal 2000. The primary reason for this increase was the
interest cost related to the note payable to TI dated March 10, 2000 in the
amount of $2,500,000 and interest on the revolving line of credit with, and
interest accrued on progress payments made by, Centura.
The fiscal 2001 decrease in accounts receivable was due to the lower
sales during the fiscal year and enhanced collection efforts on past due
receivables.
The fiscal 2001 increase in inventory was related to the continued
production of recorder units in order to increase on-hand inventory and to
purchases of raw material related to the production of the Vitsab(R) product.
Oilfield Operations and Other
There were limited oil production operations conducted during fiscal
2001. The Company maintained certain insurance and other compliance matters
pertaining to the oilfield operations during this fiscal year. The Company
recognized $3,062,196 of the oilfield operations net assets as a loss on
impairment in the fourth quarter of fiscal 2001.
The other expenses related to the Phoenix, Arizona office operations,
which functioned as a management office for certain of the overall affairs of
the Company, the center for administration of oilfield activities and
transactions, and as a location for aspects of software development. Effective
August 31, 2000, the Company ceased all software development in this office. The
Company wrote off this investment in software development of approximately
$155,000 in fiscal 2001. Effective October 31, 2000, the Company closed the
Phoenix office and transferred the activities of this office to the Corporate
Office in Belmont, North Carolina.
Forward-Looking Statements
Statements contained in this document that are not historical in nature
are forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements give our current expectations of
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such
as "estimate," "intend," "plan," and other words and terms of similar meaning in
connection with any discussion of future operating and financial performance.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements. The Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances after the date hereof. Such risks
and uncertainties with respect to the Company include, but are not limited to,
its ability to successfully implement internal performance goals, performance
issues with suppliers, regulatory issues, competition, the effect of weather on
customers, exposure to environmental issues and liabilities, variations in
material costs and general and specific economic conditions. From time to time,
the Company may include forward-looking statements in oral statements or other
written documents.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 2003 April 30, 2002
-------------- --------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 572,149 $ 216,042
Accounts receivable, net 964,078 1,072,935
Inventory, net 1,182,270 1,419,342
Notes receivable - current portion 75,000 --
Prepaid expenses 17,733 44,832
------------ ------------
TOTAL CURRENT ASSETS 2,811,230 2,753,151
Property and equipment, net 505,688 764,628
Property held for sale, net -- 300,000
Due from officer, net 8,928 41,067
Other assets 71,510 64,749
Patents 114,845 148,796
------------ ------------
TOTAL ASSETS $ 3,512,201 $ 4,072,391
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 291,948 $ 658,123
Short-term debt -- 1,000,000
Current portion of long-term debt 530,778 1,485,878
------------ ------------
TOTAL CURRENT LIABILITIES 822,726 3,144,001
OTHER LIABILITIES:
Long-term debt 862,393 208,913
Long-term debt - related party 3,327,500 3,025,000
------------ ------------
TOTAL OTHER LIABLITIES 4,189,893 3,233,913
------------ ------------
TOTAL LIABILITIES $ 5,012,619 $ 6,377,914
------------ ------------
COMMITMENTS AND CONTINGENCIES
- -----------------------------
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized 100,000,000
shares;issued and outstanding; 38,339,094 shares
at April 30, 2003 and 25,769,684 shares at April 30, 2002 $ 23,252,804 $ 22,593,724
Accumulated other comprehensive loss (32,591) (68,168)
Accumulated deficit (24,696,452) (24,806,900)
Less - Notes receivable for common stock (24,179) (24,179)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT ($ 1,500,418) ($ 2,305,523)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,512,201 $ 4,072,391
============ ============
See Notes to Consolidated Financial Statements.
18
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended April 30,
--------------------------------------------
2003 2002 2001
---- ---- ----
REVENUE:
Sales $ 8,773,852 $ 8,627,103 $ 9,709,561
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 4,917,048 5,436,181 5,351,019
General and administrative 2,045,839 2,540,680 4,555,195
Selling 1,057,109 1,260,652 1,812,052
Research and development -- -- 345,393
Depreciation and depletion 306,349 423,398 513,820
Loss on impairment -- 3,537,597 3,062,196
Amortization of patents and goodwill 33,951 255,564 219,303
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 8,360,296 13,454,072 15,858,978
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 413,556 (4,826,969) (6,149,417)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 151,150 189,185 (128,150)
Interest expense (454,258) (525,262) (496,442)
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (303,108) (336,077) (624,592)
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 110,448 (5,163,046) (6,774,009)
Provision for income taxes -- -- --
------------ ------------ ------------
NET INCOME (LOSS) $ 110,448 ($ 5,163,046) ($ 6,774,009)
============ ============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ .00 ($ .20) ($ .27)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 27,907,224 25,360,071 24,661,104
See Notes to Consolidated Financial Statements.
19
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated Subscribed
Other Stock
Common Comprehensive Accumulated Less Note
Stock Income (Loss) Deficit Receivable Total
----- ------------- ------- ---------- -----
Balance, April 30, 2000 $ 21,889,449 $ -- ($12,869,845) $ 22,201 $ 9,041,805
Comprehensive income (loss)
Net income (loss) -- -- (6,774,009) -- (6,774,009)
Foreign currency
translation adjustment -- (108,581) -- -- (108,581)
------------
Total comprehensive
income (loss) -- -- -- -- (6,882,590)
Change in subscribed stock, net -- -- -- (53,332) (53,332)
Common stock issued 422,472 -- -- -- 422,472
------------ ------------ ------------ ------------ ------------
Balance, April 30, 2001 22,311,921 (108,581) (19,643,854) (31,131) 2,528,355
Comprehensive income (loss)
Net income (loss) -- -- (5,163,046) -- (5,163,046)
Foreign currency
translation adjustment -- 40,413 -- -- 40,413
------------
Total comprehensive
income (loss) -- -- -- -- (5,122,633)
Payment on subscribed stock -- -- -- 6,952 6,952
Common stock issued 281,803 -- -- -- 281,803
------------ ------------ ------------ ------------ ------------
Balance, April 30, 2002 22,593,724 (68,168) (24,806,900) (24,179) (2,305,523)
Comprehensive income (loss)
Net income -- -- 110,448 -- 110,448
Foreign currency
translation adjustment -- 35,577 -- -- 35,577
------------
Total comprehensive income -- -- -- -- 146,025
Common stock issued 659,080 -- -- -- 659,080
------------ ------------ ------------ ------------ ------------
Balance, April 30, 2003 $ 23,252,804 ($ 32,591) ($24,696,452) ($ 24,179) ($ 1,500,418)
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
20
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended April 30,
2003 2002 2001
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 110,448 ($5,163,046) ($6,774,009)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and depletion 306,349 423,398 513,820
Amortization of patents 33,951 255,564 219,303
Loss on impairment -- 3,537,597 3,062,196
Loss on disposal of property and equipment -- 2,242 22,628
Gain on sale of property held for sale (19,503) -- --
Loss on sale of subsidiary 17,013 -- --
Allowance for doubtful accounts 19,250 3,190 33,286
Other 13,131 (63,209) 21,783
Increase in valuation allowance 32,139 12,499 211,787
----------- ----------- -----------
512,778 (991,765) (2,689,206)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 89,607 65,183 483,425
Inventory 237,072 509,824 (303,551)
Prepaid expenses 27,099 (14,339) (27,380)
Other receivable and investments -- 19,230 8,586
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (276,175) 55,345 (329,673)
----------- ----------- -----------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 590,381 (356,522) (2,857,799)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (84,315) (25,562) (81,039)
Proceeds from sale of property held for sale 54,504 -- --
Equipment under development -- 28,603 (689,176)
Collection of note receivable from property
held for sale 100,000 -- --
----------- ----------- -----------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 70,189 3,041 (770,215)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 659,080 281,803 422,472
Repayment on debt (1,301,620) (370,813) (1,273,669)
Subscriptions receivable -- 6,952 4,768
Amounts borrowed under short-term debt -- 252,548 1,211,452
Amounts borrowed under long-term debt 302,500 315,000 1,190,000
----------- ----------- -----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (340,040) 485,490 1,555,023
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 35,577 40,413 (108,581)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 356,107 172,422 (2,181,572)
CASH AND CASH EQUIVALENTS, beginning of period 216,042 43,620 2,225,192
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 572,149 $ 216,042 $ 43,620
=========== =========== ===========
Supplemental Cash Flow Information
Interest paid $ 154,787 $ 250,262 $ 246,442
Income taxes paid $ -- $ -- $ --
Note Receivable resulting from sale of property
held for sale $ 175,000 $ -- $ --
See Notes to Consolidated Financial Statements.
21
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED APRIL 30, 2003, 2002 AND 2001
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Cox Technologies, Inc. (the "Company") is engaged in the business
of producing and distributing transit temperature recording
instruments, including electronic "loggers," graphic temperature
recorders and visual indicator labels, both in the United States and
internationally. Temperature recorders and loggers work by creating a
strip chart record of temperature changes over time, or record
temperatures electronically according to a preset interval
("logging"). Visual indicator labels are a relatively new technology
that employs enzymatic color indicators inside a transparent label to
show the amount of temperature exposure of a stored or shipped
temperature-sensitive commodity. The visual indicator products are
marketed under the trade name Vitsab(R). The Company has been involved
in the sale and manufacture of both types of transit monitoring
products, and has established an international market presence and
reputation for reliable temperature recording products.
In April 2001, the Company executed an agreement with its
Copenhagen distributor ("Purchaser") for an option to purchase all of
the shares and assets of the Company's wholly owned subsidiary, Vitsab
Sweden, AB ("Vitsab Sweden"). The option agreement gave the Purchaser
until November 30, 2001 to exercise the option. On October 18, 2001
the Company entered into a verbal agreement with Purchaser to extend
the agreement through February 2002, and thereafter on a
month-to-month basis. 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. On December 10, 2002,
the Company executed an additional amendment with the Purchaser that
extended the option period until March 31, 2003. On March 15, 2003,
the Company, under a Share Purchase Agreement, sold all of its shares
in Vitsab Sweden to the Purchaser. The purchase price for all of the
Company's shares in Vitsab Sweden was $1.00. The Company recognized a
loss of approximately $17,000 that is included in other income
(expense). Additionally, the Purchaser must make monthly payments of
$6,000 to the Company beginning the month after the sale and ending
with a final payment in June 2004. Upon completion of these payments
by Purchaser, the Company will transfer title and ownership of certain
equipment located at the Malmo, Sweden location. Should the Purchaser
fail to make any payment within 30 days of its due date, then they
will forfeit their ownership rights in the assets and the Company
shall be entitled to take immediate possession of those assets. The
Company will be paid a quarterly royalty based on the volume of
Vitsab(R) products sold by the Purchaser. 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's entire Vitsab(R) operation has been largely
dependent on one customer. That customer has been testing these
products for use in the distribution of their perishable products. On
September 5, 2002 the Company received notification from the customer
that 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. The Company
continues to manufacture and sell the Vitsab(R) products to the
largest user in the pilot program and other customers. The Company
added several new customers during the fiscal year.
Stock-based Compensation
The Company has elected to follow Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees"
(APB No. 25), and related interpretations in accounting for its
employee stock options. The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
This statement defines a fair value method of accounting for stock
options or similar equity instruments. SFAS No. 123 permits companies
to continue to account for stock-based compensation awards under APB
No. 25, but requires disclosure in a note to the financial statements
of the pro forma net income and earnings per share as if the Company
had adopted the new method of accounting. SFAS No. 123 has been
amended by Financial Accounting Standards Board pronouncement number
148 ("FASB No. 148), "Accounting for Stock-based Compensation -
Transition and Disclosure". FASB No. 148 requires prominent disclosure
in the annual and quarterly statements of the Company on stock-based
compensation.
22
The Company has two stock option plans, the Stock Option
Agreements By and Between Cox Technologies, Inc. and Certain
Executives ("Executive Plan") and the 2000 Stock Incentive Plan ("2000
Plan"). In accordance with the Executive Plan, options to purchase an
aggregate of up to 6,652,500 shares of the Company's Common Stock were
granted to certain executives of the Company. Options generally were
granted at the fair market value of the Company's Common Stock
determined on the date of the grant. Certain options were granted at
an exercise price below fair market value and $600,000 of compensation
expense was charged to operations in fiscal 2000. Options from the
Executive Plan are exercisable on various dates and expire on various
dates. All options under the Executive Plan have been granted. In
accordance with the 2000 Plan, up to 8,000,000 shares of the Company's
Common Stock can be issued through the use of stock-based incentives
to employees, consultants and non-employee members of the Board of
Directors. The exercise price of options granted through the 2000 Plan
cannot be less than 85% of the fair market value of the Company's
Common Stock on the date of the grant. All outstanding options have
been granted at the fair market value; therefore, no compensation
expense has been recorded. Options from the 2000 Plan are exercisable
on various dates from the date of the grant and expire on various
dates. Exceptions to the exercise date for both plans are allowed upon
the retirement, disability or death of a participant. An exception is
also allowed upon a change in control as defined in both plans.
Options granted, exercised and canceled under both plans for the
three years ended April 30, 2003 were as follows:
Options Weighted-Average
Outstanding Exercise Price
--------------------- ---------------------
April 30, 1999 -- --
Granted 600,000 $1.25
Exercised -- --
Canceled -- --
----------
April 30, 2000 600,000 $1.25
Granted 7,310,000 $.58
Exercised -- --
Canceled -- --
----------
April 30, 2001 7,910,000 $.63
Granted 3,742,500 $.12
Exercised -- --
Canceled (120,000) $.38
----------
April 30, 2002 11,532,500 $.45
Granted 777,500 $.11
Exercised -- --
Canceled (439,500) $.19
----------
April 30, 2003 11,870,500 $.45
==========
The Company applies APB No. 25 in accounting for both Plans.
Accordingly, compensation cost is determined using the intrinsic value
method under APB No. 25. Had compensation cost for both Plans been
determined consistent with the fair value method for compensation
expense encouraged under SFAS No. 123, the Company's net income and
earnings per share (EPS) would have been the pro forma amounts shown
below for the fiscal years ended April 30. For purposes of pro forma
disclosures, the estimated fair value of options is recorded in its
entirety in the year granted.
2003 2002 2001
---- ---- ----
Net income (loss) As reported $110,448 ($5,163,046) ($6,774,009)
Net income (loss) Pro forma 95,587 ($5,191,687) ($7,036,503)
Basic and diluted EPS As reported $.00 ($.20) ($.27)
Basic and diluted EPS Pro forma $.00 ($.20) ($.29)
For purposes of pro forma disclosure, the fair value of each
option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used
for nonqualified stock option grants in fiscal 2003, 2002 and 2001,
respectively:
2003 2002 2001
---- ---- ----
Risk free interest rate(s) 4.9% to 5.3% 4.8% to 5.2% 4.8% to 6.0%
Volatility factor(s) 285% to 304% 224% to 249% 98% to 243%
Expected life 7 to 10 years 7 to 10 years 4 to 10 years
The weighted average fair value of nonqualified stock options
granted during fiscal 2003, 2002 and 2001 was $.11, $.12, and $.55,
respectively. Options outstanding at April 30, 2003 have exercise
prices ranging from $.08 to $1.25, and a weighted average remaining
contractual life of 8.2 years. The number of
23
shares and weighted average exercise price of those shares exercisable
at the end of each fiscal year was 7,500 shares at $.11 for 2003,
67,500 shares at $.34 for 2002, and 2,697,501 shares at $.55 for 2001.
Restricted stock was issued out of the 2000 Plan to consultants
and employees in lieu of cash payments totaling 30,000 and 723,028
shares, respectively for fiscal 2003 and 2002. At April 30, 2003,
there were 2,028,972 shares reserved for issuance under the 2000 Plan.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Cox Technologies, Inc. (the Company) and its wholly owned
subsidiary, Vitsab Sweden, through March 15, 2003, the date it was
sold, and Cox Recorders Australia, a 95% owned Australian distribution
company. Vitsab Sweden carried out development, production and
marketing activities that were a part of the Vitsab(R) operation. Such
activities were not considered a component of an entity as defined in
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets". In July 2001 all domestic subsidiaries were merged into the
parent company, Cox Technologies, Inc. All material intercompany
transactions and balances among the Company and its subsidiary
companies have been eliminated in the accompanying consolidated
financial statements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and investments with a maturity of three months
or less.
Accounts Receivable
Accounts receivable consist of trade accounts receivable and are
stated at cost less an allowance for doubtful accounts. Credit is
extended to customers and generally collateral is not required.
Management's determination of the allowance for doubtful accounts is
based on an evaluation of the accounts receivable, past experience,
current economic conditions and other risks inherent in the accounts
receivable portfolio. The balance in the allowance for doubtful
accounts is $45,750 and $65,000 at April 30, 2003 and 2002,
respectively.
Depreciation, Depletion and Amortization
Depreciation for property and equipment is provided on a
combination of straight-line and accelerated cost recovery methods
over the respective estimated lives over a range of five to twenty
years. Depletion expense for fiscal 2001 was based on production.
Inventory
Inventories are stated at the lower of cost determined by the
FIFO (first-in, first-out) method or market. Inventory consists
primarily of raw material, work-in-process and finished goods related
to the transit temperature recording segment. The Company established
a $50,000 reserve for slow moving or obsolete inventory in fiscal
2003.
Goodwill
Goodwill represents the excess of the cost of companies acquired
over the fair value of their net assets at dates of acquisition and
was being amortized on the straight-line method over a range of six to
seventeen years. Goodwill was written off as of April 30, 2002,
therefore no amortization expense was recognized for 2003 (see Note 8
to the consolidated financial statements). Amortization expense
charged to operations totaled $220,094 and $200,910 for fiscal 2002
and 2001, respectively. As goodwill was written off as of April 30,
2002, the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets" has no effect on goodwill.
24
Patents
The Company owns a number of patents directly related to and
important to the Company's business. The Company adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets",
effective May 1, 2002. Under SFAS No. 142, intangible assets that have
finite useful lives are amortized over their estimated useful lives,
but without the constraint of the 40-year maximum life required by APB
Opinion No. 17. Intangible assets with finite useful lives are
reviewed for impairment in accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144
requires the Company to evaluate the recoverability of long-lived
assets whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. The adoption of the provisions
of SFAS 142 did not have a significant impact on the Company's
financial position or results of operations. Amortization expense
charged to operations totaled $33,951, $35,470 and $18,793 for fiscal
2003, 2002 and 2001, respectively.
Long-lived Assets
Long-lived assets held and used by the Company are reviewed for
impairment whenever changes in circumstances indicate that the
carrying value of the asset may not be recoverable.
Income Taxes
The Company accounts for income taxes pursuant to the Statement
of Financial Accounting Standards (SFAS) No. 109, which requires a
liability method of accounting for income taxes. Under this method,
the deferred tax liability represents the tax effect of temporary
differences between the financial statement and tax bases of assets
and liabilities and is measured using current tax rates.
Revenue Recognition
The Company recognizes revenue when products are shipped, net of
estimated allowance for product returns.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts
receivable, notes receivable, accounts payable, accrued expenses,
short-term debt and long-term debt. The amounts reported for financial
instruments other than long-term debt are considered to be reasonable
approximations of their fair values due to their short-term nature.
Based on borrowing rates currently available to the Company for loans
with similar terms and maturities, the fair value of the Company's
long-term debt approximates the carrying value.
Comprehensive Income (Loss)
The Company recorded a foreign currency translation adjustment in
fiscal 2003, 2002 and 2001 of $35,577, $40,413 and ($108,581),
respectively. As a result, total comprehensive income was $146,025 as
compared to a net income of $110,448 for fiscal 2003, a total
comprehensive loss of $5,122,633 as compared to a net loss of $5,163,046
for fiscal 2002 and a total comprehensive loss of $6,882,590 as compared
to a net loss of $6,774,009 for fiscal 2001.
Research and Development Costs
The costs of research and development activities are charged to
operations as incurred.
Basic and Diluted Earnings Per Share
Earnings per share have been calculated in conformity with SFAS
No. 128, "Earnings Per Share." The Company has a complex capital
structure with significant potential common shares. However, basic
earnings per common share is based on the weighted average number of
common shares outstanding during each year. Potential common shares
from the Senior Subordinated Convertible Promissory Note with
Technology Investors, LLC ("TI") and stock option grants are
anti-dilutive for fiscal 2003, 2002 and 2001 and have been excluded
for the earnings per share calculations.
Reclassifications
Certain amounts previously reported on the consolidated financial
statements have been reclassified to conform to the current period's
presentation. Common stock and paid in capital have been combined in
their presentation on the consolidated balance sheet and on the
consolidated statements of changes in stockholder's equity (deficit).
25
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Credit risk is generally
diversified due to the large number of entities comprising the
customer base. At times, cash balances at financial institutions are
in excess of FDIC insurance coverage. The cash balances are maintained
at financial institutions with high credit - quality ratings and the
Company believes no significant risk of loss exists with respect to
those balances.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
certain estimates and assumptions. These affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Recent Accounting Pronouncements
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, and the Company
believes the adoption of the provisions of SFAS No. 143 will not have
a significant effect on its financial position or results of
operations.
SFAS No. 150 addresses the accounting for certain financial
instruments with characteristics of both liabilities and equity, and
is effective for interim periods beginning after June 15, 2003. The
Company believes the adoption of the provisions of SFAS No. 150 will
not have a significant effect on its financial position or results of
operations.
2. INVENTORIES
Inventory at April 30, 2003 and 2002 consists of the following:
2003 2002
---- ----
Raw materials $328,744 $377,478
Work-in-process 103,059 143,339
Finished goods 800,467 898,525
---------- ----------
1,232,270 1,419,342
Less reserve 50,000 --
---------- ----------
Total $1,182,270 $1,419,342
========== ==========
26
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at cost, by
major classification, less accumulated depreciation at April 30, 2003
and 2002:
2003 2002
---- ----
Manufacturing Property and Equipment
- ------------------------------------
Tooling $518,840 $495,507
Machinery and equipment 1,567,752 1,558,060
Office furniture and equipment 175,780 167,538
Leasehold improvements 300,665 293,635
---------- ----------
2,563,037 2,514,740
Less: Accumulated depreciation 2,057,349 1,750,112
---------- ----------
Total manufacturing property and equipment 505,688 764,628
---------- ----------
Properties Held for Sale:
- -------------------------
Oil and Gas Properties and Equipment
- ------------------------------------
Intangible drilling costs -- 883,023
Lease and well equipment -- 1,828,881
Leasehold improvements -- 715,891
Undeveloped leases -- 72,167
Repurchased participating units -- 2,608,640
Other -- 24,600
---------- ----------
-- 6,133,202
Less: Accumulated depreciation and depletion -- 2,771,006
Allowance for loss on impairment -- 3,062,196
---------- ----------
Total oil and gas properties and equipment -- 300,000
---------- ----------
Total property and equipment $505,688 $1,064,628
========== ==========
Until September 30, 2002, the Company owned working interests
through subleases in developed oil and gas properties located in
California. These developed properties contained drilled wells that
were capable of producing crude oil or natural gas. The Company
attempted to manage and improve production in the fields by employing
an independent oilfield operator through several contractual
agreements dating back to 1999.
As a result of the high cost and difficulty in producing crude
oil of the type found in the field and losses incurred in the oilfield
operations, the Company evaluated the recoverability of the carrying
amount of the oilfield net assets. In analyzing expected future cash
flows from potential offers, the Company was of the opinion that
$300,000 of net assets should be recognized as property held for sale.
As a result, the Company recognized a loss on impairment of $3,062,196
in the fourth quarter of fiscal 2001. The Company determined that no
change in the valuation of this asset was necessary for fiscal 2002.
On July 31, 2001, the operator filed a lien against the subleased
properties. On January 29, 2002, the operator filed a lawsuit against
the Company, two of its current officers and a former officer claiming
breach of contract, fraud and damages totaling approximately $87,000.
At April 30, 2002, the Company accrued $90,000, which was the balance
of capital and related interest that the operator invested into the
subleases under an agreement with the Company and to which he had a
reasonable claim.
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 it was 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. The Company recognized a gain of approximately
$19,000 that is included in other income (expense). At closing, the
Company received an additional $50,000, net of transaction fees. The
balance of the sale price was comprised primarily of a promissory note
payable to the Company in the amount of $175,000 and a payment of
$87,000 to the operator of the oilfield subleases to
27
settle the lawsuit (the "Oilfield Litigation") filed against the
Company, two of its current officers and a former officer, claiming
breach of contract, fraud and damages totaling approximately $87,000.
The operator of the oilfield received the $87,000 payment on September
30, 2002 and the Oilfield Litigation was settled as of that date. The
Company received the first installment under the note in the amount of
$100,000 on January 30, 2003, and the last installment in the amount
of $75,000 on May 30, 2003. Proceeds from both installments were
reduced by a $9,000 sales commission paid to a third party.
4. PATENTS
Patents are being amortized over their estimated useful lives in
accordance with SFAS No. 142. The carrying value and amortization of
patents are as follows:
As of April 30, 2003
--------------------
Gross Carrying Accumulated
Value Amortization
Amortized intangible asset
Patents $206,597 $91,752
Aggregate amortization expense
2003 $ 33,951
Estimated amortization expense
2004 $ 38,282
2005 $ 38,282
2006 $ 38,281
2007 --
2008 --
5. DEBT
The following is a summary of long-term debt obligations and
lease contracts payable at April 30, 2003 and 2002:
2003 2002
---- ----
10% Senior Subordinated
Convertible Promissory Note due
March 2005 (from related party,
see Note 6) (principal amount of
the note and accrued interest
are convertible into the
Company's no par common stock at a
conversion price of $1.25 per share) $3,327,500 $3,025,000
Note payable to bank, secured by
accounts receivable and
inventory. See details set forth
in the narrative below. 1,184,999 --
Note payable to bank secured by
general business assets. See details
set forth in the narrative below. -- 870,148
Unsecured note payable to a
vendor in 24 monthly
installments of $2,000. 12,000 36,000
Note payable to bank, secured by
equipment. See details set forth
in the narrative below. -- 448,600
Capital leases secured by
equipment, expiring in various
years, with terms ranging from
36 months to 60 months, due in
monthly installments ranging
from $496 to $5,467 196,172 340,043
------------ ------------
4,720,671 4,719,791
Less: Current maturities 530,778 1,485,878
------------ ------------
Total long-term debt $ 4,189,893 $ 3,233,913
============ ============
28
In March 2000, the Company entered into an agreement with TI
whereby the Company issued to TI a 10% subordinated convertible
promissory note in the amount of $2,500,000 (the "TI Note"), the
entire principal and interest of which are due on March 10, 2005.
Alternatively, the principal amount of the TI Note and interest
accrued thereon may be converted, at the option of holder, into shares
of the Company's Common Stock at a conversion price of $1.25 per
share. As of April 30, 2003, the principal and accrued interest of
$3,327,500 would be converted into 2,662,000 shares of the Company's
Common Stock. Mr. Fletcher and Mr. Reid serve as the sole managers of
TI and share voting and dispositions power with respect to the Common
Stock issuable upon conversion of the TI Note.
The Company's cash flow from operations is currently not adequate
to retire the TI Note, and it is unlikely that cash flow will increase
in an amount sufficient for the Company to meet its obligations under
the TI Note when the principal and accrued interest become due on
March 10, 2005. TI has indicated that, in the event the Company
becomes unable to meet its obligations under the TI Note, TI may be
willing to explore alternative financing arrangements, including a
restructuring of the TI Note prior to its due date. Alternatively, the
Company may seek a cash infusion elsewhere, through a separate debt or
equity offering, a strategic partnership or some form of business
combination. The Company may consider any or all of these alternatives
in the event it becomes unable to meet its debt obligation to TI, but
there can be no assurance that any deal will be consummated on terms
acceptable to both the Company and TI or another third party. Without
such an arrangement, it is highly likely that the Company would
default on its obligations under the TI Note, at which time TI would
be entitled to exercise any and all remedies available to it under the
TI Note and applicable law, including bringing suit against the
Company and its assets. Should TI seek to enforce its right to timely
repayment of the TI Note, there is a risk that the Company will not be
able to continue as a going concern.
On July 13, 2000 the Company entered into a five-year term loan
("Term Loan") with its primary lender, Centura in the amount of
$1,190,000. 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 was Centura's prime rate
plus .625% per annum. Thereafter, principal payments of $22,313, in
addition to accrued interest, were due monthly until July 13, 2005.
On July 13, 2000 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 was Centura's prime rate plus .25% per
annum and was due monthly beginning in August 2000. The principal of
the Revolving Loan was due on September 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 continued to pay the
principal and interest on the Term Note and pay interest on the
Revolving Loan. On February 21, 2002 the Company executed documents
with Centura, effective January 31, 2002, that amended the Modified
Agreements to extend the maturity dates of the Revolving Loan and the
Term Loan to July 31, 2002. As a result, the full balance of theses
loans was classified as current portion of long-term debt at April 30,
2002.
The Company 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 had advanced approximately $842,000 in progress
payments on the cost of both pieces of equipment, of which $464,000
had 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.
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 were preventing the engineering firm from delivering a
machine that would
29
meet the Company's production requirements at the agreed upon fees. 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.
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
("Lease Loan"), effective January 31, 2002. The executed documents
also incorporated the note into the Modified Agreements. The interest
rate on the note was 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 was July 31, 2002.
On 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.
On December 1, 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 continued paying the current monthly
principal payments plus accrued interest on the Loans during this
forbearance period. This extension gave the Company additional time to
procure additional debt or equity funding to allow the Company to
decrease the amount owed to Centura by an additional $450,000 (the
"Loan Reduction"). The Company was required to reduce the amount of
principal outstanding under the Loans to $1,215,000, including the
Loan Reduction, by March 15, 2003. The Loan Reduction was in addition
to the Company's normal monthly principal payments due on the Loans
and the $91,000 payment that the Company received on January 30, 2003
from the purchaser of the oilfield subleases.
On March 19, 2003, the Company executed with Centura: (a) an
amendment to the loan agreement, (b) a promissory note and (c) a
security agreement. The amendment to the loan agreement required among
other considerations that the outstanding Term Loan, Revolving Loan
and Lease Loan should not exceed a combined balance of $1,214,999.
Also, under this agreement the aforementioned notes would be amended
and restated to one promissory note. Principal payments on the note
are $30,000 plus accrued interest beginning April 15, 2003 and
continuing each month thereafter through August 19, 2006. The interest
rate on the outstanding principal is calculated at the bank's 30-day
LIBOR base rate plus 4% per annum (5.32% on April 30, 2003). On the
first day of the month after the principal balance has been paid equal
to or less than $800,000, the interest rate will decrease to the
bank's 30-day LIBOR base rate plus 3% per annum provided there is no
event of default. Effective October 1, 2003, the Company will be
required to submit a monthly borrowing base calculation in support of
the loan balance and would be required to pay a sufficient principal
payment to reduce the loan balance to the amount supported by such
borrowing base. The borrowing base is defined as the sum of 80% of the
eligible accounts receivable and 35% of the eligible inventory of the
Company.
On May 19, 2003, the Company executed a note modification
agreement to modify the note dated March 19, 2003. The effective date
of the modification was established when the Company made a principal
payment on the note for $355,000. The payment was made to Centura on
May 21, 2003. The results of the modification is to reduce the monthly
principal payment to $21,000 plus accrued interest beginning on June
15, 2003 and continuing until July 15, 2006 on which date the balance
of the note will mature. Also, beginning on the effective date of the
modification, the interest rate on the outstanding principal shall be
calculated at the bank's 30-day LIBOR base rate plus 2.5% per annum.
Capital leases consist primarily of manufacturing property and
equipment with a capitalized cost of approximately $672,000 and
accumulated depreciation of approximately $537,000 and $403,000 as of
April 30, 2003 and 2002, respectively.
Following are maturities of long-term debt for each of the next
five fiscal years ended April 30:
2003 $ 530,778
2004 3,724,894
2005 360,000
2006 104,999
-----------
Total $4,720,671
===========
30
6. RELATED PARTY TRANSACTIONS
On January 20, 2003, the Company entered into a Stock Purchase
Agreement (the "TI Stock Purchase Agreement") with Technology
Investors, LLC ("TI"), an affiliate of certain executive officer and
directors of the Company, pursuant to which TI agreed to purchase and
the Company agreed to sell 12,500,000 shares of the Company's Common
Stock at a price of $0.06 per share, for a total purchase price of
$750,000. This transaction was submitted to the Company's shareholders
for their approval at a special meeting of the shareholders on March
12, 2003. With a quorum of shareholders present, a motion was made and
seconded to approve the TI Stock Purchase Agreement, and the motion
was passed by a unanimous vote of those present in person or
represented by proxy. The transaction was consummated on March 19,
2003. TI, together with Mr. Fletcher and Mr. Reid and their
affiliates, now collectively own and control beneficially an aggregate
of 15,594,966 shares of the Company's Common Stock, or approximately
38% of the Company's issued and outstanding common stock. These
figures include the 2,662,000 shares of the Company's Common Stock
that TI may obtain by converting its existing promissory note, but
exclude the options that Mr. Fletcher and Mr. Reid own to purchase, in
the aggregate, 3,000,000 shares of the Company's Common Stock, which
options become exercisable on September 12, 2003.
A more detailed description of this transaction can be read in
the Proxy Statement, dated February 6, 2003, which was mailed to
shareholders of record on January 17, 2003.
In March 2000, the Company issued the TI Note to TI. See Note 5
for further discussion of this transaction and the consequences to the
Company if it fails to meet its principal and accrued interest
obligations under the TI Note when they become due on March 10, 2005.
In addition, Mr. Fletcher and Mr. Reid were named directors of
the Company. The Company has agreed to nominate Mr. Fletcher and Mr.
Reid for three consecutive terms on the Board of Directors. Mr.
Fletcher and Mr. Reid were also both retained as consultants to the
Company. In connection with their services they each would receive
compensation of $1 annually and a one-time grant of immediately
exercisable options to purchase 300,000 shares of the Company's Common
Stock at an exercise price of $1.25 per share for a period of up to
ten years.
In fiscal 2001, Mr. Fletcher and Mr. Reid each received stock
options to purchase 2,000,000 shares of the Company's Common Stock at
an exercise price of $.59 per share for a period of up to ten years.
In fiscal 2002, Mr. Fletcher and Mr. Reid each received stock
options to purchase 800,000 shares of the Company's Common Stock at an
exercise price of $.11 per share for a period of up to seven years.
Also, the Board of Directors approved an increase in compensation for
Mr. Fletcher and Mr. Reid retroactive to January 1, 2001, in which
they each would receive annual compensation of $100,000, payable
quarterly in unrestricted shares of the Company's Common Stock valued
at the average daily closing price during the quarter. During fiscal
2002, Mr. Fletcher and Mr. Reid were paid $75,000 of salary in
unrestricted shares of the Company's Common Stock at an average market
price of $.35 per share under this structure. 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 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 were each granted
options to purchase 200,000 shares of the Company's Common Stock at an
exercise price of $.11 per share for a period of up to seven years.
Effective November 1, 2002, the Board of Directors ratified the
recommendation of the Compensation Committee to change the
compensation structure for both Mr. Fletcher and Mr. Reid and set the
annual salary rate at $100,000 per year. On April 1, 2003, the Board
of Directors modified the compensation plan for Mr. Fletcher and Mr.
Reid increasing their annual salary rate to $120,000 per year,
effective April 15, 2003, and establishing a quarterly bonus plan
beginning with the first quarter of fiscal 2004 based on the
profitability of the company. The quarterly bonus is limited to 50% of
the Company's net income for the quarter and Mr. Fletcher and Mr. Reid
can earn a non-cumulative bonus up to $10,000 per quarter. During
fiscal 2003, Mr. Fletcher and Mr. Reid were each compensated
approximately $99,000 as a payout from the fiscal 2002 compensation
arrangement and approximately $50,000 from the fiscal 2003
compensation arrangement.
31
7.RETIREMENT PLAN
The Company maintains a 401(k) plan that covers substantially all
employees, including subsidiary companies. Effective January 1, 2002,
the Company elected to discontinue matching contributions. Prior to
that date, the Company matched 50% of employee contributions up to 4%
of gross earnings. The Company's matching contributions amounted to
approximately $15,400 and $33,000, respectively, for fiscal 2002 and
2001.
8. IMPAIRMENT OF ASSETS
During fiscal 2002 goodwill and non-depreciable assets were
determined to be impaired and these amounts were recognized as a loss
on impairment of $3,537,597 in the fourth quarter of fiscal 2002.
Goodwill originated primarily from the acquisition of Vitsab, AB
("Vitsab") (see Note 13 to the consolidated financial statements)
during fiscal 1999. At April 30, 2002 the Company evaluated the fair
value of goodwill, which was determined by reference to the present
value of estimated future cash inflows and a significant change in
technology to get the product to market. Due to the significant change
in technology and projected future cash flows for this product,
management has determined goodwill from the Vitsab(R) product to be
impaired and has recognized an impairment loss of $2,695,689 in the
fourth quarter of fiscal 2002.
The non-depreciable asset represents machinery for the high-speed
production of the Vitsab(R) product. Since the machinery will not be
completed and not produce any positive future cash flows and has a
minimal scrap value, management has determined the equipment to be
impaired and has recognized a loss on impairment of $841,908 in the
fourth quarter of fiscal 2002.
9.INCOME TAXES
The Company and its subsidiaries file consolidated federal income
tax returns. There is an aggregate federal net operating loss
carryforward of $9,796,000 available to reduce future federal taxable
income of the parent company. These net operating loss carryforwards
will expire in various amounts between fiscal 2004 and fiscal 2023.
For the fiscal years ended April 30, 2003, 2002 and 2001, the
Company has not recognized an income tax provision due to operating
losses and deferred tax asset valuation allowances.
The reconciliation of income tax computed at federal and state
statutory rates to the income tax provision is as follows for the
fiscal years ended April 30,
2003 2002 2001
---- ---- ----
Income (loss) before income taxes $110,448 ($5,163,046) ($6,774,009)
Statutory federal income tax rate: 34% 34% 34%
Expected federal income tax
expense at statutory rate 37,552 -- --
Utilization of deferred tax asset (37,552) -- --
----------- ----------- -----------
Provision for income taxes $ -- $ -- $ --
=========== =========== ===========
32
The following is a summary of the significant components of the
Company's deferred tax assets for the fiscal years ended April 30,
2003 2002 2001
---- ---- ----
Deferred tax assets:
Net operating loss carryforwards $3,754,000 $2,978,000 $3,960,000
Impairment on long-lived assets 345,000 1,600,000 1,285,000
Other 168,000 322,000 149,000
--------- --------- ---------
4,267,000 4,900,000 5,394,000
Less: Valuation allowance 4,267,000 4,900,000 5,394,000
--------- --------- ---------
Net deferred tax asset $ -- $ -- $ --
========= ========= =========
The valuation allowance primarily represents the tax benefits of
certain operating loss carryforwards and other deferred tax assets
that may expire without being utilized. During fiscal 2003, 2002 and
2001, the valuation allowance (decreased) increased ($633,000),
($494,000) and $2,504,000, respectively.
The unused net operating loss carryforwards, which may provide
future tax benefits, expire at the end of each fiscal year as follows:
Unused Net Operating
Fiscal Year of Expiration Loss Carryforward Amount
------------------------- ------------------------
2004 $ 282,000
2005 641,000
2006 411,000
2007 253,000
2008 253,000
Remaining years 7,956,000
-----------
Total $9,796,000
==========
10. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents certain financial information for
each quarter during the fiscal years ended April 30,
2003
--------------------------------------------------------
Fourth Third Second First
--------------------------------------------------------
Sales $2,177,619 $2,289,867 $2,040,459 $2,265,907
Income (loss) from
operations
171,030 222,372 (128,324) 148,478
Net income (loss)
80,025 158,585 (209,842) 81,680
Basic and diluted net
income (loss) per
average common
share .00 .01 (.01) .00
2002
--------------------------------------------------------
Fourth Third Second First
--------------------------------------------------------
Sales $2,158,846 $2,045,969 $2,213,633 $2,208,655
Income (loss) from
operations
(3,818,566) (206,114) (260,520) (541,769)
Net income (loss) (340,716)
(3,940,428) (339,258) (542,644)
Basic and diluted net
income (loss) per
average common
share (.16) (.01) (.01) (.02)
33
11. SEGMENT INFORMATION
Prior to fiscal 2002, the Company had two current operating
segments that involved the (1) production and distribution of
temperature recording and monitoring devices, including electronic
"loggers", graphic temperature recorders and visual indicator labels
(referred to as "Temperature Recorder Operations" as a group) and (2)
oilfield operations and other, which included all economic activity
related to the oil production and the holding of the oil leases and
the operation of its Phoenix, Arizona office. The Company closed its
Phoenix office effective October 31, 2000. The activities performed in
Phoenix were transferred to the Corporate Office in Belmont, North
Carolina. The Company now operates in one reporting segment,
Temperature Recorder Operations. Therefore, no segment information is
required to be reported for fiscal 2003 or fiscal 2002.
Fiscal Year Ended April 30, 2001
- --------------------------- ----
Revenues:
Temperature Recorder Operations $9,637,075
Oilfield Operations and Other 72,486
-----------
$9,709,561
===========
Net income (loss):
Temperature Recorder Operations ($3,428,857)
Oilfield Operations and Other (1) (3,345,152)
-----------
($6,774,009)
===========
Identifiable assets:
Temperature Recorder Operations $4,377,067
Oilfield Operations and Other (1) 300,000
-----------
$4,677,067
===========
Capital expenditures:
Temperature Recorder Operations $ 84,388
Oilfield Operations and Other --
-----------
$ 84,388
===========
Depreciation, depletion and amortization:
Temperature Recorder Operations $ 733,123
Oilfield Operations and Other (1) --
-----------
$ 733,123
===========
Interest expense:
Temperature Recorder Operations $ 496,442
Oilfield Operations and Other --
-----------
$ 496,442
===========
(1) The Company recognized $3,062,196 of the oilfield operations net assets as
a loss on impairment in the fourth quarter of fiscal 2001.
34
Information on the Temperature Recorder Operations by domestic
and international is presented in the following table.
Fiscal Years Ended April 30, Domestic International Total
- ---------------------------- ---------- --------------- ----------
Revenues:
2003 $6,897,095 $1,876,757 $8,773,852
2002 $5,719,605 $2,907,498 $8,627,103
2001 $6,461,359 $3,175,716 $9,637,075
2000 $7,497,224 $2,203,058 $9,700,282
Net income (loss):
2003 $522,755 ($362,307) $160,448
2002 ($3,456,703) ($1,706,343) ($5,163,046)
2001 ($2,298,835) ($1,130,022) ($3,428,857)
2000 ($1,530,259) ($449,666) ($1,979,925)
Identifiable assets:
2003 $ 468,314 $37,375 $ 505,689
2002 $ 993,738 $70,890 $ 1,064,628
2001 $1,370,091 $92,373 $ 1,462,464
2000 $4,912,310 $144,737 $ 5,057,047
12. LEASES
The Company leases its corporate office, sales office and
manufacturing facilities under non-cancelable operating leases. Rental
expense for fiscal 2003, 2002 and 2001 was $113,291, $110,578 and
$174,723, respectively. At April 30, 2003, future minimum rental
payments for non-cancelable operating leases are approximately
$119,000 for fiscal 2004, and $18,000 for fiscal 2005.
13. BUSINESS COMBINATION
In November 1997, the Company acquired a nominal interest in
Vitsab, AG ("Vitsag"), a corporation formed under the laws of the
Country of Switzerland, for $300,000. In June 1998, the Company
acquired from Vitsag all of the outstanding shares of Vitsab, a
corporation formed under the laws of the Country of Sweden, and a
wholly owned subsidiary of Vitsag. The acquisition was accomplished by
(i) the issuance to Vitsag of 3,375,734 shares of the Company's
unregistered common stock and 950,000 shares of the common stock of
Vitsab USA, Inc. ("Vitsab USA"), a wholly owned subsidiary of the
Company in the formation stage with 4,750,000 issued shares of common
stock outstanding, and (ii) the assumption by the Company of certain
debt owed by Vitsab to an unrelated company. In an agreement dated
July 18, 1999, the Company purchased its minority interest in Vitsab
USA through the issuance of 527,458 shares of the Company's
unregistered common stock. The transaction has been accounted for as a
purchase and the results of Vitsab's operations have been included in
the accompanying consolidated financial statements since the date of
the acquisition, which was June 30, 1998. The cost of the acquired
enterprise was approximately $2,600,000, including debt assumed of
approximately $1,750,000. At acquisition, the fair value of
liabilities assumed exceeded the fair value of assets acquired, and
the excess plus the cost of acquisition were recorded as goodwill.
During fiscal 2000, the Company adjusted the initial purchase price
allocation that resulted in additional goodwill of approximately
$469,000. Goodwill was being amortized over the average estimated
useful life of 16 years. The Company determined goodwill to be
impaired and recognized an impairment loss of $2,695,689 in the fourth
quarter of fiscal 2002. As of March 15, 2003 , the Company sold all of
its shares in Vitsab Sweden, the successor to Vitsab, to its
Copenpenhagen distributor. See Note 1 for further detail.
14. GOING CONCERN CONSIDERATION
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which contemplates continuation of the Company as a
going concern. During fiscal 2003, the Company produced both income
and working capital from operations; however, fiscal 2002 and 2001
produced substantial operating losses and consumed substantial working
capital as well. Current assets exceed current liabilities at April
30, 2003 by $2,038,504 as compared to current liabilities exceeding
current assets by $390,850 on April 30, 2002. Total liabilities
continue to exceed total assets by $1,500,418 and $2,305,523 as of
April 30, 2003 and 2002, respectively.
35
At present, the cash flow from operations appears adequate to
meet cash requirements and commitments of the Company during the 2004
fiscal year. However, the Company's cash flow from operations is
currently not adequate to retire the principal and accrued interest on
the TI Note when such obligation becomes due on March 10, 2005. A more
detailed description of the TI Note and the consequences to the
Company if it fails to meet its obligations under the TI Note is
provided in Note 5. Mr. Fletcher and Mr. Reid currently serve as the
sole managers of TI.
Realization of a major portion of the assets in the accompanying
balance sheet is dependent upon continued operations of the Company,
which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. The
consolidated financial statements do not reflect any adjustments
related to the recoverability and classification of recorded assets,
or the amounts and classification of liabilities that might be
necessary in the event the Company cannot continue as a going concern.
36
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cox Technologies, Inc.
Belmont, North Carolina
We have audited the accompanying consolidated balance sheets of Cox
Technologies, Inc. and subsidiaries as of April 30, 2003 and 2002 and the
related consolidated statements of income, changes in stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
April 30, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cox Technologies,
Inc. and subsidiaries as of April 30, 2003 and 2002 and the results of their
operations and cash flows for each of the years in the three-year period ended
April 30, 2003, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred substantial losses in the previous
two years and at April 30, 2003 total liabilities exceed total assets by
$1,500,418. In addition, the cash flows from operations is currently not
adequate to retire the Company's debt obligation to Technology Investors, LLC,
which matures on March 10, 2005. Notes 5 and 14 to the consolidated financial
statements discuss management's plans relating to these matters. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
the Company cannot continue in existence.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Gastonia, North Carolina
July 3, 2003
37
Supplementary Data
The information for this item is contained in Note 10 entitled
"SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) on page 33 of
this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
The information for this item is set forth in the sections
entitled "Election of Directors" and "The Board of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in Cox
Technologies' proxy statement dated July 29, 2003, relating to
the August 29, 2003 annual meeting of shareholders, which section
is incorporated herein by reference.
Executive Officers
The information for this item is set forth on page 6 of this
annual report.
ITEM 11. EXECUTIVE COMPENSATION
The information for this item is set forth in the sections
entitled "Executive Compensation," "Performance Graph" and
"Report of Board of Directors on Executive Compensation" in Cox
Technologies' proxy statement dated July 29, 2003, relating to
the August 29, 2003 annual meeting of shareholders, which section
is incorporated herein by reference (specifically excluding
disclosures in such sections relating to Items 402(k) and (1) of
Regulation S-K).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information for this item is set forth in the section
entitled "Common Stock Ownership by Certain Beneficial Owners and
Management" in Cox Technologies' proxy statement dated July 29,
2003, relating to the August 29, 2003 annual meeting of
shareholders, which section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information for this item is set forth on page 31 of
this annual report and in the sections entitled "Election of
Directors" and "Certain Relationships and Related Transactions"
in Cox Technologies' proxy statement dated July 29, 2003,
relating to the August 29, 2003 annual meeting of shareholders,
which sections are incorporated herein by reference.
ITEM 14. INTERNAL CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of a
date within 90 days prior to the filing of this report, an
evaluation of the effectiveness of the Company's disclosure
controls and procedures was carried out under the supervision and
with the participation of Brian D. Fletcher and Kurt C. Reid, the
Company's Co-Chief Executive Officers, and John R. Stewart, the
Company's Chief Financial Officer. Based upon that evaluation,
the Chief Executive Officers and Chief Financial Officer
concluded that the Company's disclosure controls and procedures
were effective.
38
(b) Changes to Internal Controls. There were no significant
changes to the Company's internal controls or in other factors
that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K Page
1. Financial statements -
Consolidated Balance Sheets at April 30, 2003 and 2002 18
Consolidated Statements of Income for the
Fiscal Years Ended April 30, 2003, 2002 and 2001 19
Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the Fiscal Years Ended
April 30, 2003, 2002 and 2001 20
Consolidated Statements of Cash Flows for the
Fiscal Years Ended April 30, 2003, 2002 and 2001 21
Notes to Consolidated Financial Statements for the
Fiscal Years Ended April 30, 2003, 2002 and 2001 22-36
Independent Auditors' Report 37
2. Financial statement schedules -
The following financial statement schedules
are included herein:
Supplemental Schedules:
Independent Auditors' Report on Financial
Statement Schedules 40
Schedule II - Valuation and Qualifying Accounts
for the Fiscal Years Ended April 30, 2003,
2002 and 2001 41
All other financial statement schedules are omitted as not
applicable, not required, or the required information is included
in the consolidated financial statements and notes thereto.
3. Exhibits -
23.1 - Consent of Independent Public Accountants A-1
Certifications A-2
99.1 - Certificate of Co-Chief Executive Officers A-5
99.2 - Certificate of Chief Financial Officer A-6
4. Reports on Form 8-K -
The registrant filed an 8-K on March 19, 2003 that included a
press release reporting that, at a special meeting of
shareholders held on March 12, 2003, the registrant's
shareholders approved the registrant's issuance of 12,500,000
shares of its common stock to Technology Investors, LLC, an
affiliate of Brian D. Fletcher and Kurt C. Reid, for an
aggregate purchase price of $750,000, pursuant to a Stock
Purchase Agreement dated as of January 20, 2003.
39
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Stockholders
Cox Technologies, Inc.
Belmont, North Carolina
Under date of July 3, 2003, we reported on the consolidated balance sheets of
Cox Technologies, Inc. and subsidiaries as of April 30, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity (deficit), and
cash flows for each of the three years in the three-year period ended April 30,
2003, which are included in this annual report on Form 10-K. In connection with
our audit of the aforementioned consolidated financial statements, we also
audited the related accompanying consolidated financial statement schedules.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Our report on the consolidated financial statements referred to factors that
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statement schedules do not include any
adjustments that might be necessary if the Company cannot continue in existence.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Gastonia, North Carolina
July 3, 2003
40
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additions
-----------------------------
Charged to Other
Balance at Charged to Other Changes - Add Balance
Fiscal Beginning of Costs and Accounts - (Deduct) - at End of
Year Description Fiscal Year Expenses Describe (1) Describe (2) Fiscal Year
- -------------------------------------------------------------------------------------------------------
2001 Allowance for
doubtful accounts $ 28,524 $ 33,286 $ -- $ -- $ 61,810
Impairment loss -- 3,062,196 -- -- 3,062,196
Deferred tax assets 2,890,000 -- 2,504,000 5,394,000
----------- ----------- ----------- ----------- -----------
$ 2,918,524 $ 3,095,482 $ 2,504,000 $ -- $ 8,518,006
=========== =========== =========== =========== ===========
2002 Allowance for
doubtful accounts $ 61,810 $ 23,898 $ -- ($ 20,708) $ 65,000
Impairment loss 3,062,196 3,537,597 -- -- 6,599,793
Deferred tax assets 5,394,000 -- (494,000) -- 4,900,000
----------- ----------- ----------- ----------- -----------
$ 8,518,006 $ 3,561,495 ($ 494,000) ($ 20,708) $11,564,793
=========== =========== =========== =========== ===========
2003 Allowance for
doubtful accounts $ 65,000 $ 9,154 $ -- ($ 28,404) $ 45,750
Inventory reserve -- 50,000 -- -- 50,000
Impairment loss 6,599,793 -- -- (3,062,196) 3,537,597
Deferred tax assets 4,900,000 -- (633,000) -- 4,267,000
----------- ----------- ----------- ----------- -----------
$11,564,793 $ 59,154 ($ 633,000) ($3,090,600) $ 7,900,347
=========== =========== =========== =========== ===========
(1) Deferred tax valuation allowance offsets gross deferred tax assets.
(2) Write-off of accounts considered to be uncollectible and realization of
impairment loss.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COX TECHNOLOGIES, INC.
(Registrant)
July 29, 2003 /s/ Brian D. Fletcher /s/ Kurt C. Reid
--------------------------- -------------------------------
Brian D. Fletcher Kurt C. Reid
Co-Chief Executive Officer Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on July 29, 2003.
/s/ Brian D. Fletcher /s/ Kurt C. Reid
- ------------------------------------ ------------------------------
Brian D. Fletcher Kurt C. Reid
Co-Chief Executive Officer Co-Chief Executive Officer
/s/ John R. Stewart
- ----------------------------
John R. Stewart
Chief Financial Officer
and Secretary
(Principal financial and
accounting officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on July 29, 2003.
/s/ James L. Cox
---------------------------
James L. Cox
Chairman and President and Director
/s/ Brian D. Fletcher
---------------------------
Brian D. Fletcher
Co-Chief Executive Officer and Director
/s/ Kurt C. Reid
---------------------------
Kurt C. Reid
Co-Chief Executive Officer and Director
42
Certifications
I, Brian D. Fletcher, certify that:
1. I have reviewed this annual report on Form 10-K of Cox
Technologies, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual report;
4. The registrant's other certifying officers 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 annual 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 annual report (the "Evaluation
Date"); and
c) presented in this annual 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 officers 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 officers and I have indicated
in this annual 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: 7-29-03 /s/ Brian D Fletcher
----------- -----------------------------------
Brian D. Fletcher
Co-Chief Executive Officer
A-2
Certifications
I, Kurt C. Reid, certify that:
1. I have reviewed this annual report on Form 10-K of Cox
Technologies, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual report;
4. The registrant's other certifying officers 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 annual 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 annual report (the "Evaluation
Date"); and
c) presented in this annual 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 officers 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 officers and I have indicated
in this annual 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: 7-29-03 /s/ Kurt C. Reid
----------- ------------------------------
Kurt C. Reid
Co-Chief Executive Officer
A-3
Certifications
I, John R. Stewart, certify that:
1. I have reviewed this annual report on Form 10-K of Cox
Technologies, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual report;
4. The registrant's other certifying officers 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 annual 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 annual report (the "Evaluation
Date"); and
c) presented in this annual 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 officers 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 officers and I have indicated
in this annual 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: 7-29-03 /s/ John R. Stewart
----------- ------------------------
John R. Stewart
Chief Financial Officer
and Secretary
A-4