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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-8006
COX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 86-0220617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
69 MCADENVILLE ROAD
BELMONT, NORTH CAROLINA 28012-2434
(Address of principal executive offices) (Zip Code)
(704) 825-8146
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, no par value, outstanding at
December 11, 2001.....................................................25,601,694
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
FACE SHEET 1
INDEX 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
October 31, 2001 and April 30, 2001 3
Consolidated Statements of Income (Unaudited)
Three Months and Six Months Ended October 31, 2001 and 2000 4-5
Consolidated Statements of Changes in
Stockholders' Equity (Unaudited)
Six Months Ended October 31, 2001 and 2000 6
Consolidated Statements of Cash Flows (Unaudited)
Three Months and Six Months Ended October 31, 2001 and 2000 7-8
Notes to Consolidated Financial Statements 9-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11-14
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
SIGNATURES 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
October 31, 2001 April 30, 2001
---------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,496 $ 43,620
Accounts receivable, less allowance for doubtful
accounts of $61,810 at October 31, 2001 and
at April 30, 2001 1,155,823 1,141,308
Inventory 1,725,527 1,929,166
Notes receivable - current portion 19,230 19,230
Deposits 882,148 813,305
Prepaid expenses 22,046 30,493
------------ ------------
TOTAL CURRENT ASSETS 3,837,270 3,977,122
Property and equipment, net 1,016,124 1,162,464
Property held for sale, net 300,000 300,000
Goodwill 2,866,094 2,976,622
Due from officer, net 51,781 53,566
Patents 164,091 184,415
------------ ------------
TOTAL ASSETS $ 8,235,360 $ 8,654,189
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 698,802 $ 602,778
Short-term debt 1,388,109 1,211,452
Current portion of long-term debt 1,160,937 1,221,560
------------ ------------
TOTAL CURRENT LIABILITIES 3,247,848 3,035,790
Long-term debt 3,115,637 3,090,044
------------ ------------
TOTAL LIABILITIES 6,363,485 6,125,834
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized
100,000,000 shares; issued and outstanding;
25,489,861 shares at October 31, 2001 and
24,904,823 shares at April 30, 2001 21,852,489 21,267,448
Paid in capital 663,132 1,044,473
Accumulated other comprehensive income (loss) (91,386) (108,581)
Accumulated deficit (20,527,214) (19,643,854)
Less - Notes receivable for common stock 25,146 31,131
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,871,875 2,528,355
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,235,360 $ 8,654,189
============ ============
See Notes to Consolidated Financial Statements.
3
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended October 31,
------------------------------
2001 2000
------------ ------------
REVENUE:
Sales $ 2,213,633 $ 2,708,379
------------ ------------
COSTS AND EXPENSES:
Cost of sales 1,247,633 1,345,864
General and administrative 737,951 916,327
Selling 337,318 459,080
Research and development -- 174,096
Depreciation and depletion 87,502 32,139
Amortization of patents and goodwill 63,749 53,000
------------ ------------
TOTAL COSTS AND EXPENSES 2,474,153 2,980,506
------------ ------------
INCOME (LOSS) FROM OPERATIONS (260,520) (272,127)
------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 34,310 607
Interest expense (114,506) (105,299)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (80,196) (104,692)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (340,716) (376,819)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ (340,716) $ (376,819)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ (.01) $ (.02)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 25,191,936 24,558,538
See Notes to Consolidated Financial Statements.
4
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended October 31,
----------------------------
2001 2000
------------ ------------
REVENUE:
Sales $ 4,422,288 $ 5,132,160
------------ ------------
COSTS AND EXPENSES:
Cost of sales 2,790,677 2,533,297
General and administrative 1,403,834 2,024,734
Selling 740,056 911,486
Research and development -- 253,970
Depreciation and depletion 162,512 63,198
Amortization of patents and goodwill 127,498 105,803
------------ ------------
TOTAL COSTS AND EXPENSES 5,224,577 5,892,488
------------ ------------
INCOME (LOSS) FROM OPERATIONS (802,289) (760,328)
------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 153,303 17,811
Interest expense (234,374) (233,757)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (81,071) (215,946)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (883,360) (976,274)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ (883,360) $ (976,274)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ (.04) $ (.04)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 25,048,379 24,503,271
See Notes to Consolidated Financial Statements.
5
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated
Other Subscribed
Comprehensive Stock
Income Retained Common Paid in Less Note
Total (Loss) Earnings Stock Capital Receivable
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 2000 $ 9,391,518 $ -- $(11,920,132) $ 20,868,467 $ 420,982 $ 22,201
Net income (loss) (976,274) -- (976,274) -- -- --
Common stock issued 211,859 -- -- 178,067 33,792 --
Payment on subscribed stock 1,711 -- -- -- -- 1,711
------------ ------------ ------------ ------------ ------------ ------------
Balance at October 31, 2000 $ 8,628,814 $ -- $(12,896,406) $ 21,046,534 $ 454,774 $ 23,912
============ ============ ============ ============ ============ ============
Balance at April 30, 2001 $ 2,528,355 $ (108,581) $(19,643,854) $ 21,267,448 $ 1,044,473 $ (31,131)
Comprehensive income (loss) -- -- -- -- --
Net income (loss) (883,360) -- (883,360) -- -- --
Foreign currency
translation adjustment 17,195 17,195 -- -- -- --
Total comprehensive
Income (loss) (866,165) -- -- -- -- --
Common stock issued 203,700 -- -- 585,041 (381,341) --
Payment on subscribed stock 5,985 -- -- -- -- 5,985
------------ ------------ ------------ ------------ ------------ ------------
Balance at October 31, 2001 $ 1,871,875 $ (91,386) $(20,527,214) $ 21,852,489 $ 663,132 $ (25,146)
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
6
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
October 31,
-------------------------
2001 2000
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $(340,716) $(376,819)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and depletion 87,502 32,139
Amortization of patents and goodwill 63,749 53,000
Other 311 181
(Increase) decrease in valuation adjustment (1,786) 154,864
--------- ---------
(190,940) (136,635)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable (6,381) 46,904
Inventory (3,563) (23,754)
Prepaid expenses 7,394 50,295
Notes receivable and investments -- 8,266
Deposits (68,843) --
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 8,564 (163,022)
--------- ---------
CASH USED IN OPERATING ACTIVITIES (253,769) (217,946)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,545) (30,272)
--------- ---------
CASH USED IN INVESTING ACTIVITIES (9,545) (30,272)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 203,700 111,259
Repayment on notes payable - Long-term debt (30,377) (180,346)
Subscriptions receivable 4,840 --
Amounts borrowed under short-term debt 76,657 --
--------- ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 254,820 (69,087)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,978) --
--------- ---------
NET DECREASE IN CASH (11,472) (317,305)
CASH AND CASH EQUIVALENTS, beginning of period 43,968 789,097
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 32,496 $ 471,792
========= =========
Supplemental Cash Flow Information
Interest paid $ 45,756 $ 108,757
Income taxes paid $ -- $ --
See Notes to Consolidated Financial Statements.
7
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
October 31,
----------------------------
2001 2000
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (883,360) $ (976,274)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and depletion 162,512 63,198
Amortization of patents and goodwill 127,498 105,803
Other 3,354 181
Decrease in valuation adjustment 1,785 154,864
----------- -----------
(588,211) (652,228)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable (14,515) (22,294)
Inventory 203,639 (140,047)
Prepaid expenses 8,447 (8,541)
Notes receivable and investments -- 32,443
Deposits (68,843) (655,156)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 96,024 (344,596)
----------- -----------
CASH USED IN OPERATING ACTIVITIES (363,459) (1,790,419)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,172) (269,310)
----------- -----------
CASH USED IN INVESTING ACTIVITIES (16,172) (269,310)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 203,700 211,859
Repayment on notes payable - Long-term debt (35,030) (1,476,326)
Subscriptions receivable 5,985 1,711
Amounts borrowed under short-term debt 176,657 379,085
Amounts borrowed under long-term debt -- 1,190,000
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 351,312 306,329
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 17,195 --
----------- -----------
NET DECREASE IN CASH (11,124) (1,753,400)
CASH AND CASH EQUIVALENTS, beginning of period 43,620 2,225,192
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 32,496 $ 471,792
=========== ===========
Supplemental Cash Flow Information
Interest paid $ 96,874 $ 108,757
Income taxes paid $ -- $ --
See Notes to Consolidated Financial Statements.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cox Technologies, Inc. and its wholly owned subsidiary, Vitsab Sweden, AB,
a Swedish corporation, and Cox Temperature Recorders Pty. Ltd., a 95% owned
Australian distribution company (collectively "the Company"), engage in the
business of producing and distributing transit temperature recording
instruments, both in the United States and internationally.
The accompanying unaudited consolidated financial statements and notes
should be read in conjunction with the audited consolidated financial statements
and notes included in the Cox Technologies, Inc. 2001 Annual Report on Form
10-K. In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair statement of the results of
operations for the interim periods have been recorded. Certain amounts
previously reported have been reclassified to conform with the current period's
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
three Statements of Financial Accounting Standards ("SFAS"), No. 141, "Business
Combinations" (SFAS No. 141), No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142) and No. 143, "Accounting for Asset Retirement" (SFAS No. 143). In
August 2001, the FASB issued No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Asset" (SFAS No. 144).
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations in the scope of SFAS No. 141 are to be
accounted for using one method, the purchase method. The provisions of SFAS No.
141 apply to all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method for those business combinations is prohibited. The
provisions of SFAS No. 141 also apply to all business combinations accounted for
by the purchase method for which the date of acquisition is July 1, 2001, or
later.
SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. SFAS No. 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Under SFAS No. 142, goodwill and intangible assets that
have indefinite useful lives will not be amortized but rather will be tested at
least annually for impairment. The Company is currently amortizing approximately
$220,000 annually related to goodwill. Intangible assets that have finite useful
lives will continue to be amortized over their useful lives, but without the
constraint of the 40-year maximum life required by SFAS No. 142. The provisions
of SFAS No. 142 are required to be applied starting with fiscal years beginning
after December 15, 2001.
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.
SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The provisions SFAS
No. 144 are required to be applied starting with fiscal years beginning after
December 15, 2001.
The Company expects to adopt the provisions of SFAS No. 142 and SFAS No.
144 effective May 1, 2002. The Company is in the process of determining the
impact the adoption of the provisions of SFAS No. 142 will have on financial
position and results of operations. The Company expects to adopt the provisions
of SFAS No. 143 effective May 1, 2003. The Company believes the adoption of the
provisions of this statement will not have a significant effect on financial
position or results of operations.
9
NOTE A -- INVENTORY
Inventory at the respective balance sheet dates consists of the following:
October 31, 2001 April 30, 2001
---------------- --------------
Raw materials $ 384,870 $ 377,470
Work-in-progress 424,333 528,687
Finished goods 916,324 1,023,009
---------- ----------
$1,725,527 $1,929,166
========== ==========
NOTE B -- DEBT
On July 13, 2000 the Company entered into a secured five-year term loan
("Term Loan") with its primary lender, RBC Centura Bank ("Centura") in the
amount of $1,190,000. The Company used the proceeds of the Term Loan to retire
short-term debt of approximately $1,177,000 and the remainder was used for
working capital.
Initial principal payments of $9,920, in addition to accrued interest, were
due monthly from August 2, 2000 to July 2, 2001. The rate of interest on the
Term Loan is Centura's prime rate plus .625% per annum. Thereafter, principal
payments of $22,312.50, in addition to accrued interest, are due monthly until
July 13, 2005.
The Company has established a revolving line of credit with Centura for
working capital in the amount of up to $1,000,000 ("Revolving Loan"), subject to
a maximum percentage of eligible trade accounts receivable and inventories. The
rate of interest on the Revolving Loan is Centura's prime rate plus .25% per
annum and is due monthly beginning in August 2000. The Company has borrowed
$930,000 related to this line of credit at October 31, 2001, including $30,000
during the current quarter and $130,000 during fiscal 2002. On December 4, 2001
the Company borrowed the remaining $70,000 available on the Revolving Loan.
The principal of the Revolving Loan was due on September 2, 2001. On
October 30, 2001 the Company executed a note modification agreement with Centura
that extended the maturity date of the Revolving Loan to November 2, 2001. On
November 29, 2001, the Company executed (a) an amendment to the original
Revolving Loan agreement, (b) a new security agreement and (c) a note
modification agreement for the Term Note and for the Revolving Loan that were
effective October 30, 2001 (collectively "Modified Agreements"). These Modified
Agreements extended the maturity date of the Revolving Loan to January 31, 2002
and changed the rate that interest will accrue on the Term Note and the
Revolving Loan from prime rate plus .625% per annum and prime rate plus .25% per
annum, respectively, to 30-day LIBOR plus 500 basis points per annum. These
Modified Agreements also stated that Centura would forbear exercise of its
rights and remedies under the Modified Agreements until January 31, 2002, so
long as the Company continues to pay the principal and interest on the Term Note
and pay interest on the Revolving Loan. Centura will continue to meet monthly
with Company management to review its financial results and determine quarterly
whether to extend the maturity date of the Revolving Loan.
The Company has agreed to certain covenants, including prohibiting the
payment of dividends, with respect to both the Term Loan and the Revolving Loan.
The Company is in violation of certain covenants related to Cash Flow Coverage
Ratio and Tangible Net Worth. In a letter dated July 24, 2001, Centura waived
the violation of these covenants as of April 30, 2001. As a result, this amount
has been classified as current portion of long-term debt.
Centura has also agreed to finance the lease of two major pieces of
production equipment related to the manufacturing of the Vitsab(R) product. The
Company has advanced approximately $836,000 in progress payments on the cost of
both pieces of equipment, of which $458,000 has been advanced directly by
Centura. Through October 31, 2001, the Company had accrued and paid
approximately $46,000 of interest related to the progress payments made by
Centura on behalf of the Company. Pursuant to the lease agreement relating to
the equipment, the Company will receive the amount of its progress payments upon
delivery and acceptance of the equipment and the closing of the lease. If
needed, Centura has agreed to loan the Company the total amount of progress
payments made by the Company for a minimum of 90 days at an interest rate of
prime plus 1% per annum.
10
In November 2001, the Company met with representatives of the engineering
firm that designed, and is in the later stages of constructing, the new
production equipment for manufacturing the Vitsab(R) product. In that meeting,
the engineering firm stated it was still having technical problems with the
production equipment. These problems prevent the engineering firm from
delivering a machine that meets the Company's production requirements at the
agreed upon fees. It was also noted that the engineering firm could not continue
to work on the technical problems without the infusion of approximately $300,000
of additional funds by the Company. It was agreed by both parties that the
design and construction of the new production equipment would be put on hold
indefinitely. It was also agreed that the Company could have possession and/or
title to the equipment at its current state of development. The date of
completion of the new production equipment, if ever, will be determined at a
later date. The engineering firm also offered the use of its engineering staff
to increase the efficiency of the Company's existing two units of production
equipment and improve the quality of the Vitsab(R) product being produced. The
Company's existing production equipment is currently able to produce enough of
the Vitsab(R) product to meet the projected needs of the current customer base.
If needed, the Company has two units of production equipment, located at its
plant in Malmo, Sweden, to support the Vitsab(R) production requirements.
The cost of the equipment related to the first lease is approximately
$1,000,000, with monthly lease payments of $17,040, including interest at
approximately 9.35% for a period of 84 months. The cost of the equipment related
to the second lease is approximately $80,000, with monthly lease payments of
$1,685, including interest at approximately 10.4% for a period of 60 months.
Both leases were to commence upon the delivery of the equipment. Effective March
13, 2001, the Company and Centura agreed to combine both leases into one lease
agreement. The combined lease is to commence upon the delivery of the equipment.
The Company and Centura are currently in discussions with regards to delivery of
the equipment and the Company expects Centura to make a decision regarding the
equipment and the lease agreement during the next quarter.
NOTE C -- RELATED PARTY TRANSACTIONS
In March 2000 the Company entered into an agreement with Technology
Investors, LLC ("TI") whereby the Company issued to TI a 10% subordinated
convertible promissory note due March 2005 in the amount of $2,500,000 for cash.
The principal amount of the note and interest accrued thereon are convertible,
at the option of holder into 2,000,000 shares of the Company's Common Stock at a
conversion price of $1.25 per share. Mr. Fletcher and Mr. Reid serve as the sole
managers of TI and share voting and dispositions power with respect to the
Common Stock issuable upon conversion of the note.
In addition, Mr. Fletcher and Mr. Reid were named directors of the Company.
The Company has agreed to nominate Mr. Fletcher and Mr. Reid for three
consecutive terms on the Board of Directors. Mr. Fletcher and Mr. Reid were also
both retained as consultants to the Company. In connection for their services
they each will receive compensation of $1 annually and a one-time grant of
immediately exercisable options to purchase 300,000 shares of the Company's
Common Stock at an exercise price of $1.25 per share for a period of up to 10
years. In fiscal 2001, Mr. Fletcher and Mr. Reid each received stock options to
purchase 2,000,000 shares of the Company's Common Stock at an exercise price of
$0.59 per share for a period of up to 10 years. On July 23, 2001, the Board of
Directors approved an increase in compensation for Mr. Fletcher and Mr. Reid.
Retroactive to January 1, 2001, they each will receive annual compensation of
$100,000, payable quarterly in unrestricted shares of the Company's Common Stock
valued at the average daily closing price during the quarter. Approved by the
Board of Directors on December 7, 2001, Mr. Fletcher and Mr. Reid agreed to a
decrease in their compensation to $1 annually effective October 1, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR FISCAL 2002 AND 2001
The Company previously had two current operating segments that involved the
(1) production and distribution of temperature recording and monitoring devices,
including electronic "loggers," graphic temperature recorders and visual
indicator tags (referred to as "Temperature Recorder Operations" as a group) and
(2) oilfield operations and other, which included all economic activity related
to the oil production and the holding of the oil subleases and the operation of
its Phoenix office. The Company closed its Phoenix office effective October 31,
2000. The activities performed in Phoenix were transferred to the Corporate
Office in Belmont, North Carolina. The Company entered into an agreement with a
group in Dallas, Texas, to sell the subleases on behalf of the Company. The
group contacted and solicited potential buyers to make purchase offers to the
Company for the subleases. The Company terminated the agreement in April 2001
11
after receiving no purchase offers from potential buyers. As a result of the
inability of the Company to attract a potential buyer, the high cost and
difficulty in producing crude oil of the type found in the field and losses
incurred in the oilfield operations, the Company evaluated the recoverability of
the carrying amount of the oilfield net assets. In analyzing expected future
cash flows from potential offers, the Company is of the opinion that $300,000 of
net assets should be accounted for as property held for sale. As a result, the
Company recognized a loss on impairment of $3,062,196 in the fourth quarter of
fiscal 2001. The Company now operates in one reporting segment of Temperature
Recorder Operations.
TEMPERATURE RECORDER OPERATIONS
Sales decreased 18% and 14% for the three and six months ended October 31,
2001 as compared to the same periods last year. The decrease in both periods is
primarily due to an 18% and 11%, respectively, decrease in the number of Cox1
units sold as a result of decreased demand and a 3% and 4%, respectively,
decrease in average sales price. The three-month period reflected a 2% increase
in the number of Tracer(R) products sold, which was offset by a 3% decrease in
average sales price. The six-month period reflected a 17% decrease in the number
of Tracer(R) products sold and an 11% decrease in average sales price. Partially
offsetting this decrease for the three and six months ended October 31, 2001 was
a 105% and 125%, respectively, increase in the number of DataSource(TM) units
sold as compared to the same periods last year. Management believes that the
Company will continue to experience a decrease in average sales price for all
products due to competitive price pressure, but expects unit sales to remain
constant or increase as compared to prior periods.
Cost of sales decreased 7% for the three months ended October 31, 2001 as
compared to the same period last year. The decrease is due to decreased
purchases of raw materials, decreased retriever fees and postage, partially
offset by increased labor and shipping costs. Cost of sales increased 10% for
the six months ended October 31, 2001 as compared to the same period last year.
The increase is due to increased labor costs, retriever fees, shipping costs,
outside services and supplies used in the manufacturing process, partially
offset by decreased purchases of raw material and data loggers.
General and administrative expense decreased $178,400 and $620,900, or 19%
and 31%, respectively, for the three and six months ended October 31, 2001, as
compared to the same periods last year. The decrease is due to lower costs
associated with legal fees, professional services, bank charges, and general
expenses, partially offset by increase in salaries, outside services, and
insurance expenses.
Selling expense decreased $121,800 and $171,400, or 27% and 19%,
respectively, for the three and six months ended October 31, 2001 as compared to
the same periods last year. The decrease for both periods is due to lower sales
salaries, commissions, trade shows and travel expenses.
No research and development costs are incurred in the three and six months
ended October 31, 2001 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 for the three and six months ended October 31,
2000 are related to costs incurred from both the EDS(TM) and Vitsab(R) products
related to various aspects of product development, including the development of
production techniques, product research and consulting, and marketing studies.
Depreciation expense increased $55,400 and $99,300, or 172% and 157%,
respectively, for the three and six months ended October 31, 2001 as compared to
the same periods last year due to the increase in depreciable base. All
depletion expenses associated with the oilfield operations were written off as a
loss on impairment in the fourth quarter of fiscal 2001. As a result, no
additional depletion expense is being recorded.
Amortization of patents and goodwill increased $10,700 and $21,700, or 20%
and 21%, respectively, for the three month and six months ended October 31, 2001
as compared to the same periods last year. This increase is related to the
additional goodwill recognized from the acquisition of Vitsab Sweden, AB.
Other income increased $33,700 and $135,500, or 555% and 761%,
respectively, for the three and six months ended October 31, 2001 as compared to
the same periods last year. This increase is primarily related to the payments
received as a result of the agreement between the Company and its Copenhagen
distributor for an option to purchase all of the shares and assets of the
Company's wholly owned subsidiary, Vitsab Sweden, AB. The details of this
agreement are more fully discussed in Liquidity and Capital Resources.
Interest expense increased $9,200, or 9%, for the three months ended
October 31, 2001 as compared to the same period last year. The primary reason
for this increase is the interest on the note payable to Technology Investors,
12
MANAGEMENT'S DISCUSSION (CONTINUED)
LLC dated March 10, 2000 in the amount of $2,500,000 and interest on the
Revolving Loan with, and interest accrued on progress payments made by, Centura.
The decrease in inventory of $203,600 is related to the decrease in the
number of units in on-hand inventory and a decrease in work-in-progress
inventory.
The increase in deposits of $68,800 is due to a progress payment of $51,600
and interest accrued and paid to Centura related to progress payments made by
Centura on behalf of the Company for production equipment.
The decrease in property and equipment of $146,300, net of depreciation, is
primarily due to depreciation, partially offset by the purchase of tooling,
computer equipment, machinery and equipment and leasehold improvements.
LIQUIDITY AND CAPITAL RESOURCES
The Company derives cash from operations, equity sales, and borrowing from
long- and short-term lending sources to meet its cash requirements. At present,
the cash flow from operations is not adequate to meet cash requirements and
commitments of the Company. The Company may enter into equity, debt or other
financing arrangements to meet its further financial needs for expansion into
food safety control products and to provide for general working capital needs.
On July 13, 2000 the Company entered into a secured five-year term loan
("Term Loan") with its primary lender, RBC Centura Bank ("Centura") in the
amount of $1,190,000. The Company used the proceeds of the Term Loan to retire
short-term debt of approximately $1,177,000 and the remainder was used for
working capital.
Initial principal payments of $9,920, in addition to accrued interest, were
due monthly from August 2, 2000 to July 2, 2001. The rate of interest on the
Term Loan is Centura's prime rate plus .625% per annum. Thereafter, principal
payments of $22,312.50, in addition to accrued interest, are due monthly until
July 13, 2005.
The Company has established a revolving line of credit with Centura for
working capital in the amount of up to $1,000,000 ("Revolving Loan") subject to
a maximum percentage of eligible trade accounts receivable and inventories. The
rate of interest on the Revolving Loan is Centura's prime rate plus .25% per
annum and is due monthly beginning in August 2000. The Company has borrowed
$930,000 related to this line of credit at October 31, 2001, including $30,000
during the current quarter and $130,000 during fiscal 2002. On December 4, 2001
the Company borrowed the remaining $70,000 available on the Revolving Loan.
The principal of the Revolving Loan was due on September 2, 2001. On
October 30, 2001 the Company executed a note modification agreement with Centura
that extended the maturity date of the Revolving Loan to November 2, 2001. On
November 29, 2001, the Company executed (a) an amendment to the original
Revolving Loan agreement, (b) a new security agreement and (c) a note
modification agreement for the Term Note and for the Revolving Loan that were
effective October 30, 2001 (collectively "Modified Agreements"). These Modified
Agreements extended the maturity date of the Revolving Loan to January 31, 2002
and changed the rate that interest will accrue on the Term Note and the
Revolving Loan from prime rate plus .625% per annum and prime rate plus .25% per
annum, respectively, to 30-day LIBOR plus 500 basis points per annum. These
Modified Agreements also stated that Centura would forbear exercise of its
rights and remedies under the agreements, until January 31, 2002, so long as the
Company continues to pay the principal and interest on the Term Note and pay
interest on the Revolving Loan. Centura will continue to meet monthly with
Company management to review its financial results and determine quarterly
whether to extend the maturity date of the Revolving Loan.
The Company has agreed to certain covenants, including prohibiting the
payment of dividends, with respect to both the Term Loan and the Revolving Loan.
The Company is in violation of certain covenants related to Cash Flow Coverage
Ratio and Tangible Net Worth. In a letter dated July 24, 2001, Centura waived
the violation of these covenants as of April 30, 2001. As a result, this amount
has been classified as current portion of long-term debt.
Centura has also agreed to finance the lease of two major pieces of
production equipment related to the manufacturing of the Vitsab(R) product. The
Company has advanced approximately $836,000 in progress payments on the cost of
both pieces of equipment, of which $458,000 has been advanced directly by
Centura. Through October 31, 2001, the Company had accrued and paid
approximately $46,000 of interest related to the progress payments made by
Centura on behalf of the Company. Pursuant to the lease agreement relating to
the equipment, the Company will receive the amount of its progress payments upon
delivery and acceptance of the equipment and the closing of the lease. If
13
needed, Centura has agreed to loan the Company the total amount of progress
payments made by the Company for a minimum of 90 days at an interest rate of
prime plus 1% per annum.
In November 2001, the Company met with representatives of the engineering
firm that designed, and is in the later stages of constructing, the new
production equipment for manufacturing the Vitsab(R) product. In that meeting,
the engineering firm stated it was still having technical problems with the
production equipment. These problems prevent the engineering firm from
delivering a machine that meets the Company's production requirements at the
agreed upon fees. It was also noted that the engineering firm could not continue
to work on the technical problems without the infusion of approximately $300,000
of additional funds by the Company. It was agreed by both parties that the
design and construction of the new production equipment would be put on hold
indefinitely. It was also agreed that the Company could have possession and/or
title to the equipment at its current state of development. The date of
completion of the new production equipment, if ever, will be determined at a
later date. The engineering firm also offered the use of its engineering staff
to increase the efficiency of the Company's existing two units of production
equipment and improve the quality of the Vitsab(R) product being produced. The
Company's existing production equipment is currently able to produce enough of
the Vitsab(R) product to meet the projected needs of the current customer base.
If needed, the Company has another unit of production equipment, located at its
plant in Malmo, Sweden, to support the Vitsab(R) production requirements.
The cost of the equipment related to the first lease is approximately
$1,000,000, with monthly lease payments of $17,040, including interest at
approximately 9.35% for a period of 84 months. The cost of the equipment related
to the second lease is approximately $80,000, with monthly lease payments of
$1,685, including interest at approximately 10.4% for a period of 60 months.
Both leases were to commence upon the delivery of the equipment. Effective March
13, 2001, the Company and Centura agreed to combine both leases into one lease
agreement. The combined lease is to commence upon the delivery of the equipment.
The Company and Centura are currently in discussions with regards to delivery of
the equipment and the Company expects Centura to make a decision regarding the
equipment and the lease agreement during the next quarter.
In April 2001 the Company executed an agreement with its Copenhagen
distributor ("Purchaser") for an option to purchase all of the shares and assets
of the Company's wholly owned subsidiary, Vitsab Sweden, AB. The option
agreement gives the Purchaser until November 30, 2001 to exercise the option. On
October 18, 2001 the Company entered into a verbal agreement with Purchaser to
extend the agreement through February 2002, and then on a month-to-month basis,
with a requirement that each party provide a two month notice to cancel the
agreement. Additionally, the Purchaser will pay $17,000 a month in return for
the extension beginning December 1, 2001. All of the other terms and conditions
in the agreement remain the same. If the Purchaser does not execute the purchase
option by the end of the option period, the Company will retain ownership of all
shares and assets of Vitsab Sweden, AB.
In return for the option, the Purchaser will pay the Company $20,000 a
month beginning March 2001 and ending November 2001. During the option period,
the Company cannot sell, transfer, pledge, mortgage or otherwise dispose of nor
issue new shares in Vitsab Sweden, AB without the prior written approval by the
Purchaser. The stated purchase price in the agreement for all of the shares in,
and assets of, Vitsab Sweden, AB is $1.00. In addition, the Purchaser must make
monthly payments of $6,000 to the Company beginning the month after the option
is exercised and ending with the final payment in June 2004. If the Purchase
option is executed, the Purchaser will have the exclusive right for ten years to
manufacture, sell and distribute the Vitsab(R) product in certain countries
designated in the agreement. The Company will be paid a minimum annual royalty
based on the volume of Vitsab(R) products sold.
Statements contained in this document, which are not historical in nature,
are forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements give our current expectations of
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such
as "estimate," "intend," "plan," and other words and terms of similar meaning in
connection with any discussion of future operating and financial performance.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements. Cox Technologies undertakes no obligation to update forward-looking
statements to reflect events or circumstances after the date hereof. Such risks
and uncertainties with respect to Cox Technologies include, but are not limited
to, its ability to successfully implement internal performance goals,
performance issues with suppliers, regulatory issues, competition, the effect of
weather on customers, exposure to environmental issues and liabilities,
variations in material costs and general and specific economic conditions. From
time to time, Cox Technologies may include forward-looking statements in oral
statements or other written documents.
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PART II. OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, but the Company does
not believe these proceedings could have a material impact on the results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on August 31, 2001. The
following matters were voted upon at the meeting.
1. To elect seven (7) directors for a one-year term expiring in 2002 or until
their successors are elected and qualified.
NUMBER OF SHARES
NUMBER OF SHARES VOTING TO
NOMINEE VOTING FOR WITHHOLD AUTHORITY TOTAL SHARES VOTED
- ------- ---------- ------------------ ------------------
Dr. James L. Cox 20,114,606 169,071 20,283,677
Brian D. Fletcher 20,198,606 85,071 20,283,677
Dr. Michael E. Fonzo 20,257,606 26,071 20,283,677
Dr. George M. Pigott 20,257,606 26,071 20,283,677
Kurt C. Reid 20,198,606 85,071 20,283,677
Ben R. Rudisill, II 20,208,221 75,456 20,283,677
Robert D. Voigt 20,208,221 75,456 20,283,677
2. To ratify the appointment of Cherry, Bekaert & Holland, L.L.P. as certified
independent public accountants for the Company for the fiscal year ending
April 30, 2002.
NUMBER OF SHARES
----------------
FOR 20,220,393
AGAINST 57,385
ABSTAIN 5,899
-----------
20,283,677
===========
Percent of FOR votes of those shares actually voting for this
proposal: 99.69%
ITEM 5. OTHER INFORMATION
On November 29, 2001 Dr. Michael E. Fonzo, an outside director of the
Company since November 1997, resigned from the Board of Directors to pursue
outside interests. At its December 7, 2001 regular quarterly meeting, the Board
of Directors appointed outside director Mr. Ben R. Rudisill, II to replace Dr.
Fonzo on the Compensation Committee. The Board of Directors also appointed Mr.
Rudisill and Mr. Robert D. Voigt, also an outside director, to serve on the
newly created Audit Committee. Mr. Rudisill will serve as the Chairman of the
Audit Committee.
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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: 12-14-01 /s/ James L. Cox
----------------------------------------
James L. Cox
Chairman, President and
Chief Executive Officer
Date: 12-14-01 /s/ Jack G. Mason
----------------------------------------
Jack G. Mason
Chief Financial Officer
and Secretary
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