SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ........... to ............
Commission file number 0-8006
COX TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 86-0220617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
69 McADENVILLE ROAD
BELMONT, NORTH CAROLINA 28012-2434
(Address of principal executive offices) (Zip Code)
(704) 825-8146
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the Registrant is an accelerated filer.
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, no par value, outstanding
at December 12, 2002..................................................38,331,825
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
FACE SHEET 1
TABLE OF CONTENTS 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
October 31, 2003 and April 30, 2002 3
Consolidated Statements of Income (Unaudited)
Three Months and Six Months Ended October 31,
2003 and 2002 4 - 5
Consolidated Statements of Changes in Stockholders'
Equity (Unaudited)
Six Months Ended October 31, 2003 and 2002 6
Consolidated Statements of Cash Flows (Unaudited)
Three Months and Six Months Ended October 31,
2003 and 2002 7 - 8
Notes to Consolidated Financial Statements 9 - 12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 12 - 15
Item 3. Quantitative and Qualitative Disclosure About Market Risks 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION AND SIGNATURES
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
1. Exhibits
31.1 - Certification by Co-Chief Executive Officer 19
31.2 - Certification by Co-Chief Executive Officer 20
31.3 - Certification by Chief Financial Officer 21
32.1 - Certification by Co-Chief Executive Officers 22
32.2 - Certification by Chief Financial Officer 23
2. Report on Form 8-K 17
Signatures 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 2003 April 30, 2003
---------------- --------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 620,188 $ 572,149
Accounts receivable, less allowance
for doubtful accounts 1,142,656 964,078
Inventory, net 1,680,813 1,182,270
Notes receivable -- 75,000
Prepaid expenses 61,087 17,733
---------- ----------
TOTAL CURRENT ASSETS 3,504,744 2,811,230
Property and equipment, net 376,637 505,688
Due from officer, net -- 8,928
Other assets 74,503 71,510
Patents 95,704 114,845
---------- ----------
TOTAL ASSETS $4,051,588 $3,512,201
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 512,451 $ 291,948
Current portion of long-term debt 368,949 530,778
---------- ----------
TOTAL CURRENT LIABILITIES 881,400 822,726
OTHER LIABILITIES:
Long-term debt 443,197 862,393
Long-term debt - related parties 3,541,151 3,327,500
---------- ----------
TOTAL OTHER LIABILITIES 3,984,348 4,189,893
---------- ----------
TOTAL LIABILITIES 4,865,748 5,012,619
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized
100,000,000 shares; issued and outstanding;
38,331,825 shares at October 31, 2003 and
38,339,094 at April 30, 2003 23,253,876 23,252,804
Accumulated other comprehensive income (loss) (41,781) (32,591)
Accumulated deficit (24,000,454) (24,696,452)
Less - Notes receivable for common stock (25,801) (24,179)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (814,160) (1,500,418)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,051,588 $ 3,512,201
============ ============
See Notes to Consolidated Financial Statements.
3
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended October 31,
------------------------------
2003 2002
---- ----
REVENUE:
Sales $ 2,699,143 $ 2,040,459
------------ ------------
COSTS AND EXPENSES:
Cost of sales 1,360,335 1,171,233
General and administrative 463,312 606,611
Selling 291,531 301,601
Depreciation 73,535 78,344
Amortization of patents 9,571 10,994
------------ ------------
TOTAL COSTS AND EXPENSES 2,198,284 2,168,783
------------ ------------
INCOME (LOSS) FROM OPERATIONS 500,859 (128,324)
------------ ------------
OTHER INCOME (EXPENSE):
Other income 9,155 36,202
Interest expense (141,342) (117,720)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (132,187) (81,518)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 368,672 (209,842)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ 368,672 ($ 209,842)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ .01 ($ .01)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 38,336,671 25,885,423
See Notes to Consolidated Financial Statements.
4
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended October 31,
----------------------------
2003 2002
---- ----
REVENUE:
Sales $ 5,140,083 $ 4,306,366
------------ ------------
COSTS AND EXPENSES:
Cost of sales 2,590,624 2,446,201
General and administrative 920,680 1,123,488
Selling 555,467 538,670
Depreciation 142,727 155,865
Amortization of patents 19,141
------------ ------------
TOTAL COSTS AND EXPENSES 4,228,639 4,286,212
------------ ------------
INCOME FROM OPERATIONS 911,444 20,154
------------ ------------
OTHER INCOME (EXPENSE):
Other income 25,699 94,757
Interest expense (241,145) (243,073)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (215,446) (148,316)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 695,998 (128,162)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ 695,998 ($ 128,162)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ .02 ($ .00)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 38,337,883 25,858,686
See Notes to Consolidated Financial Statements.
5
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated Subscribed
Other Stock
Common Comprehensive Accumulated Less Note
Stock Income (Loss) Deficit Receivable Total
----- ------------- ------- ---------- -----
Balance, April 30, 2002 $ 22,593,724 ($ 68,168) ($24,806,900) ($ 24,179) ($ 2,305,523)
Comprehensive income (loss) -
Net income (loss) -- -- (128,162) -- (128,162)
Foreign currency
translation adjustment -- 18,477 -- -- 18,477
Total comprehensive
income (loss) -- -- -- -- (109,685)
------------
Common stock issued 13,404 -- -- -- 13,404
Change in subscribed stock, net -- -- -- (449) (449)
------------ ------------ ------------ ------------ ------------
Balance, October 31, 2002 $ 22,607,128 ($ 49,691) ($24,935,062) ($ 24,628) ($ 2,402,253)
============ ============ ============ ============ ============
Balance, April 30, 2003 $ 23,252,804 ($ 32,591) ($24,696,452) ($ 24,179) ($ 1,500,418)
Comprehensive income -
Net income (loss) -- -- 695,998 -- 695,998
Foreign currency
translation adjustment -- (9,190) -- -- (9,190)
Total comprehensive
income (loss) -- -- -- -- 686,808
Common stock issued 1,072 -- -- 1,072
Change in subscribed stock, net -- -- -- (1,622) (1,622)
------------ ------------ ------------ ------------ ------------
Balance, October 31, 2003 $ 23,253,876 ($ 41,781) ($24,000,454) ($ 25,801) ($ 814,160)
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
6
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended October 31,
------------------------------
2003 2002
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 368,672 ($209,842)
Adjustments to reconcile net income (loss) to
net cash used byoperating activities:
Depreciation 73,535 78,344
Amortization of patents 9,571 10,994
Decrease in allowance for doubtful accounts -- (5,634)
Other (3,202) 3,300
Decrease in valuation adjustment 8,928 10,713
--------- ---------
457,504 (112,125)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable (204,537) 186,968
Inventory (380,024) (436)
Prepaid expenses (43,621) 2,556
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 62,940 (157,420)
--------- ---------
CASH USED IN OPERATING ACTIVITIES (107,738) (180,457)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,888) (22,895)
Proceeds from sale of property held for sale -- 100,000
--------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (11,888) 77,105
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 1,072 1,130
Increase (decrease) in debt 28,062 (80,503)
Subscriptions receivable -- (426)
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 29,134 (79,799)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5,467) 6,440
--------- ---------
NET INCREASE (DECREASE) IN CASH (95,959) 23,289
CASH AND CASH EQUIVALENTS, beginning of period 716,147 139,186
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 620,188 $ 162,475
========= =========
Supplemental Cash Flow Information
Interest paid $ 11,125 $ 41,977
Income taxes paid $ -- $ --
Note received resulting from sale of property held for sale $ -- $ 175,000
See Notes to Consolidated Financial Statements.
7
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended October 31,
----------------------------
2003 2002
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 695,998 ($128,162)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation 142,727 155,865
Amortization of patents 19,141 21,988
Decrease in allowance for doubtful accounts (750) (5,318)
Other (2,993) (2,355)
Decrease in valuation adjustment 8,928 30,354
--------- ---------
863,051 72,372
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable (177,828) 252,640
Inventory (498,543) (13,289)
Prepaid expenses (43,355) 23,656
Notes receivable 75,000 --
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 220,503 (192,370)
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 438,828 43,009
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,675) (61,664)
Proceeds from sale of property held for sale -- 100,000
--------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (13,675) 38,336
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 1,072 13,404
Repayment of debt (368,996) (366,344)
Subscriptions receivable -- (449)
--------- ---------
CASH USED IN FINANCING ACTIVITIES (367,924) (353,389)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (9,190) 18,477
--------- ---------
NET INCREASE (DECREASE) IN CASH 48,039 (53,567)
CASH AND CASH EQUIVALENTS, beginning of period 572,149 216,042
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 620,188 $ 162,475
========= =========
Supplemental Cash Flow Information
Interest paid $ 27,785 $ 91,705
Income taxes paid $ -- $ --
Note received resulting from sale of property held for sale $ -- $ 175,000
See Notes to Consolidated Financial Statements.
8
COX TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Cox Technologies, Inc., and Cox Recorders Australia, Ltd., Pty., an
Australian distribution company 95% owned by Cox Technologies, Inc.
(collectively "the Company"), engage in the business of producing and
distributing temperature recording instruments, both in the United States and
internationally.
The accompanying unaudited consolidated financial statements and notes
should be read in conjunction with the audited consolidated financial statements
and notes included in the Cox Technologies, Inc. 2003 Annual Report on Form
10-K. In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair statement of the results of
operations for the interim periods have been recorded. Certain amounts
previously reported have been reclassified to conform with the current period's
presentation.
The accompanying unaudited condensed consolidated financial statements have
been prepared on a going concern basis, which contemplates continuity of
operations, realization of assets, and liquidation of liabilities and
commitments in the normal course of business. On December 12, 2003, the Company
entered into an Asset Purchase Agreement with Sensitech Inc. and its wholly
owned subsidiary Cox Acquisition Corp., pursuant to which Sensitech will acquire
substantially all the assets and business of the Company and, shortly
thereafter, the Company will wind up its operating business, effect a complete
liquidation and dissolution of the Company, and distribute any remaining cash to
its shareholders (see details in Note 6 of the Notes to Consolidated Financial
Statements (Unaudited)). Both the sale of assets and the liquidation and
dissolution of the Company are subject to approval by the Company's shareholders
and other conditions. There can be no assurance that these conditions will be
met and the sale of assets and dissolution consummated. The accompanying
unaudited condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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.
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. At October 31, 2003, 6,600,000
options under the Executive Plan are outstanding. 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.
9
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. For the periods ended October 31, 2003 and 2002, there was no stock-based
compensation expense recorded. 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 periods
ended October 31, 2003 and 2002.
October 31, 2003 October 31, 2002
---------------- ----------------
Net income (loss), as reported $ 695,998 $(128,162)
Proforma stock-based compensation - net of tax (131,987) (124,183)
--------- ---------
Net income (loss), proforma $ 564,011 $(352,345)
========= =========
Basic and diluted EPS, as reported $ .02 $ (.01)
Basic and diluted EPS, proforma $ .01 $ (.02)
Restricted stock was issued out of the 2000 Plan to consultants and
employees in lieu of cash payments totaling zero and 30,000 shares, respectively
for the six months ended October 31, 2003 and 2002. At October 31, 2003, there
were 2,869,472 shares reserved for issuance under the 2000 Plan.
Accounts Receivable
The balance in the allowance for doubtful accounts is $46,668 and $45,750
at October 31, 2003 and April 30, 2003, respectively.
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
has adopted the provisions of SFAS No. 143 effective May 1, 2003, and the
adoption of the provisions of SFAS No. 143 did 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 has adopted the
provisions of SFAS No. 150 effective August 1, 2003, and the adoption of the
provisions of SFAS No. 150 did not have a significant effect on its financial
position or results of operations.
2. INVENTORY
Inventory at October 31, 2003 and April 30, 2003 consists of the following:
October 31, 2003 April 30, 2003
Raw materials $ 410,333 $ 328,744
Work-in-process 362,247 103,059
Finished goods 958,233 800,467
---------- ----------
1,730,813 1,232,270
Less reserve 50,000 50,000
---------- ----------
Total $1,680,813 $1,182,270
========== ==========
3. DEBT
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. As of October 31,
2003, Centura has waived the requirement of the Company to produce a borrowing
base calculation on a monthly basis. The Company's qualifying accounts
receivable and inventory are adequate to support the outstanding loan at October
31, 2003.
10
4. 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 Brian Fletcher and Kurt Reid, who are officers 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 15,765,887 shares of the Company's Common Stock, or
approximately 38% of the Company's issued and outstanding common stock. These
figures include the 2,832,921 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 are exercisable in varying increments
through September 9, 2009.
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 October 31, 2003, the principal and accrued interest of $3,541,151 could
be converted into 2,832,921shares 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.
See Note 5 below 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, whereby 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.
11
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. At
October 31, 2003, the Company has paid and accrued bonus compensation to Mr.
Fletcher and Mr. Reid totaling $40,000 each.
5. LIQUIDITY AND CAPITAL RESOURCES
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. Please refer to Note 6 of the Notes to Consolidated Financial
Statements (Unaudited) concerning the proposed asset sale and plan of
liquidation and dissolution of the Company.
6. PROPOSED ASSET SALE AND PLAN OF LIQUIDATION AND DISSOLUTION OF THE COMPANY
On December 12, 2003, the Company entered into an Asset Purchase Agreement
with Sensitech Inc. and its wholly owned subsidiary Cox Acquisition Corp.,
pursuant to which Sensitech will acquire substantially all the assets and
business of the Company. Subject to the terms and conditions of the Asset
Purchase Agreement, Sensitech will pay approximately $10,532,000 to the Company
in exchange for substantially all of the assets of the Company exclusive of the
Vitsab product line, cash and certain furniture and equipment. Of the purchase
price, $10,240,000 is payable in cash with the remainder being paid through the
assumption of an estimated $292,000 in accounts payable. The purchase price may
be adjusted based on changes in the amount of receivables, inventory, payables,
product claims, customer commitments and claims for indemnification.
In connection with the negotiation of the asset sale, the Company has
agreed to continue manufacturing products for Sensitech during a transition
period to end no later than June 1, 2004. After the closing of the asset sale
and following expiration of those manufacturing obligations, the Company's
intention is to wind up its operating business, effect a complete liquidation
and dissolution of the Company, and distribute any remaining cash to its
shareholders.
Both the sale of assets and the liquidation and dissolution of the Company
are subject to approval by the Company's shareholders. The Board of Directors
has called for a special meeting of shareholders to consider the approval of
this sale of asset and also to consider approval of a plan whereby the Company
will convert its remaining assets to cash, pay all of its debts and distribute
the remaining net proceeds to the shareholders. Subject to the approval of
shareholders, it is anticipated that the sale will be consummated in the first
calendar quarter of 2004 and that a final distribution of cash to shareholders
will occur in the third or fourth calendar quarter of 2004.
ITEM 2. Management's Discussion And Analysis of Financial Condition
And Results of Operations
Recent Major Development - Proposed Sale of Assets and Plan of Liquidation
On December 12, 2003, the Company entered into an Asset Purchase Agreement
with Sensitech Inc. and its wholly owned subsidiary Cox Acquisition Corp.,
pursuant to which Sensitech will acquire substantially all the assets and
business of the Company. Subject to the terms and conditions of the Asset
Purchase Agreement, Sensitech will pay approximately $10,532,000 to the Company
in exchange for substantially all of the assets of the Company exclusive of the
Vitsab product line, cash and certain furniture and equipment. Of the purchase
price, $10,240,000 is payable in cash with the remainder
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being paid through the assumption of an estimated $292,000 in accounts payable.
The purchase price may be adjusted based on changes in the amount of
receivables, inventory, payables, product claims, customer commitments and
claims for indemnification.
In connection with the negotiation of the asset sale, the Company has
agreed to continue manufacturing products for Sensitech during a transition
period to end no later than June 1, 2004. After the closing of the asset sale
and following expiration of those manufacturing obligations, the Company's
intention is to wind up its operating business, effect a complete liquidation
and dissolution of the Company, and distribute any remaining cash to its
shareholders.
Both the sale of assets and the liquidation and dissolution of the Company
are subject to approval by the Company's shareholders. The Board of Directors
has called for a special meeting of shareholders to consider the approval of
this sale of asset and also to consider approval of a plan whereby the Company
will convert its remaining assets to cash, pay all of its debts and distribute
the remaining net proceeds to the shareholders. Subject to the approval of
shareholders, it is anticipated that the sale will be consummated in the first
calendar quarter of 2004 and that a final distribution of cash to shareholders
will occur in the third or fourth calendar quarter of 2004.
Comparison of Operations for 2004 and 2003
The Company operates in one reporting segment that involves the production
and distribution of temperature recording and monitoring devices, including the
Cox1 graphic temperature recorder, DataSource(R) and Tracer(R) electronic data
loggers, Vitsab(R) visual indicator labels, and temperature probes and related
products.
Revenues from sales increased $658,684, or 32% and $833,717, or 19% for the
three and six months ended October 31, 2003 as compared to the same periods as
last year. The revenues from sales of graphic recorders represented $1,657,113
and $3,095,172 or 61% and 60%, for the three and six months ended October 31,
2003 of total revenues as compared to $1,435,708 and $3,087,023, or 70% and 72%,
in the same periods last year. The revenue from sales of electronic data loggers
represented $924,973 and $1,763,443, or 34% and 34%, for the three and six
months periods ended October 31, 2003 of total revenues as compared to $464,665
and $957,051, or 23% and 22%, in the same periods last year. The revenue from
sales of Vitsab(R) products represented $67,833 and $175,222 or 3% and 3%, for
the three and six months ended October 31, 2003 of total revenues as compared to
$69,530 and $114,734 or 3%, in the same periods last year. The revenues from
sales of temperature probes and other products represented $49,224 and $106,246,
or 2% and 2%, for the three and six months ended October 31, 2003 of total
revenues as compared to $39,791 and $70,326, or 2%, in the same periods last
year. Sales of Cox1 units increased 25% and 6% for the three and six months
ended October 31, 2003 as compared to the same periods last year and the average
sales price decreased 7% for the same periods. Sales of DataSource(R) units
increased 118% and 96% for the three and six months ended October 31, 2003 as
compared to the same periods last year and the average sales price decreased 1%
and less than 1% for the same periods. Sales of Tracer(R) units increased 36%
for both the three and six months ended October 31, 2003 as compared to the same
periods last year and the average sales price increased 19% and 17% for the same
periods. Vitsab(R) unit sales increased 69% and 121% for the three and six
months ended October 31, 2003 as compared to the same periods last year and the
average sales price decreased 39% and 30% for the same periods. Management
believes that the Company will continue to experience a decrease in average
sales price for all products due to competitive price pressure, but expects
units sales for its primary products to remain constant, or in the case of
electronic data loggers, to increase in future periods. Historically, the
Company has had a broad base of customers in a highly competitive market;
however, the Company finds that it's growth in revenues is developing from a
smaller base of customers.
Cost of sales increased $189,102 and $144,423, or 16% and 6%, respectively,
for the three and six months ended October 31, 2003 as compared to the same
periods last year. The increases for both the second quarter and the six months
of fiscal 2004 were principally driven by increases in revenue over the same
periods last year and to increases in the expenses associated with products
returned for retriever fees and rebates, however, cost of sales improved as a
percentage of revenues. For the second quarter of 2004, cost of sales as a
percentage of revenues decreased to 50% as compared to 57% for the same quarter
last year and for the six month period ended October 31, 2003 cost of sales as a
percentage of revenues decreased to 50% as compared to 57% for the same period
last year. These improvements are attributable to the Company's efforts to hold
down labor and supply costs and to a reduction in the price that the company
pays for raw material components.
The Company contracts with a third party to manufacture and assemble
certain base versions of the Cox1 units at an offshore location. During the
first 6 months of fiscal 2004, this location supplied approximately 54% of the
total number of units being utilized by the Company. Because of this
manufacturing arrangement, the Company has realized significant cost savings on
units manufactured in both the offshore and Belmont, North Carolina facilities.
The Company plans to continue assembling special use Cox1 units in the Belmont
facility. The Belmont facility will also continue to manufacture and
13
assemble a certain percentage of the base Cox1 units. If necessary, the
production capabilities of the Belmont facility can be expanded to meet the
total demand for all Cox1 units. The Company has identified certain risks and
uncertainties that are associated with offshore production that include, but are
not limited to, political issues, transportation risks and the availability of
raw materials. The Company will not experience foreign currency exchange risks
as all transactions are denominated in U.S. dollars.
General and administrative expenses for the three and six months ended
October 31, 2003 decreased $143,299 and $202,808 or 24% and 18%, respectively,
as compared to the same periods last year. The decrease in both periods of
fiscal 2004 as compared to the same periods a year ago was due principally to
lower salary and payroll taxes, equipment rental expense, computer system costs
and the absence of expenses associated with the Company's former oil and gas
operations, partially offset by increases in bad debt expense, temporary labor
costs, insurance expenses and legal expenses.
Selling expense decreased $10,070 and $16,797, or 3% respectively, for the
three and six months ended October 31, 2003 as compared to the same periods last
year. The decrease in the both periods was principally due to lower outside
services expenses and to a lesser extent by decreased travel and trade show
expenses, partially offset by an increase in salary and commission expenses.
Depreciation expense decreased $4,809 and $13,138, or 6% and 8%,
respectively, for the three and six months ended October 31, 2003 as compared to
the same periods. The decreases in expense in fiscal 2004 as compared to the
same periods are principally to the some assets of the Company becoming fully
depreciated.
Amortization of patents decreased $1,423 and $2,847, or 13%, for the three
and six-months ended October 31, 2003 as compared to the same periods last year.
Other income decreased $27,047 and $69,058, or 75% and 73%, respectively,
for the three and six months ended October 31, 2003 as compared to the same
period last year. This change in both periods was primarily related to the
decrease in the amount of the payments received as a result of the revision in
the agreement between the Company and its Copenhagen distributor for an option
to purchase all of the shares and assets of the company's wholly owned
subsidiary, Vitsab Sweden, AB. Also, the Company realized a gain on disposal of
certain oil and gas assets in the second quarter of fiscal 2003 and there have
been no such transactions in the second quarter of fiscal 2004.
Interest expense increased $23,622, or 20%, for the three ended October 31,
2003 as compared to the same period last year and decrease $1,928, or less than
1%, for the six months ended October 31, 2003 as compared to the same period
last year. The significant cause for the increased expense in the second quarter
and for only a small decrease in expense for the six months was an adjustment
resulting from an error in the calculation of accrued interest on the TI Note,
due March 10, 2005 in the amount of $47,276. Without this adjustment, both the
second quarter and the six month interest expense would have been lower than the
same periods last year because of the decreases in the interest rate applied to
the debt and decreases in the principal balance.
The increase in accounts receivable of $178,578, or 19%, is primarily due
to the increased sales in the first half of fiscal 2004.
The increase in inventory of $498,843, or 42%, reflects the Company's plan
to be able to meet future demand for our products on a timely basis.
The increase in prepaid expenses of $43,354 is due to the increase premium
costs of property and casualty and directors and officers coverage at the
renewal of the policies.
The decrease in property and equipment of $129,051, is primarily due to
depreciation, partially offset by the purchase of machinery and equipment.
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. Please refer to "Recent
Major Development - Proposed Asset Sale and Plan of Liquidation" concerning the
proposed asset sale and plan of liquidation and dissolution of the Company. If
14
the proposed asset sale and liquidation and dissolution of the Company are
approved and effected as currently planned, it is anticipated the Company would
have sufficient resources to satisfy existing obligations and distribute
approximately $0.15 to $0.19 per share to shareholders upon liquidation.
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 October 31, 2003, the principal and accrued interest of $3,541,151 could
be converted into 2,832,921 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 May 19, 2003, the Company executed a note modification agreement with
Centura Bank 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. As of October 31, 2003, Centura has waived the requirement of the Company
to produce a borrowing base calculation on a monthly basis. The Company's
qualifying accounts receivable and inventory are adequate to support the
outstanding loan at October 31, 2003.
Forward-Looking Statements
Statements contained in this document, which are not historical in nature,
are forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements give our current expectations of
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such
as "estimate," "intend," "plan," and other words and terms of similar meaning in
connection with any discussion of future operating and financial performance.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements. Cox Technologies undertakes no obligation to update forward-looking
statements to reflect events or circumstances after the date hereof. Such risks
and uncertainties with respect to Cox Technologies include, but are not limited
to, its ability to successfully implement internal performance goals,
performance issues with suppliers, regulatory issues, competition, the effect of
weather on customers, exposure to environmental issues and liabilities,
variations in material costs and general and specific economic conditions, the
risk that the sale of assets to Sensitech and/or the dissolution may not be
consummated in a timely manner, on the terms described above, or at all; the
discretion of the Cox Technologies' shareholders in approving the sale and/or
the dissolution; changes in the value of the assets and liabilities transferred
to Sensitech and retained by Cox Technologies; performance of the business of
Cox Technologies prior to the closing of the sale; delays in distributions to
Cox Technologies shareholders and reduced distributions due to unexpected
liabilities and the inability to settle obligations to creditors; delays in
distributions due to the timing of sales of non-cash assets, claim settlements
with creditors and the amounts paid out under warranty claims. From time to
time, Cox Technologies may include forward-looking statements in oral statements
or other written documents.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
There was no material change in the Company's market risk during the
quarter ended October 31, 2003. For additional information on market risk, refer
to the "Quantitative and Qualitative Disclosure About Market Risk" section of
the Company's Annual Report on Form 10-K for the year ended April 30, 2003.
Item 4. DISCLOSURE CONTROLS AND PROCEDURES
The Co-Chief Executive Officers and the Chief Financial Officer of the
Company have concluded, based on their evaluation as of a date within 90 days
prior to the date of the filing of this Report, that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in the reports filed or submitted by it under the
Securities Act of 1934, as amended, are recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and include controls and procedures designed to
ensure that information required to be disclosed by the Company in such reports
is accumulated and communicated to the Company's management, including the
Co-Chief Executive Officers and the Chief Financial Officer of the Company, as
appropriate to allow timely decisions regarding required disclosures.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of such evaluation.
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PART II. OTHER INFORMATION AND SIGNATURE
Item 2. Changes in Securities and Use of Proceeds
(a) On October 1, 2003 the Company issued 148,148 unregistered common
shares to Mr. Peter H. Ronnow as payment of $10,000 of
compensation due Mr. Ronnow under the employment agreement dated
March 1, 2000 and amended August 17, 2000 between him and the
Company. Exemption from registration is claimed under Section
4(2) of the Securities Act of 1933, and /or Regulation S
promulgated under the Securities Act, as the transaction was an
isolated transaction with a single purchaser/offeree who is a
citizen and resident of Sweden.
(b) On October 20, 2003 the Company canceled and returned to
authorized and unissued, 155,417 common shares that were returned
to the Company as part of the distribution of the Company's
holding of Vitsag, AG. These shares represented the final
distribution of an ownership position, through Dr. James L. Cox,
in the Vitsag , AG company in Sweden. The return of these shares
was used to satisfy the accounts receivable from officer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 - Certification by Co-Chief Executive Officer
31.2 - Certification by Co-Chief Executive Officer
31.3 - Certification by Chief Financial Officer
32.1 - Certificate of Co-Chief Executive Officers
32.2 - Certificate of Chief Financial Officer
(b) Reports on Form 8-K:
The Company filed on September 16, 2003 a Current Report on Form
8-K disclosing the first quarter fiscal 2004 financial results.
The Company filed on December 19, 2003 a Current Report on Form
8-K disclosing the offer to purchase substantially all of the
assets of the Company by Sensitech Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COX TECHNOLOGIES, INC.
(Registrant)
Date: 12-22-03 /s/ Brian D Fletcher
-------- ------------------------
Brian D. Fletcher
Co-Chief Executive Officer
Date: 12-22-03 /s/ Kurt C. Reid
-------- ------------------------
Kurt C. Reid
Co-Chief Executive Officer
Date: 12-22-03 /s/ John R. Stewart
-------- -------------------------
John R. Stewart
Chief Financial Officer
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