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 January 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-8006
COX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 86-0220617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
69 MCADENVILLE ROAD
BELMONT, NORTH CAROLINA 28012-2434
(Address of principal executive offices) (Zip Code)
(704) 825-8146
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, no par value, outstanding
at March 11, 2002.....................................................25,686,120
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
FACE SHEET 1
INDEX 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)
January 31, 2002 and April 30, 2001 3
Consolidated Statements of Income (Unaudited)
Three Months and Nine Months Ended January 31, 2002 and 2001 4-5
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Nine Months Ended January 31, 2002 and 2001 6
Consolidated Statements of Cash Flows (Unaudited)
Three Months and Nine Months Ended January 31, 2002 and 2001 7-8
Notes to Consolidated Financial Statements 9-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-16
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
January 31, 2002 April 30, 2001
---------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 80,618 $ 43,620
Accounts receivable, less allowance for doubtful
accounts of $40,945 at January 31, 2002 and
$61,810 at April 30, 2001 1,112,161 1,141,308
Inventory 1,435,021 1,929,166
Notes receivable - current portion 19,230 19,230
Prepaid expenses 34,060 30,493
------------ ------------
TOTAL CURRENT ASSETS 2,681,090 3,163,817
Property and equipment, net 944,943 1,162,464
Property held for sale, net 300,000 300,000
Non-depreciable asset 841,908 813,305
Goodwill 2,811,556 2,976,622
Due from officer, net 46,424 53,566
Patents 154,742 184,415
------------ ------------
TOTAL ASSETS $ 7,780,663 $ 8,654,189
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 464,152 $ 602,778
Short-term debt 1,000,000 1,211,452
Current portion of long-term debt 1,580,511 1,221,560
------------ ------------
TOTAL CURRENT LIABILITIES 3,044,663 3,035,790
Long-term debt 3,168,716 3,090,044
------------ ------------
TOTAL LIABILITIES 6,213,379 6,125,834
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized
100,000,000 shares; issued and outstanding;
25,601,694 shares at January 31, 2002 and
24,904,823 shares at April 30, 2001 21,964,319 21,267,448
Paid in capital 584,849 1,044,473
Accumulated other comprehensive income (loss) (90,678) (108,581)
Accumulated deficit (20,866,472) (19,643,854)
Less - Notes receivable for common stock 24,734 31,131
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,567,284 2,528,355
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,780,663 $ 8,654,189
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended January 31,
------------------------------
2002 2001
------------ ------------
REVENUE:
Sales $ 2,045,969 $ 2,302,426
------------ ------------
COSTS AND EXPENSES:
Cost of sales 1,386,633 1,338,047
General and administrative 444,267 1,937,406
Selling 276,512 426,716
Research and development -- 120,684
Depreciation and depletion 80,922 81,564
Amortization of patents and goodwill 63,749 53,000
------------ ------------
TOTAL COSTS AND EXPENSES 2,252,083 3,957,417
------------ ------------
INCOME (LOSS) FROM OPERATIONS (206,114) (1,654,991)
------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 24,677 45,264
Interest expense (157,821) (110,386)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (133,144) (65,122)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (339,258) (1,720,113)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ (339,258) $ (1,720,113)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ (.01) $ (.07)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 25,601,694 24,733,247
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended January 31,
------------------------------
2002 2001
------------ ------------
REVENUE:
Sales $ 6,468,257 $ 7,434,586
------------ ------------
COSTS AND EXPENSES:
Cost of sales 4,177,310 3,871,344
General and administrative 1,848,101 3,962,140
Selling 1,016,568 1,338,202
Research and development -- 374,654
Depreciation and depletion 243,434 144,762
Amortization of patents and goodwill 191,247 158,803
------------ ------------
TOTAL COSTS AND EXPENSES 7,476,660 9,849,905
------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,008,403) (2,415,319)
------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) 177,980 63,075
Interest expense (392,195) (344,143)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) (214,215) (281,068)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,222,618) (2,696,387)
Provisions for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ (1,222,618) $ (2,696,387)
============ ============
BASIC AND DILUTED:
NET INCOME (LOSS) PER SHARE $ (.05) $ (.11)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 25,232,818 24,579,930
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated Subscribed
Other Stock
Comprehensive Accumulated Common Paid in Less Note
Total Income (Loss) Deficit Stock Capital Receivable
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 2000 $ 9,391,518 $ -- $(11,920,132) $ 20,868,467 $ 420,982 $ 22,201
Comprehensive income (loss)
Net income (loss) (2,696,387) -- (2,696,387) -- -- --
Foreign currency
translation adjustment (51,798) (51,798) -- -- -- --
------------
Total comprehensive
income (loss) (2,748,185) -- -- -- -- --
Common stock issued 391,582 -- -- 421,712 (30,130) --
Payment on subscribed stock 3,362 -- -- -- -- 3,362
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 31, 2001 $ 7,038,277 $ (51,798) $(14,616,519) $ 21,290,179 $ 390,852 $ 25,563
============ ============ ============ ============ ============ ============
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) (1,222,618) -- (1,222,618) -- -- --
Foreign currency
translation adjustment 17,903 17,903 -- -- -- --
------------
Total comprehensive
income (loss) (1,204,715) -- -- -- -- --
Common stock issued 237,247 -- -- 696,871 (459,624) --
Payment on subscribed stock 6,397 -- -- -- -- 6,397
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 31, 2002 $ 1,567,284 $ (90,678) $(20,866,472) $ 21,964,319 $ 584,849 $ (24,734)
============ ============ ============ ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended January 31,
------------------------------
2002 2001
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (339,258) $(1,720,113)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and depletion 80,922 81,564
Amortization of patents and goodwill 63,749 53,000
Loss on disposal of property and equipment -- 22,628
Non-depreciable asset 97,446 (413,762)
Other (4,520) --
Decrease in valuation adjustment 5,357 67,019
----------- -----------
(96,304) (1,909,664)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 43,662 534,287
Inventory 290,506 (148,351)
Prepaid expenses (12,014) (31,977)
Notes receivable and investments -- (9,618)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (234,650) 368,800
----------- -----------
CASH USED IN OPERATING ACTIVITIES (8,800) (1,196,523)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,741) (9,340)
----------- -----------
CASH USED IN INVESTING ACTIVITIES (9,741) (9,340)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 33,547 179,723
Repayment on notes payable - Long-term debt (31,347) 6,057
Repayment on short-term debt (464,000) --
Subscriptions receivable 412 1,651
Amounts borrowed under short-term debt 23,343 726,178
Amounts borrowed under long-term debt 504,000 --
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 65,955 913,609
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 708 (50,330)
----------- -----------
NET INCREASE (DECREASE) IN CASH 48,122 (342,584)
CASH AND CASH EQUIVALENTS, beginning of period 32,496 471,792
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 80,618 $ 129,208
=========== ===========
Supplemental Cash Flow Information
Interest paid $ 89,071 $ 47,886
Income taxes paid $ -- $ --
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended January 31,
-----------------------------
2002 2001
----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ($1,222,618) ($2,696,387)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation and depletion 243,434 144,762
Amortization of patents and goodwill 191,247 158,803
Loss on disposal of property and equipment -- 22,628
Non-depreciable asset 28,603 (640,055)
Other (1,166) 181
Decrease in valuation adjustment 7,142 191,203
----------- -----------
(753,358) (2,818,865)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 29,147 511,993
Inventory 494,145 (288,398)
Prepaid expenses (3,567) (40,518)
Notes receivable and investments -- 2,855
(Increase) decrease in non-current assets:
Notes receivable - long-term -- 19,970
Other receivables, net -- 30,680
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (138,626) 24,204
----------- -----------
CASH USED IN OPERATING ACTIVITIES (372,259) (2,558,079)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (25,913) (328,428)
----------- -----------
CASH USED IN INVESTING ACTIVITIES (25,913) (328,428)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net 237,247 391,582
Repayment on notes payable - Long-term debt (66,377) (1,470,269)
Repayment on short-term debt (464,000) --
Subscriptions receivable 6,397 3,362
Amounts borrowed under short-term debt 200,000 726,178
Amounts borrowed under long-term debt 504,000 1,190,000
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 417,267 840,853
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 17,903 (50,330)
----------- -----------
NET INCREASE (DECREASE) IN CASH 36,998 (2,095,984)
CASH AND CASH EQUIVALENTS, beginning of period 43,620 2,225,192
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 80,618 $ 129,208
=========== ===========
Supplemental Cash Flow Information
Interest paid $ 185,945 $ 156,643
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 SFAS No. 143 will not have a significant effect on its financial
position or results of operations.
9
NOTE A - INVENTORY
Inventory at the respective balance sheet dates consists of the following:
January 31, 2002 April 30, 2001
---------------- --------------
Raw materials $ 381,558 $ 377,470
Work-in-progress 247,323 528,687
Finished goods 806,140 1,023,009
---------- ----------
$1,435,021 $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
$1,000,000 related to this line of credit at January 31, 2002, including $70,000
during the current quarter and $200,000 during fiscal 2002.
The principal of the Revolving Loan was due on September 2, 2001. On
October 30, 2001 the Company executed a note modification agreement with Centura
that extended the maturity date of the Revolving Loan to November 2, 2001. On
November 29, 2001, the Company executed (a) an amendment to the original
Revolving Loan agreement, (b) a new security agreement and (c) a note
modification agreement for the Term Note and for the Revolving Loan that were
effective October 30, 2001 (collectively "Modified Agreements"). These Modified
Agreements extended the maturity date of the Revolving Loan to January 31, 2002
and changed the rate that interest will accrue on the Term Note and the
Revolving Loan from prime rate plus .625% per annum and prime rate plus .25% per
annum, respectively, to 30-day LIBOR plus 500 basis points per annum. These
Modified Agreements also stated that Centura would forbear exercise of its
rights and remedies under the Modified Agreements until January 31, 2002, so
long as the Company continues to pay the principal and interest on the Term Note
and pay interest on the Revolving Loan. On February 21, 2002 the Company
executed documents with Centura, effective January 31, 2002, that amended the
Modified Agreements to extend the maturity dates of the Revolving Loan and the
Term Loan to July 31, 2002. Centura will continue to meet monthly with Company
management to review its financial results and determine whether to extend the
maturity date of the Revolving Loan and the Term Loan past July 31, 2002.
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 $842,000 in progress payments on the cost of
both pieces of equipment, of which $464,000 has been advanced directly by
Centura. Through January 31, 2002, the Company had accrued and paid
approximately $57,000 of interest related to the progress payments made by
Centura on behalf of the Company. Pursuant to the lease agreement relating to
the equipment, the Company was to receive the amount of its progress payments
upon delivery and acceptance of the equipment and the closing of the lease. If
needed, Centura had agreed to loan the Company the total amount of progress
payments made by the Company for a minimum of 90 days at an interest rate of
prime plus 1% per annum.
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 stage of development. The date of
completion of the new production equipment, if ever, will be determined at a
later date. Management is currently evaluating the current and future value of
the production equipment. 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 was to commence upon the delivery of the
equipment. As a result of the indefinite delay in the design and construction of
the equipment, the Company and Centura agreed to execute documents on February
21, 2002 that converted the $464,000 advanced under the lease by Centura to a
five-year note payable, effective January 31, 2002. The executed documents also
incorporated the note into the Modified Agreements. The interest rate on the
note is the 30-day LIBOR plus 500 basis points per annum, with monthly payments
of $7,700 plus accrued interest. The maturity date of the note is July 31, 2002.
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 with 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 annual compensation to $1 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
11
group in Dallas, Texas, to sell the subleases on behalf of the Company. The
group contacted and solicited potential buyers to make purchase offers to the
Company for the subleases. The Company terminated the agreement in April 2001
after receiving no purchase offers from potential buyers. As a result of the
inability of the Company to attract a potential buyer, the high cost and
difficulty in producing crude oil of the type found in the field and losses
incurred in the oilfield operations, the Company evaluated the recoverability of
the carrying amount of the oilfield net assets. In analyzing expected future
cash flows from potential offers, the Company 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
Revenue from sales decreased 11% and 13% for the three and nine months
ended January 31, 2002 as compared to the same periods last year. The decrease
in both periods is primarily due to a 14% and 12%, respectively, decrease in the
number of Cox1 units sold as a result of decreased demand and a 4% decrease in
average sales price for both periods. The three-month period reflected an 11%
decrease in the number of Tracer(R) products sold and a 13% decrease in average
sales price. The nine-month period reflected a 16% decrease in the number of
Tracer(R) products sold and a 12% decrease in average sales price. Partially
offsetting this decrease for the three and nine months ended January 31, 2002
was a 136% and 130%, respectively, increase in the number of DataSource(R) 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 increased 4% for the three months ended January 31, 2002 as
compared to the same period last year. This increase was due to a reduction in
the price the Company now pays for raw material components and labor costs, as
compared to October 31, 2001, of approximately $290,400. Cost of sales also
includes increased retriever fees, partially offset by a decrease in the
purchases of raw materials, a decrease in labor costs and employee benefits and
a decrease in postage expenses. Cost of sales increased 8% for the nine months
ended January 31, 2002 as compared to the same period last year. The increase is
due to increased labor costs, the previously mentioned price reduction in
component costs and labor costs in inventory, retriever fees, shipping costs,
outside services and supplies used in the manufacturing process, partially
offset by decreased purchases of raw material and data loggers for resale.
General and administrative expense decreased $1,493,100 and $2,114,000, or
77% and 53%, respectively, for the three and nine months ended January 31, 2002,
as compared to the same periods last year. The decrease in both periods is due
to lower costs associated with legal fees, professional services, bank charges,
insurance expenses and general expenses. The three-month period includes
decreases related to salaries, payroll taxes and employee benefits. The decrease
in the nine-month period is partially offset by increases in salaries and
outside services.
Selling expense decreased $150,200 and $321,600, or 35% and 24%,
respectively, for the three and nine months ended January 31, 2002 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 were incurred during the three and nine
months ended January 31, 2002 due to the Company reaching the final development
stages of the Vitsab(R) product and the halt in the development of the EDS(TM)
product. Research and development expenses for the three and nine months ended
January 31, 2001 were 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. More information on the Vitsab(R) products is discussed more
fully under Vitsab(R) Operations.
Depreciation expense decreased $600, or 1%, for the three months ended
January 31, 2002 as compared to the same period last year. Depreciation
increased $98,700, or 68%, for the nine months ended January 31, 2002 as
compared to the same period 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 $32,400, or 20%,
respectively, for the three month and nine months ended January 31, 2002 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 decreased $20,600, or 45% for the three months ended January
31, 2002 as compared to the same period last year. This decrease is due to the
12
MANAGEMENT'S DISCUSSION (CONTINUED)
$20,000 down payment refunded to a potential buyer of the oilfield subleases as
discussed more fully under Oilfield Subleases. Other income increased $114,900,
or 182%, for the nine months ended January 31, 2002 as compared to the same
period 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 discussed more
fully in Liquidity and Capital Resources.
Interest expense increased $47,400 and $48,100, or 43% and 14%, for the
three months and nine months ended January 31, 2002 as compared to the same
period last year. Reasons for this increase are interest on the Revolving Loan
with Centura and the reclassification of interest paid on progress payments made
by Centura from deposits to interest expense of approximately $51,600.
The decrease in inventory of $494,100 is related to the decrease in the
number of units in finished goods inventory and a decrease in work-in-progress
inventory. The Company has also lowered its costs of purchasing raw materials
through negotiations with vendors. Decreased direct labor and benefits costs and
overheads incurred in the production of the Cox1 units resulted in a decrease in
the valuation of finished goods.
The decrease in property and equipment of $217,500, net of depreciation, is
primarily due to depreciation, partially offset by the purchase of tooling,
computer equipment, machinery and equipment and leasehold improvements.
The increase in non-depreciable asset of $28,600 is due to the
reclassification of Vitsab(R) production equipment from deposits to
non-depreciable asset. This amount includes additional progress payments made by
Centura on behalf of the Company for production equipment in fiscal 2002 net of
the reclassification of interest capitalized.
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
$1,000,000 related to this line of credit at January 31, 2002, including $70,000
during the current quarter and $200,000 during fiscal 2002.
The principal of the Revolving Loan was due on September 2, 2001. On
October 30, 2001 the Company executed a note modification agreement with Centura
that extended the maturity date of the Revolving Loan to November 2, 2001. On
November 29, 2001, the Company executed (a) an amendment to the original
Revolving Loan agreement, (b) a new security agreement and (c) a note
modification agreement for the Term Note and for the Revolving Loan that were
effective October 30, 2001 (collectively "Modified Agreements"). These Modified
Agreements extended the maturity date of the Revolving Loan to January 31, 2002
and changed the rate that interest will accrue on the Term Note and the
Revolving Loan from prime rate plus .625% per annum and prime rate plus .25% per
annum, respectively, to 30-day LIBOR plus 500 basis points per annum. These
Modified Agreements also stated that Centura would forbear exercise of its
rights and remedies under the Modified Agreements until January 31, 2002, so
long as the Company continues to pay the principal and interest on the Term Note
and pay interest on the Revolving Loan. On February 21, 2002 the Company
executed documents with Centura, effective January 31, 2002, that amended the
Modified Agreements to extend the maturity dates of the Revolving Loan and the
Term Loan to July 31, 2002. Centura will continue to meet monthly with Company
13
management to review its financial results and determine whether to extend the
maturity date of the Revolving Loan and the Term Loan past July 31, 2002.
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 $842,000 in progress payments on the cost of
both pieces of equipment, of which $464,000 has been advanced directly by
Centura. Through January 31, 2002, the Company had accrued and paid
approximately $57,000 of interest related to the progress payments made by
Centura on behalf of the Company. Pursuant to the lease agreement relating to
the equipment, the Company was to receive the amount of its progress payments
upon delivery and acceptance of the equipment and the closing of the lease. If
needed, Centura had agreed to loan the Company the total amount of progress
payments made by the Company for a minimum of 90 days at an interest rate of
prime plus 1% per annum.
In November 2001, the Company met with representatives of the engineering
firm that designed, and is in the later stages of constructing, the new
production equipment for manufacturing the Vitsab(R) product. In that meeting,
the engineering firm stated it was still having technical problems with the
production equipment. These problems prevent the engineering firm from
delivering a machine that meets the Company's production requirements at the
agreed upon fees. It was also noted that the engineering firm could not continue
to work on the technical problems without the infusion of approximately $300,000
of additional funds by the Company. It was agreed by both parties that the
design and construction of the new production equipment would be put on hold
indefinitely. It was also agreed that the Company could have possession and/or
title to the equipment at its current state of development. The date of
completion of the new production equipment, if ever, will be determined at a
later date. Management is currently evaluating the current and future value of
the production equipment. 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 was to commence upon the delivery of the
equipment. As a result of the indefinite delay in the design and construction of
the equipment, the Company and Centura agreed to execute documents on February
21, 2002 that converted the $464,000 advanced under the lease by Centura to a
five-year note payable, effective January 31, 2002. The executed documents also
incorporated the note into the Modified Agreements. The interest rate on the
note is the 30-day LIBOR plus 500 basis points per annum, with monthly payments
of $7,700 plus accrued interest. The maturity date of the note is July 31, 2002.
In April 2001 the Company executed an agreement with its Copenhagen
distributor ("Purchaser") for an option to purchase all of the shares and assets
of the Company's wholly owned subsidiary, Vitsab Sweden, AB. The option
agreement gives the Purchaser until November 30, 2001 to exercise the option. In
return for the option, the Purchaser 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. 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. The agreement is discussed more fully in Vitsab(R)
Operations.
14
MANAGEMENT'S DISCUSSION (CONTINUED)
OILFIELD SUBLEASES
As previously disclosed in other documents, the Company owns working
interests in oil well subleases in Kern County, California, named the Mitchel
and Bacon Hills subleases. In the fourth quarter of fiscal 2001, the Company
recognized a loss on impairment of $3,062,196 leaving $300,000 of net assets
related to the subleases as property held for sale. The Company has attempted to
sell the subleases for nearly two years. Despite continued efforts, no sale has
been completed. In August 2001 the Company received an offer to purchase the
subleases and received a good faith deposit. After due diligence was completed,
the potential purchaser determined the Company may not have good title to the
subleases due to an extended period of non-production during the 1990's. With
their uncertainty about the Company being able to deliver good title, the
potential purchaser canceled the offer and the deposit was refunded in November
2001.
The Company has hired legal counsel and a title insurance company to
perform a title search on the subleases and to research any title issues that
were found. The title insurance company recently issued a policy for $1,000,000
of title coverage on the subleases. One of the exceptions listed in the title
policy relates to a lien filed by the operator on July 31, 2001. In the
Company's opinion, the lien filed by the operator is without merit and is
clearly in violation of the agreement dated June 30, 2000 between the Company
and the operator. The agreement supersedes all previous agreements and states
that 120% of the operator's capital investment at the date of the agreement will
be repaid from 50% of the net profit generated from the operations of the
subleases or proceeds from the sale of the subleases. The Company owes
approximately $83,000 to the operator, which is the balance of capital and
related interest that he invested into the subleases under a previous agreement.
Due to the increasing cost of maintaining and operating the oil wells and
the related decrease in oil produced, along with a decrease in the market price
for the type of crude oil found on the subleases, the operations did not
generate any net profit during fiscal 2002. The Company recognizes that the
operation of the subleases is not related to its core business, and as such is
exploring every opportunity to sell the subleases. Consequently, the Company is
not pursuing further development of the subleases. Because of these factors, the
operator has not been reimbursed for any of his capital investment during fiscal
2002. On January 29, 2002, the operator filed a lawsuit against the Company, two
of its current officers and a former officer claiming breach of contract, fraud
and damages totaling approximately $87,000. The Company believes the lawsuit is
without merit and will take all legal actions necessary to defend the Company,
its current officers, its former officer, and the agreement signed by the
operator and the Company.
The Company intends to continue to maintain the lease in good standing and
take whatever steps necessary that are required to sell the subleases. The
Company intends to pay the operator out of proceeds from the sale of the
subleases.
VITSAB(R) OPERATIONS
As previously discussed in this report, the Company has halted indefinitely
the design and construction of the new production equipment for manufacturing
the Vitsab(R) products due to technical problems associated these efforts.
Additionally, the Company is dealing with technical issues related to the
manufacturing of Vitsab(R) products with its existing production equipment and
the raw materials being used. Another issue that influenced the decision to halt
the construction of the new production machine was the lack of demand for the
Vitsab(R) products. The Vitsab(R) products have been well received in the
perishables industry, but orders for the product have been far less than
originally projected. Currently, Vitsab(R) operations are being financed almost
entirely from the sale of the Company's other temperature recorder products.
Revenues from the sale of Vitsab(R) products were $31,200 and $51,900,
respectively, for the three and nine months ended January 31, 2002. Sales of the
Vitsab(R) products during fiscal 2002 have been well under the Company's most
conservative projections. Even if these projected sales are attained for the
remaining three months of fiscal 2002, the revenues from the sale of Vitsab(R)
products will not generate adequate revenues to sustain Vitsab(R) operations
without cash generated from other temperature recorder products.
Also previously discussed in this report, the Company has executed an
agreement with its Copenhagen distributor to sell its wholly owned subsidiary,
Vitsab Sweden, AB. The subsidiary is located in Malmo, Sweden, and has had
virtually no sales of Vitsab(R) products during fiscal 2002. The primary
functions of the Sweden operations have been technical support for the transfer
of Vitsab(R) technology to Belmont and for manufacturing test products for
potential customers of the Vitsab(R) products in Europe. For the three and nine
months ended January 31, 2002, the subsidiary reported a net loss of $78,100 and
$263,100, respectively, exclusive of the income generated from payments required
by the purchase agreement. If revenues from the European market do not develop
or the distributor does not exercise the option to purchase Vitsab Sweden, AB,
the Company intends to close the facility no later than the end of fiscal 2003.
15
The Vitsab(R) technology has been highly praised by the industry as an
exceptional tool to monitor perishables. The Company continues to improve the
manufacturing methods and quality of the Vitsab(R) products that it produces.
The Company is still optimistic that Vitsab(R) product sales will improve over
the next several months but cannot project when, or if, Vitsab(R) product sales
will improve. Given the limited human and financial resources available to the
Company, management has chosen to focus most of its existing sales efforts
towards the development of other temperature recorder product sales considered
to be more useful in their ability to produce cash flow. Additional resources
will be reallocated towards the development of Vitsab(R) product sales as
revenues increase in the future. The Company is working diligently with one
large grocery retailer on a Vitsab(R) pilot program. In the event the pilot
program proves beneficial to the retailer, the Company will ramp up production
of Vitsab(R) products to meet the demands of this customer. While the Company is
encouraged by the results of the pilot program, it is still undetermined if the
program will result in success to the extent the retailer will implement a
full-scale program using Vitsab(R) products. The Company cannot predict if the
retailer will continue using Vitsab(R) products after the completion of the
pilot program.
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.
16
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports of Form 8-K:
The Company filed on February 11, 2002 a Current Report of Form 8-K
disclosing the President's Letter to Shareholders mailed to
shareholders of record on or about February 8, 2002 regarding an
overview and summary of the prior year's events.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COX TECHNOLOGIES, INC.
(Registrant)
Date: 3-15-02 /s/ James L. Cox
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James L. Cox
Chairman, President and Chief Executive
Officer
Date: 3-15-02 /s/ Jack G. Mason
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Jack G. Mason
Chief Financial Officer and Secretary
18