SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 113 OF 15 (D)
OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended April 30, 1998, Commission File #0-8006
COX TECHNOLOGIES, INC.
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f.k.a. ENERGY RESERVE, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0220617
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification # )
69 McAdenville Road, Belmont, North Carolina 28012
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (704) 825-8146
Securities registered pursuant to Section 12 (b) of the Act: (None)
Securities registered pursuant to Section 12 (g) of the Act: (None)
Common stock, without par value
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( Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
State the aggregate market value of the voting stock held by non-affiliates for
the registrant's (the aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices at
which the stock was sold, or the average bid and asked prices of such stock, as
of a specified date within 60 days prior to the date of filing.)
$3,505,566 at July 1, 1998
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date (applicable only to corporate
registrants.)
19,905,438 as of July 1, 1998
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Documents incorporated by reference: List the following documents if
incorporated by reference and the part of the Form 10-K into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 4249B) or
(C) under the Securities Act of 1933. (The listed documents should be clearly
described for identification purposes.)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Cox Technologies, Inc. f.k.a. Energy Reserve, Inc. (the Company) has
been primarily engaged in the business of producing and distributing transit
temperature recording instruments, both domestically in the United States and
internationally. The Company also engages in the business of acquiring,
developing and selling oil properties and of producing and selling crude oil for
its own account in the United States. As such the Company has not and does not
engage in petroleum refining or retail marketing.
The Company was incorporated as Mericle Oil Company in July 1968, under
the laws of the State of Arizona. The name was changed to Energy Reserve, Inc.
in August, 1975 and changed for the second time in April 1998 to Cox
Technologies, Inc. Its executive offices, formerly located in Phoenix, Arizona
are now located at 69 McAdenville Road, Belmont, North Carolina 28012 and its
telephone number is (704) 825-8146. Except where the context otherwise
indicates, all references to the "Company" are to Cox Technology, Inc. and its
wholly owned subsidiaries, Twin-Chart, Inc. its wholly owned subsidiary Transit
Services, Inc., ERES Cogenics, Inc., Energy Reserve Financial Corporation,
Energy Reserve Holdings, Inc. and Digi-V, Inc., a 56% owned subsidiary.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has two industry segments: (1) production and distribution
of temperature recording devices; and (2) crude oil production and development.
The following table summarizes the assets, revenues and operating results
attributable to the Company's operations by industry segments for the date and
periods indicated.
1998 1997 1996
---- ---- ----
Revenues
(1) Temperature recorders-Y/E 4/30 $8,135,197 $7,444,170 $6,864,519
(2) Oil production-Y/E 4/30 $3,559 $9,647 -0-
Operating profit or loss:
(1) Temperature recorders-Y/E 4/30 $1,094,285 $840,992 $531,885
(2) Oil production-Y-E 4/30 $1,972,283 $29,649 $(363,864)
Identifiable assets
(1) Temperature recorders-4/30 $2,958,066 $3,142,207 $2,798,723
(2) Oil production-Y/E 4/30 $6,808,470 $3,811,149 $3,756,947
(c) NARRATIVE DESCRIPTION OF BUSINESS
TEMPERATURE RECORDER OPERATIONS
The Company's temperature recorder activities include production and
distribution of transit temperature recording instruments. These instruments,
known as temperature recorders, are self contained, battery powered and designed
to create a graphical "time vs. temperature" record.
The recorders are marketed under the trade name Cox Recorders and
produce a record which is documentary proof of temperature conditions useful for
compliance with governmental regulations, the monitoring performance of
refrigerated carriers, and for claims in the transport of valuable perishables
such as produce, meat, pharmaceuticals, chemicals, live plants and animal
material.
The Company produces two separate graphic recorders. The COX1 and COBRA
are single-channel recorders which record the air temperature in the truck or
container. The COBRA is a new low-cost recorder with a transparent case, which
allows viewing of the temperature record without opening the case itself. Both
are used primarily in transit monitoring of temperature variations.
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In addition to these graphic temperature recorders, the Company
distributes an electronic temperature recorder, or "data logger", named the
TRACER. The TRACER delivers its data via a cable link to a PC computer using
specialized software. TRACER is used in quality control and safety applications
in the foods industries and also in shipping. The shipping configuration is a
new design with an integral mailer pack that has patents pending.
The source and availability of raw materials are not critical or
significant factors in the temperature recorder operations of the Company.
The temperature recorder operations of the Company are non-seasonal.
The Company does and is required to carry significant amounts of
inventory for its temperature recorder operations and neither Company nor
industry practices provide extended payment terms to customers.
The temperature recorder operations of the Company are not dependent
upon a single or a few customers, nor would the loss of any one customer have a
materially adverse effect upon earnings or the financial position of the
Company.
Backlog of orders is not a major factor in the temperature recorder
operations of the Company.
The Company is a major competitor in the temperature recording industry
as regards its production and distribution activities.
The Company does not maintain company owned distribution entities. All
distributors are on contract and major distributors are located in Copenhagen,
Singapore and Melbourne. All other distribution and sales operations are through
individual sales persons operating on a sales commission basis or a salary plus
incentive basis.
The product lines include a portable penetration probe thermometer,
which is retailed but not manufactured by the Company. The Company also performs
contract manufacturing.
The COX1 product accounts for 90% of the Company's business. The balance
is due to probes and retail sales of other temperature monitoring products,
which are not manufactured. The COBRA and TRACER products are new and no
substantial volume has yet been achieved.
OIL PRODUCTION OPERATIONS
The Company's oil activities include the drilling of development wells
and the development and operation of such properties for production of oil.
Since 1980, the Company has principally financed these activities by borrowings,
sales of non-operating assets, issuance of its common stock and from operations.
During the three years covered by this report the Company has only had modest
crude oil production or sales from March 1997, when production sales were
reactivated.
In 1986, as a means to maximize production through steam enhancement of
its significant heavy crude reserves, the Company undertook a project to
construct a Cogeneration (COGEN) and Thermal Enhanced Oil Recovery (TEOR) at its
oil leases in the Chico-Martinez field, Kern County, California. The COGEN/TEROR
facility as contracted with Pacific Gas & Electric Company (PG&E), a California
public utility, was a 45 MW project consisting of two phases; Phase One being
20.5 MW and Phase Two being 24.5 MW. Problems arose with PG&E, principally
dealing with the power transmission routing and inter-connection, which
prevented the Company from meeting the contract deadline.
As a result of these problems, a complaint was filed with the California
Public Utilities Commission against PG&E. The future plans of the Company
pertaining to it's oil production and the COGEN/TEOR operation are discussed
under the respective properties captions elsewhere in this report under Item 2.,
Description of Properties - Mitchel and Bacon Hills leases. The Company's plans
to augment its oil operations in California include, by late 1998, a
well-enhancement oil recovery project at the Chico-Martinez Field. It is
anticipated that the project will be a "Qualified Enhanced Oil Recovery Project"
as defined by the Omnibus Budget Reconciliation Act of 1990 with resultant
entitlements of substantial federal income tax benefits. The organizational
structure of the enhanced oil project will be such as to enable investor
financing of the project and/or outsourcing of the field operations.
Actual drilling operations are not undertaken by the Company, but are
conducted by third-party drilling contractors. The Company, however, may act as
operator of such projects, thereby supervising exploration, drilling, and
production activities. Since 1980, virtually all of the Company's development
activities have been on its Kern County Leases, which the Company acquired by
cash and/or issuance of shares of its common stock to be held for investment(
investment shares).
The source and availability of raw materials are not critical or
significant factors in the oil production operations of the Company.
2
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The oil operations of the Company are non-seasonal.
The Company does not and is not required to carry significant amounts of
inventory for its oil operations and neither Company nor industry practices
provide extended payment terms to customers.
The oil operations of the Company are not dependent upon a single or a
few customers, nor would the loss of any one customer have a materially adverse
effect upon the earnings or financial position of the Company.
Backlog of orders is not a factor in the crude oil operations of the
Company.
The oil and gas industry is extremely competitive and involves risk. The
Company is a minor factor in the petroleum and natural gas industry as regards
to its development and production activities. The ability of the Company to
market oil and gas produced from its properties or from those which may be
subsequently acquired depends on numerous factors beyond the control of the
Company, including the extent of production and imports of oil and gas into the
United States, the proximity and capacity of oil and gas pipelines, the
availability of other transportation facilities, the marketing of competitive
fuels, the effect of governmental regulations on the production of oil and gas
and other matters affecting the availability of a ready market, such as
fluctuation, supply and demand.
Governmental agencies of the United States maintain a close watch on the
ecological impact of development activities and the possibility of ecological
disturbances. Such measures may substantially increase the cost of developing
and producing oil and gas and may prevent or delay the commencement or
continuance of a given operation. In the opinion of management of the Company,
its operations comply with applicable legislation and regulations. The existence
of such regulation has had no material effect on the Company's operations and
the cost of such compliance has not been material to date. The cost and effect
on operations of compliance with future environmental laws and regulations
cannot be predicted and such measures may have an effect on the capital
investment or the net revenues resulting from the Company's activities.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company owns working interests in certain developed oil and gas
properties in the United States. Developed acreage consists of properties on
which oil and gas wells have been drilled which are capable of producing crude
oil or natural gas.
The Company's principal oil and gas properties are the Mitchel and Bacon
Hills leases previously referred to in this report. Following is a description
of each of these principal oil and gas properties:
MITCHEL LEASES
These subleases, located in the Chico-Martinez field, Kern County,
California, were acquired in 1969 and consist of 380 acres in which the Company
has interests to a depth of 2,000 feet on 320 acres and to a depth of 2,500 feet
on 60 acres. The Company owns a 78.33 percent working interest in these
subleases, with 52 completed oil wells which were unitized in 1976 and which
produce from the 500 to 1,600 foot levels. Production interest of others in
these wells was 1.1 percent at April 30, 1998, 1997 and 1996. The oil produced
is heavy crude of approximately 12.7 API gravity. The Company has no drilling
requirements under the subleases, which are held by production. There was no
crude oil production on these leases during the three years ended April 30, 1998
until March 1997.
BACON HILLS LEASE
In March 1990, the sublessor declared this sublease terminated and
requested return of the underlined portion of the sublease. The Company does not
acknowledge the declaration of termination and has not complied with the
sublessor's request. To date, no litigation, action or further request has been
undertaken by the sublessor in a connection with this matter. The Company
retains and holds a five-acre well tract and the oil and gas rights to each of
fourteen wells drilled on this sublease.
This sublease, located in the Chico-Martinez field, Kern County,
California, was acquired in December, 1980 and consists of approximately 260
acres, 1 which the Company has interests to the depth of 5,000 feet. The
landowners' and overriding royalty interest holders are identical with the
Mitchel leases which total 21.67 percent and the Company owns the remaining
78.33 percent working interest in this lease. The acquisition of this sublease,
in conjunction with the Mitchell subleases, provided the Company with an entire
leasehold interest in a full section of land.
Under the terms of this sub-lease, the Company committed to the
drilling of an initial six wells on or before March 31, 1982, and at least six
additional wells each 12-month period thereafter, until at least 52 wells have
been drilled without regard to whether they are producing or abandoned. The
Company has drilled a total of 14 wells under its commitment. No wells have been
drilled on this lease since 1984.
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COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION
During the past ten years, the Company's oil activities have been
directed toward the implementation of the COGEN/TEOR Project on the Mitchel
leases which would be capable of serving the combined Mitchel and Bacon Hills
leases with a steam flood enhanced oil recovery operation and provide for the
sale of power to a California public utility company. ERES Cogenics, Inc., a
wholly owned subsidiary, was formed in August 1987 to be the
builder/owner/operator of the COGEN/TEOR facilities. The Company signed a power
purchase agreement with Pacific Gas and Electric Company for the delivery to the
utility of 20.5 megawatts of electricity by a date no earlier than June 1, 1989
and no later than December 24, 1991. The agreement further provided for delivery
and purchase of up to 45 megawatts of power in later years. Contracts were
signed for negotiated with responsible and experienced suppliers, supervision,
natural gas delivery, maintenance and operation and the TEOR installation,
including the laying of steam lines for the steam flood operations.
As stated earlier in 1(c) under Oil Production Operations, certain
problems arose with the public utility, which rendered the Company unable to
satisfy the power purchase contract requirements by the December 24, 1991
deadline. The public utility denied a request for deferral of the deadline date.
The Company filed a complaint with the California Public Utility Commission
(CPUC) requesting continuation of the power purchase agreement. The matter was
heard by the CPUC in October 1993 and a settlement in this litigation was
reached in June 1997, which was approved by the CPUC in the amount of
$3,500,000. The Company received the settlement amount in February 1998.
The tables below set forth the gross and net developed acreage and the
gross, net, and revenue net productive wells of all oil and gas properties of
the Company at April 30, 1998.
(a) "Gross Acreage" represents all acres in respect to which the Company
has a working interest, "Net Acreage" represents the aggregate of the working
interest of the Company in the gross acreage.
Acreage (a)
----------------------
Gross
Location Held By Expires Developed Net
-------- ------- ------- --------- ---
California
Mitchel Production Indefinite 380.00 297.65
*Bacon Hills Production * 70.00 54.83
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450.00 352.48
* Reference is made to the descriptions of the Mitchel and Bacon Hills leases
previously discussed in this Item 2 concerning the status of the leases and
certain drilling commitments required of the Compnay pertaining to the
California leases.
(b) "Gross Wells" represents the total number of wells which the
Company has a working interest; "Net Wells" represents the number of gross wells
multiplied by the percentages of the working interests therein owned by the
Company. "Revenue Net Wells" represents the number of gross wells multiplied by
the percentages of the participating production interests therein retained by
the Company.
Oil Wells
Revenue
Location Gross Net Net
- -------- ----- --- ---
California 62.0 48.6 48.6
During the past five fiscal years, the Company has not drilled any oil
or gas wells.
The Company is not obligated under any existing contracts or agreements
to provide a fixed and determinable quantity of oil and gas in the future.
The latest independent petroleum studies and reports for the Kern
County, California leases were by Douglass Petroleum Management Co.,
Bakersfield, California as follows: (1) Comprehensive Reservoir Engineering
Study dated February 1986 which estimated the recoverable oil reserves at
21,103,341 barrels, and (2) a Steam Flood Development Plan, dated June 1987
which sets forth a plan including drilling and production costs for recovery of
the oil reserves. The Company has not filed any reports concerning oil and gas
reserve estimates with any regulatory authorities or agency other than the
Securities and Exchange Commission.
The net production of oil and gas for each of the last five years is
shown below. Net production represents the gross production after deduction for
royalties of other parties.
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OIL/BBDS
1998 235
1997 500
1996 -0-
1995 -0-
1994 -0-
None of the net production during each of these years is applicable to
long-term supply or similar agreements with foreign governments or authorities
in which the Company acts as producer.
ITEM 3. LEGAL PROCEEDINGS
Disclosure of legal proceedings is contained in Note M, "Commitments,
litigation and contingencies," of the Notes to Consolidated Financial Statements
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On November 15, 1997 pursuant to Notice and accompanying Proxy Statement
for the Annual Meeting of Shareholders, the annual meeting of shareholders of
the Company was held in Phoenix, Arizona at which meeting the following matters
were submitted to a vote of the securities holders:
1. To elect five Directors to the Board of Directors for a one-year
term in accordance with the articles of Incorporation.
2. To consider and act upon a proposal to ratify the selection of
Bedinger & Company as the Company's independent public
accountants for the fiscal year ending April 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION FOR COMMON STOCK
The Company's common stock is traded in the nationwide over-the-counter
market and is listed in the electronic bulletin board provided by the National
Quotation Bureau, Inc.
The range of high and low bid quotations for each quarterly period
during the past four years ended April 30, based upon information provided to
the Company by the National Association of Securities Dealers or market makers
in the Company's stock, was as follows:
1998 1997 1996 1995
----------- ----------- ----------- ------------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
First Quarter 1/4 1/4 1/4 1/4 5/8 3/8 3/16 7/64
Second Quarter 5/16 5/16 1 1/4 1/8 5/8 5/16 3/16 1/86
Third Quarter 3/4 3/8 13/16 3/8 5/8 5/16 7/16 3/16
Fourth Quarter 3/4 3/8 3/4 3/8 1/2 5/16 5/8 3/8
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(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of April 30, 1998 the approximate number of holders of record of each
class of equity securities of the Company was as follows:
Common Stock, no par value 3,000 (1)
(1) Included in the number of stockholders of record are shares held as
"nominee" or "street name.
(c) DIVIDENDS
The Company has not declared any dividends during the past three years
ended April 30, 1996 through 1998.
ITEM 6. SELECTED FINANCIAL DATA
Following is a summary of selected financial data for each of the last
three fiscal years ended April 30:
1998 1997 1996
---- ---- ----
Operating Revenues $8,138,757 $7,453,817 $6,864,519
Profit (loss) from
continuing operations 3,117,068 1,004,333 207,638
Profit (loss) from
continuing operations
per common stock 0.15 0.05 0.01
Total Assets 9,766,536 6,953,356 6,555,670
Long-term
Obligation 280,706 358,686 465,895
Cash Dividends Declared
Per Common Share -0- -0- -0-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Based upon its temperature recorder operations and the developed and
undeveloped reserves of the Mitchel and Bacon Hills leases, the Company
anticipates cash from operations, equity investment, and borrowing from
long-term lending sources adequate to meet cash requirements. At present, cash
flow from operations is adequate to meet cash requirements and commitments of
the Company. However, the Company intends to enter into equity, debt of other
financing arrangements to meet its further financial needs for expansion into
food safety control products related to its temperature recorder operations and:
(a) To resume and continue drilling and work over activities at its
Chico Martinez oil field.
(b) To repay outstanding current liabilities;
(c) To provide for general working capital needs;
COMPARISON OF OPERATIONS FOR 1998 AND 1997
Operations for the years ended April 30, 1998 resulted in a net earnings
of $3,066,568 or 0.15 per share. Included in these net earnings is a one-time
income amount of $2,043,305 net of the provision for income taxes. The income
from operations was $1,023,263 for the current year and $985,119 for the prior
year.
The following schedule sets forth the two company segments for the years
ended April 30, 1998 and 1997:
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Y/E 1998 Y/E 1997
Temperature Oil Temperature Oil
Recorders Production Recorders Production
--------- ---------- --------- ----------
Revenues:
Sales $8,135,197 $ 3,559 $ 7,444,170 $ 9,647
Cost of sales 3,676,082 28,775 3,472,256 3,649
General & Admin 1,925,715 153,492 1,745,691 88,915
Sales Expense 1,223,991 -0- 1,052,164 -0-
Interest 34,938 37,250 40,851 24,249
Depreciation 34,468 782 36,946 3,977
Income(loss) operations 1,240,003 (216,740) 1,096,262 (111,143)
Other income (expense) (127,203 2,221,008 (121,578) 140,792
Income taxes 18,515 31,985 133,692 -0-
Net earnings (loss) 1,094,285 1,972,283 840,992 29,649
TEMPERATURE RECORDERS
Sales increased approximately $700,000 or 9% for the current year as
compared to the prior year ended April 30. There was an improvement in cost of
sales as a percentage of sales from 46.6% in the 1996-97 year to 45.1% in the
1997-98 year.
Sales expense increased $171,827 for the current year over the prior
year. Such expenses expressed as a percent of sales, increased from 14% last
year to 15% for the current year. This increase was due primarily to marketing
activities in the introduction of the Company's new products concerning food
safety monitoring.
General and administrative expense as a percentage of sales remained
constant at 23% for the two years of comparative operations. The decrease of 15%
in interest expense was due to reduction in long term debt. The category of
other expense increased by $5,625 or 5% due primarily to a reduction in interest
income from the prior year.
Overall, the improvement in Income from Operations of $143,741 is
noteworthy by the fact that it represents 21% of the sales increase. This
compares favorably with the Company's historically normal percentage of 15% for
this category of income.
OIL PRODUCTION
Crude oil sales were down in the 1997- 98 year by $6,088 or 63%. This
was the result of decreased production due to depressed oil prices and a well
work-over program.
Cost of sales increased $25,126 due to the above-mentioned work-over
program, which accounted for all of the increase.
General and administrative expenses increased $64,577 or 73%, due
primarily to technological research and development costs of $32,000,
shareholder meeting costs of $19,000 and increases aggregating approximately
$13,500 for rent, travel, insurance and office relocation costs.
The increase in interest expense of $13,000 was due primarily to an
adjustment of the note payable balance pertaining to the stipulated judgement
referred to in Note H of Notes to Consolidated Financial Statements incorporated
herein by reference.
Other income increased $2,080,216 over the prior year income of
$140,792. As disclosed elsewhere in this report under Enhanced Oil Recovery
Operations and by Note E of Notes to Consolidated Financial Statements
incorporated herein by reference, the Company received $3.5 million in February
1998 in settlement of certain litigation with a public utility company. The
Company realized a net settlement amount of $2,274,764 after payment of legal
fees, consultant fees and litigation costs of the six-year litigation. The
Company absorbed a charge to operations of $53,756 from a write off of certain
investment securities valuation and other expenses which resulted in the
$2,221,008 other income amount.
COMPARISON OF OPERATIONS FOR 1997 AND 1996
Operations for the year ended April 30, 1997 resulted in a net profit of
$870,641. This is a $702,620 or 418% improvement over the $168,020 net profit
for the prior year ended April 30, 1996.
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The following schedule reflects the two company segments for the years
ended April 30, 1997 and 1996.
Y/E 1997 Y/E 1996
Temperature Oil Temperature Oil
Recorders Production Recorders Production
--------- ---------- --------- ----------
Sales $ 7,444,170 $ 9,647 $ 6,864,519 -0-
Cost of sales 3,472,256 3,649 3,525,156 6,715
General & Admin 1,745,691 88,915 1,649,384 62,076
Sales Expense 1,052,164 -0- 1,004,953 -0-
Interest 40,851 24,249 42,028 45,709
Depreciation 36,946 3,977 39,116 3,977
Income(loss) 1,096,262 (111,143) 603,882 (118,477)
operations
Other income (expense) (121,578) 140,792 (32,380) (245,387)
Income taxes 133,692 -0- 39,617 -0-
Net earnings (loss) 840,992 29,649 531,885 (363,864)
TEMPERATURE RECORDERS
Net earnings were $840,992 for the year ended in 1997 as compared to
$531,885 for 1996, an improvement of $309,107 or 58%.
Sales were up approximately 8.5% for the current year over the prior
year. There was a slight decrease in cost of sales. These two factors resulted
in an improvement in gross margin on sales of $632,551 for 1997. The gross
profit on sales in 1997 was $3,971,914 as compared to $3,339,363 for 1996.
As a percentage of sales, all categories of operating expenses, remained
relatively constant between the two years.
Income from operations was up $492,380 for 1997 over 1996. Increases in
other expense and income taxes of $183,273 reduced the improvement in net
earnings to $309,107.
OIL PRODUCTION
The oil production segment reflects net earnings for the year ended
April 30, 1997 of $29,649 as compared to a net loss of $363,864 for the prior
year. This improvement of $393,513 is attributable primarily to other income
gain as disclosed below.
The only oil production sales for either of the past two years was
approximately 500 barrels sold in March 1997. As disclosed elsewhere in this
report, the oil field operations have been inactive for several years due to
litigation involving the Company's cogeneration project. Production operations
have been reactivated in the last quarter of the 1996-1997 fiscal year.
General and administration expenses increased $26,839 or 43% due
primarily to legal costs of $8,000 and increases in salaries, rentals and
insurance expenses of approximately $19,000.
Interest expense declined due to debt reduction. Other income in 1997 of
$140,792 was the result of the settlement of liabilities at less than the
recorded liability, which resulted in a gain of $386,179 for this category of
operations. In the prior year the $245,387 expense was attributable principally
to a loss on investment securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV
ITEM 9. DISAGREEMENT OF ACCOUNTING AND FINANCIAL DISCLOSURE
None
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
(a) IDENTIFICATION OF DIRECTORS
The following table lists certain information concerning the directors
of the Company:
Name, Positions and Director Term Certain Other
Offices With Registrant Age Since Expires Corporations
- ----------------------- --- ----- ------- ------------
Alfred P. Sprenger,
Chairman of the Board 70 1968 (1) (2)
James L. Cox,
President, Chief
Executive Officer,
Chief Operating Officer 53 1995 (1) (3)
David K. Caskey
Secretary and Treasurer 36 1997 (1) (4)
George M. Pigott 70 1997 (1)
Michael E. Fonzo 58 1997 (1)
(1) Serves until next meeting of the Company's stockholders.
(2) Serves as the sole trustee of the Liquidating Trusts for Progressive
Investment Corporation (PIC) and PIC Research & Development Corp.
(3) Serves as President and Chief Executive Officer of the Company's
subsidiary, Twin-Charts, Inc.
(4) Serves as Secretary-Treasurer of Company's subsidiaries, Twin Chart, Inc.
and Transit Services, Inc.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
Executive
Name, Positions and Director Term Certain Other
Offices With Registrant Age Since Expires Corporations
- ----------------------- --- ----- ------- ------------
James L. Cox,
President, Chief
Executive Officer,
Chief Operating Officer 53 1995 (1) (2)
David Caskey
Secretary-Treasurer 36 1997 (1) (3)
(1) Serves until replaced by the Board of Directors.
(2) Serves as President and Chief Executive Officer of Company's subsidiary,
Twin-Chart, Inc. and Transit Services, Inc.
(3) Serves as Secretary-Treasurer of Company's subsidiaries, Twin-Chart, Inc.,
and Transit Services, Inc.
(c) BUSINESS EXPERIENCE
Mr. James L. Cox has been an officer and director of the Company since
August 1, 1995. He has served in the capacity of President and Chief Operating
Officer from that date to the present. From November 1997 to the present, he has
served as Chief Executive Officer. He has served in identical capacities in the
two subsidiary corporations, Twin-Chart, Inc., and Transit Services, Inc., since
1986 and from 1977 to 1986, he served as Sales Manager and Executive
Vice-President of Transit Services, Inc. He holds a Ph.D. from Stanford
University and has held various teaching and research positions with Duke
University, Stanford Research Institute and University of California, Santa
Barbara.
Mr. Alfred P. Sprenger has been a director of the Company since its
incorporation. He served in the capacity as President and Chief Operating
Officer from 1969 to August 1, 1995. He served as Chief Executive Officer of the
Company from August 1, 1995 to November 1997, on which date he resigned as an
executive officer and employee. He served in identical capacities in the two
affiliated corporations, Progressive Investment Corporation (PIC) and PIC
Research and Development (PIC R&D) until December 1983 and now serves as the
sole trustee of the Liquidating Trusts for PIC and PIC and R&D.
9
<PAGE>
In September 1996, Mr. David K. Caskey was elected Secretary/Treasurer
of the Company to replace Roger Sherer, who died in August 1996. Mr. Caskey has
served as Secretary/Treasurer in the two subsidiary corporations, Twin-Chart,
Inc., and Transit Services, Inc., since 1990. He holds a B.A. degree from Long
Beach State University and has been with the subsidiary corporations since 1987.
Mr. Michael E. Fonzo has been Vice-President of AMS Industrial, Inc.
since 1986, a firm engaged in engineering solutions for coal-fired power plants,
coal-mines and in conducting seminars to engineering companies. He holds a
Master of Science from Catholic University, Chile and has held a teaching
position with the University of the North, Chile. He has been a Sales and
Marketing manager and consultant to several companies in the petrochemical
field. From 1991 to 1993 he represented Cox Recorders in selected countries.
Dr. George M. Pigott is Professor of Food Engineering and is Director of
the Institute for Food Science and Technology, School of Fisheries, College of
Ocean and Fishery Sciences at the University of Washington. He has held these
positions since approximately 1985. He is the author of many papers presented at
symposiums around the world and is a lecturer at several universities in the
United States. For years, Dr. Pigott has been involved in research and
development activities for the processing, preservation and packaging of aquatic
products presented to the customer.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Disclosure of legal proceedings is contained in Note M "Commitments,
Litigation and Contingencies," of the Notes to Consolidated Financial Statements
incorporated herein by reference.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
(a) Remuneration, on an accrual basis, paid to the executive officers
and directors of the Company during the year ended April 30, 1998, was as
follows:
CASH AND CASH EQUIVALENTS
FORMS OF REMUNERATION
<TABLE>
<CAPTION>
Securities
or Property
Insurance Aggregate
Salaries, Fees Benefits or of
Name of Individual Director's Fees Reimbursement Contingent
or number of Capacities in Commissions, Personal Forms of
persons in Group Which Served and Bonuses Benefits Remuneration
---------------- ------------ ----------- -------- ------------
<S> <C> <C> <C> <C>
James L. Cox Director, President $125,407 None None
CEO & COO
Alfred P. Sprenger Chairman of -0- None None
the Board
David K. Caskey Director & Sec/Treas. $ 71,431 None None
Three All Officers & $196,838 None None
Directors
</TABLE>
(b) The Company does not have future plans to pay remuneration, directly
or indirectly, to any of the above officers or directors other that direct
salaries and bonuses as authorized by the Board of Directors.
(c) The directors of the Company do not receive compensation for serving
in their capacity other than reimbursement of expenses incurred related to
company business.
(d) Transactions with management are disclosed in Note L of the Notes to
Consolidated Financial Statements incorporated herein by reference.
10
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table show as of April 30, 1998 the effective number of
shares of common stock of the Company owned by every person owning of record or
known by the Company as owning beneficially more than 5 percent of the
outstanding common stock.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The number of shares and percentage ownership represents effective
ownership in the Company, including ownership through the affiliated
corporations liquidating trusts, Progressive Investment Corporation (PIC) and
PIC research and Development (PIC R&D).
Title of Name and Address Amount and Nature of Percent of
Class Beneficial Owner Beneficial Ownership Class
----- ---------------- -------------------- -----
Common James L. Cox 4,587,000 shares 23.3%
stock, 69 McAdenville Rd. Record
no par Belmont, NC
Common Alfred P. Sprenger 895,800 4.5%
stock, 2432 W. Peoria Record
no par Suite 1167
Phoenix, AZ
Common PIC Liquidating Trust 178,614 1.0%
Stock, 2432 W. Peoria Record and Beneficial
no par Suite 1167
Phoenix, AZ
Common PIC R&D Liq. Trust 67,962 0.3%
stock, 2432 W. Peoria Record
no par Suite 1167
Phoenix, AZ
Common Robert W. Dupree 704,000 3.5%
stock, 2432 W. Peoria Record
no par Suite 1167
Phoenix, AZ
Common Other Related Parties* 4,522,304 22.7%
stock, Record and Beneficial
no par
* Comprised of individuals being certain Company employees and relatives,
friends and business associates of Mr. Sprenger.
For further information concerning ownership interests, see Note L,
"Related-party Matters, Ownership Interests," of the Notes to Consolidated
Financial Statements, incorporated herein by reference.
(b SECURITY OWNERSHIP OF MANAGEMENT
The following table shows as of April 30, 1998, all shares of the
Company stock and that of the affiliated corporations liquidating trusts, PICLT
and PIC R&DLT, beneficially owned by the officers and directors of the Company
as a group:
Amount and Nature of
Title of Class Name of Security Beneficial Ownership Percent of Class
- -------------- ---------------- -------------------- ----------------
Common stock, Energy Reserve, Inc. 5,595,811 28.1%
No par
Common stock PIC Liquidating Trust -0-
No par
Common stock PIC R&D Liquidating Trust -0-
No par
11
<PAGE>
PART IV
ITEM 13. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND
REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements:
Balance sheets--April 30, 1998 and April 30, 1997
Statement of operations and accumulated deficit for the years ended
April 30, 1998, 1997 and 1996
Statement of shareholders' investment for the years ended April 30,
1998, 1997 and 1996
Statement of cash flows for the years ended April 30, 1998, 1997 and
1996
(b) REPORTS ON FORM 8-K
The Company has filed the following Forms 8-K for the year covered by
this report ended April 30, 1998:
None
12
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997
<PAGE>
CONTENTS
PAGE
----
Independent Auditors' Report.................................. 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets............................... 2
Consolidated Statements of Income and Accumulated Deficit. 3
Consolidated Statements of Changes in Stockholders' Equity 4
Consolidated Statements of Cash Flows..................... 5-6
Supplemental Schedule of Non-Cash Investing and
Financing Activities.................................... 7
Notes to Consolidated Financial Statements ............... 8-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
June 19, 1998
Board of Directors
Cox Technologies, inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Cox
Technologies, Inc. (formerly Energy Reserve, Inc.), as of April 30, 1998 and
1997, and the related consolidated statements of income and accumulated deficit
and of cash flows for the years ended April 30, 1998, 1997 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cox Technologies,
Inc., at April 30, 1998 and 1997, and the results of its operations and cash
flows for the years ended April 30, 1998, 1997 and 1996, in conformity with
generally accepted accounting principles.
Certified Public Accountants
F-1
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
April 30
---------------------------
ASSETS 1998 1997
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,575,945 $ 1,118,019
Accounts receivable, less allowance for
doubtful accounts of $29,527 and $30,000
at April 30, 1998 and 1997, respectively 1,627,074 1,131,873
Inventory (Note B) 1,043,531 757,492
Investment in securities (Note C) 39,500 64,500
Notes receivable - current (Note D) 33,503 39,579
Prepaid expenses 352,143 10,508
Deferred income taxes (Note F) 30,000 0
------------ ------------
TOTAL CURRENT ASSETS 5,701,696 3,121,971
Property and equipment (Net) (Note E) 3,704,243 3,748,808
Investment in securities (Note N) 300,000 0
Deposits 5,290 3,890
Goodwill (Notes A, I and J) 48,479 78,687
Notes receivable-non-current portion (Note D) 6,828 0
------------ ------------
TOTAL ASSETS $ 9,766,536 $ 6,953,356
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note G) $ 356,811 $ 489,740
Income taxes payable (Note F) 52,270 400
Current portion of long-term debt (Note H) 510,369 585,859
------------ ------------
TOTAL CURRENT LIABILITIES 919,450 1,075,999
Long-term debt (Note H) 280,706 358,686
Minority interest (Notes A and J) 669 2,674
------------ ------------
1,200,825 1,437,359
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note M)
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized-
100,000,000 shares; issued and outstanding;
19,905,438 shares at April 30, 1998 and
19,905,188 shares at April 30, 1997 20,041,562 20,041,562
Common stock subscribed 58,100 0
Contributed capital 220,872 220,872
Treasury stock (45,920) 0
Accumulated deficit (10,598,719) (13,665,287)
Unrealized loss on available-for-sale
securities (Note C) (180,500) (205,500)
Less - Notes receivable for common
stock:
Issued (Notes K and L) (875,650) (875,650)
Subscribed (Notes K and L) (54,034) 0
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,565,711 5,515,997
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,766,536 $ 6,953,356
============ ============
F-2
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Year Ended April 30
---------------------------------------
1998 1997 1996
---- ---- ----
REVENUE:
Sales $ 8,138,756 $ 7,453,817 $ 6,864,519
----------- ----------- -----------
TOTAL REVENUE 8,138,756 7,453,817 6,864,519
----------- ----------- -----------
COSTS AND EXPENSES
Cost of sales 3,704,857 3,475,905 3,531,871
General and administrative expenses 2,079,207 1,834,606 1,711,460
Sales expense 1,223,991 1,052,164 1,004,953
Depreciation and amortization 35,250 40,923 43,093
----------- ----------- -----------
TOTAL EXPENSES 7,043,305 6,403,598 6,291,377
----------- ----------- -----------
INCOME FROM OPERATIONS 1,095,451 1,050,219 573,142
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Other income (expense) (Note E) 2,093,805 19,214 (266,575)
Minority interest in income of
consolidated subsidiary (Note I) (11,192)
Interest expense (72,188) (65,100) (87,737)
----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 2,021,617 (45,886) (365,504)
----------- ----------- -----------
Earnings before income taxes 3,117,068 1,004,333 207,638
Provisions for income taxes (Note F) 50,500 133,692 39,617
----------- ----------- -----------
NET EARNINGS $ 3,066,568 $ 870,641 $ 168,021
=========== =========== ===========
EARNINGS PER SHARE (Note A):
Net Income $ .15 $ .04 $ .01
=========== =========== ===========
F-3
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Year Ended April 30
-----------------------------------------
1998 1997 1996
---- ---- ----
ACCUMULATED DEFICIT, beginning
of year ($13,665,287) ($14,535,928) ($14,703,949)
NET EARNINGS 3,066,568 870,641 168,021
------------ ------------ ------------
ACCUMULATED DEFICIT, end of year ($10,598,719) ($13,665,287) ($14,535,928)
============ ============ ============
Common Stock
------------------------
Number of Contributed
Shares Amount Capital
------ ------ -------
BALANCES:
April 30, 1995 19,526,374 $ 20,009,855 $220,872
Shares issued:
Settlement of liabilities 36,607 4,500
Shares reacquired and cancelled (7,793) (7,793)
BALANCES:
----------- ------------ --------
April 30, 1996 19,555,188 20,006,562 220,872
Shares issued:
Acquisition of subsidiary 350,000 35,000
BALANCES:
----------- ------------ --------
April 30, 1997 19,905,188 20,041,562 220,872
Shares issued 250
BALANCES:
----------- ------------ --------
April 30, 1998 19,905,438 $ 20,041,562 $220,872
=========== ============ ========
F-4
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Year Ended April 30
--------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $3,066,568 $870,641 $ 168,021
Adjustments to reconcile net earnings
to net cash used by
operating activities:
Depreciation and depletion 31,273 36,946 39,116
Minority interest (2,005) 2,674 11,192
Allowance for doubtful accounts (473) 5,000 25,000
Amortization of goodwill 3,977 3,977 3,977
Deferred taxes (30,000) 167,411 39,600
(Acquisition) disposition of Goodwill 26,231 (26,979)
CHANGES IN CURRENT ASSETS AND CURRENT
LIABILITIES: (Net of effect from purchase
of Twin-Chart, Inc.: for the years ended
April 30, 1997 and 1996 only)
(Increase) decrease in current assets:
Accounts receivable (494,728) 240,192) 49,237
Inventory (286,039) (12,768) 22,756
Prepaid expenses (341,635) (1,697) (2,436)
(Increase) decrease in non-current assets:
Deposits (1,400) 0 2,931
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses (132,929) 206,545) (50,907)
Income taxes payable 51,870 0 0
---------- -------- ---------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 1,890,710 598,468 308,487
---------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of treasury stock (45,920)
Issuance of securities 35,000
Disposition of securities 25,650
Investment in securities (300,000)
Purchase of property and equipment (37,090) (56,816) (308,426)
Disposition of equipment 50,382 38,629
Loss realized on sale of securities 50,000 287,850
Purchase of minority interest in subsidiary (167,750)
Common stock subscribed 58,100
---------- -------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES (224,528) (21,816) (124,047)
---------- -------- ---------
F-5
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Year Ended April 30
---------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Amounts loaned on notes receivable (9,006) (6,702)
Amounts repaid on note receivable 8,254 25,595 40,612
Amounts borrowed under notes payable 78,069 640,179
Amounts repaid on notes payable (231,539) (98,584) (291,795)
Repayment (additions) to subscriptions
receivable (54,034) 250
Reacquisition of common stock (net) (3,293)
---------- ---------- ---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (208,256) (72,989) 379,251
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH 1,457,926 503,663 563,691
CASH AND CASH EQUIVALENTS, beginning of year 1,118,019 614,356 50,665
---------- ---------- ---------
CASH AND CASH EQUIVALENTS, end of year $2,575,945 $1,118,019 $ 614,356
========== ========== =========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 36,345 $ 40,851 $ 58,091
Income taxes paid $ 26,326 $ 46,016
F-6
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES
Year Ended April 30
-------------------------------
1998 1997 1996
---- ---- ----
Payment of accounts payable and
accrued expenses in exchange
for common stock $0 $ 0 $250
Write-down for unrealized loss on
available for sale securities $0 $205,500 $ 0
F-7
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION
The Company was organized in July 1968 for the purpose of acquiring oil and gas
leases and for the exploration and development of oil and gas properties.
On October 30, 1994, the Company acquired Twin-Chart, Inc. a
Nevada Corporation, and its subsidiary (collectively Twin). Twin
was privately owned and operated and is a producer and
distributor of transit temperature recording instruments.
Twin was acquired by the issuance of 4,587,000 restricted shares of common stock
and 5,000,000 warrants to purchase restricted common stock of the Company with
an agreed aggregate value of approximately $1,050,000.
Twin conducts its operations primarily through a 100 percent owned subsidiary
Transit Services, Inc., under the trade name and style of Cox Recorders.
In March, 1997 a transaction was consummated wherein the Company acquired 75% of
the issued and outstanding shares of National On-Site Check Cashing, Inc. This
transaction was subsequently reversed with no significant effect on income in
1998.
Effective August 1, 1995, by agreement, the Company organization was
restructured with Mr. James Cox becoming an officer and director of the Company.
In 1997 Mr. Cox became President, Chief Executive Officer and Chief Operating
Officer, Mr. Sprenger, formerly President of the Company and Chief Operating
Officer became the Chairman of the Board of Directors and the Board was expanded
to a total of five members. One of the new members is an officer and employee.
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Energy Reserve Financial Corp., Energy Reserve
F-8
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
A. PRINCIPLES OF CONSOLIDATION (CONTINUED)
Holdings, Inc., ERES Cogenics, Inc. and Twin-Chart, Inc. It also includes the
56% ownership of Digi-V, Inc., which is in the development stage. All
significant intercompany accounts and transactions have been eliminated.
B. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C. CAPITALIZATION OF OIL AND GAS PROPERTIES
The following types of costs relating to the Company's oil and gas properties
are capitalized under the successful efforts method of accounting:
(i) Costs of purchase to acquire properties.
(ii)Costs to obtain access to proved reserves and to provide facilities for
extracting, treating, gathering and storing oil and gas whether or not a
specific well is successful.
D. DEPRECIATION, DEPLETION AND AMORTIZATION OF CAPITALIZED COST OF OIL AND GAS
PROPERTIES
Depreciation, depletion and amortization of the capitalized cost of oil and gas
properties are provided (on each property) on the unit-of-production method, at
F-9
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
D. DEPRECIATION, DEPLETION AND AMORTIZATION OF CAPITALIZED COST OF OIL AND GAS
PROPERTIES (CONTINUED)
rates which are based on the ratio of oil and gas produced for the year to
independent estimates of the total proved developed recoverable reserves and to
total proved recoverable reserves from the property. These rates are applied to
the unamortized costs for each property. Adjustments to the rates applied,
required as the result of revisions of independent engineers' estimates of
proved reserves, affect the year of such change and future years.
Depreciation of all other property and equipment is provided on the
straight-line method over the respective estimated lives ranging from five to
twenty years.
E. OPERATING COSTS
Costs of oil production (lifting costs), geological and geophysical costs and
the costs of carrying and retaining undeveloped properties are charged to
operations as incurred.
F. RESEARCH AND DEVELOPMENT COSTS
Costs of research and development activities are charged to operations as
incurred.
G. CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent highly liquid investments, generally with a
remaining maturity of three months or less.
F-10
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
H. INVENTORY
Inventory at April 30, 1998 and 1997 consists primarily of raw material,
work-in-progress and finished goods related to transit temperature recording
instruments; manufactured by Transit Services. Inventories are stated at the
lower of cost (first-in, first-out method) or market.
I. INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". Income taxes are provided
based on earnings reported for financial statements purposes. Deferred taxes are
provided on the temporary differences between income for financial statement and
tax purposes.
The Company deducts certain exploration and development costs in its income tax
returns, which are capitalized and amortized for financial reporting purposes.
Accordingly, the tax basis of certain of the Company's oil and gas assets is
less than its basis for financial reporting purposes. Deferred taxes for these
differences have not been provided in the accompanying consolidated financial
statements due to the existence of net operating loss carryforwards.
J. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments in two money
market accounts (totaling $817,368 and $898,997 at April 30, 1998 and 1997
respectively) with a high quality financial institution. At April 30, 1998 and
1997, substantially all cash and cash equivalents were on deposit with one
financial institution. Concentrations of credit risk with respect to trade
F-11
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
J. CONCENTRATION OF CREDIT RISK (CONTINUED)
receivables are limited due to the large number of customers comprising the
Company's customer base and their dispersion across many different geographic
areas. Accounts receivable from ten customers amounted to approximately 37% of
the total accounts receivable at April 30, 1998. Generally, the Company does not
require collateral or other security to support customer receivables. The
Company established an allowance for doubtful accounts during the year ended
April 30, 1996 of $25,000. At April 30, 1998 and 1997 the allowance for doubtful
accounts was $29,529 and $30,000 respectively.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Company for bank loans with
similar terms and maturities, the fair value of the Company's long-term debt
approximates the carrying value. Furthermore, the carrying value of all other
financial instruments potentially subject to valuation risk (principally
consisting of cash and cash equivalents, accounts receivable, bank borrowings,
and accounts payable) also approximates fair value.
L. ISSUANCE OF COMMON STOCK
The issuance of common stock for other than cash is recorded by the Company at
management's estimate of the fair value of the assets acquired or services
rendered. The shares of common stock used (investment shares) can be sold only
in accordance with issued rules promulgated by the Securities and Exchange
Commission (SEC).
F-12
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
M. GOODWILL
Goodwill created in the acquisition of the consolidated subsidiaries is being
amortized over 15 years. Accumulated amortization amounted to $11,931 and $7,954
at April 30, 1998 and 1997, respectively.
N. BASIC EARNINGS PER SHARE
Earnings per share have been calculated in conformity with Financial Accounting
Standards Board Statement No. 128 "EARNINGS PER SHARE". The Company has a simple
capital structure with no significant potential common shares. Basic earnings
per common share is based on the weighted average number of common shares
outstanding during each year (1998 - 19,905,438; 1997 - 19,584,355; 1996 -
19,540,781). Common stock equivalents were immaterial for earnings per share
purposes.
O. LONG-LIVED ASSETS
The Company has implemented the requirements of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
assets and for Long-Lived asset for the Disposal of". In evaluating the
recoverability of the Company's Long-lived assets, management evaluated the
current fair market value and expected future cash flows of its assets and
concluded that no impairment of value has occurred as of April 30, 1998.
F-13
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE B - INVENTORY
Inventory at April 30, 1998 and 1997 consists of the following:
1998 1997
----- ----
Raw Materials $ 364,540 $279,338
Work-in-process 352,096 142,413
Finished goods 326,895 335,741
---------- --------
$1,043,531 $757,492
========== ========
NOTE C - INVESTMENT IN SECURITIES
In March 1992, as part of a February 1992 agreement to acquire securities of Pan
American Energy, Inc., (PAEC) a public corporation, the Company traded certain
California real estate lots in exchange for 4,000,000 Series "A" common stock
warrants and the right to purchase 2,000,000 additional such warrants at ten
cents ($.10) per warrant. The Company did not recognize gain on the exchange and
has recorded the cost of the warrants at the $30,000 recorded cost of the lots.
INVESTMENTS IN SECURITIES
O.T.S. HOLDINGS, INC.
In February 1992, the Company entered into an agreement with O.T.S. Holdings,
Inc. (OTS) a public company to sell certain mining equipment and 50,000 shares
of Company stock in exchange for $10,000 cash and 190,000 shares of 10%
Cumulative Convertible Income Preferred stock of OTS. The transaction was valued
at $200,000 comprised of $50,000 for the Company stock at $1.00 per share and
$150,000 for the mining equipment.
In conversations with a market-maker for these securities, it was concluded that
recent litigation has reduced the value of this stock to $.05 bid; $.09 asked.
Accordingly, a valuation allowance was established reducing the carrying amount
to $.05 per share. Because the core business of the company was still considered
F-14
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE C - INVESTMENT IN SECURITIES (CONTINUED)
INVESTMENTS IN SECURITIES (CONTINUED)
O.T.S. HOLDINGS, INC. (CONTINUED)
sound, the loss is considered unrealized and reflected in the stockholders'
equity section of the financial statements.
PERFECTION FOODS INTERNATIONAL
In December 1992, the Company agreed in principal to use 50,000 shares of its
common stock to acquire 1,500,000 common stock shares and 5,000,000 warrants of
Perfection Foods, International (PFI) a company formed in 1992 to engage in the
fish processing business. In March 1993, subsequent to the fiscal year ended
December 31, 1992, the transaction was completed and the Company issued the
agreed shares and received the PFI shares. Mr. Sprenger, the chairman of the
Board of Directors of the Company, is an officer and director of PFI. At the
date of the transaction, March 1993, the Company's holding represented 33% of
the outstanding shares of PFI, and the Company recorded the transaction of $1.00
per share issued on 50,000 shares. Because the short-term growth of PFI has been
slower than anticipated, the Company reduced the carrying amount of PFI's shares
by 50% in 1997. The loss on these available for sale securities was realized in
1998.
Shares held at April 30, 1998 and 1997 were comprised as follows:
1998
------------------------------
Current Unrealized
Cost Value Loss
---- ----- ----
Pan American Energy Corporation Warrants $ 30,000 $30,000 $
O.T.S. Holdings, Inc. Stock 190,000 9,500 180,500
-------- ------- --------
$220,000 $39,500 $180,500
======== ======= ========
F-15
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE C - INVESTMENT IN SECURITIES (CONTINUED)
INVESTMENTS IN SECURITIES (CONTINUED)
PERFECTION FOODS INTERNATIONAL (CONTINUED)
1997
---------------------------------
Current Unrealized
Cost Value Loss
---- ----- ----
Pan American Energy Corporation Warrants $30,000 $30,000 $
Perfection Food International Stock 50,000 25,000 25,000
O.T.S. Holdings, Inc. Stock 190,000 9,500 180,500
-------- ------- --------
$270,000 $64,500 $205,500
======== ======= ========
NOTE D - NOTES RECEIVABLE
Notes receivable at April 30, 1998 and 1997 consists of:
1998 1997
---- ----
Unsecured note receivable, due October 6, 1998
plus accrued interest at 13%. $14,929 $23,183
Other 25,402 16,396
------- -------
40,331 39,579
Less: current portion 33,503 39,579
------- -------
$ 6,828 $ 0
======= =======
F-16
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT
At April 30, 1998 and 1997, property and equipment are summarized by major
classification as follows:
Oil and Gas Properties and Equipment 1998 1997
- ------------------------------------ ---- ----
Intangible drilling costs $ 883,023 $ 883,023
Lease and well equipment 1,828,881 1,828,881
Leasehold improvements 715,891 715,891
Undeveloped leases 72,167 72,167
Repurchased participating interests 2,608,640 2,608,640
Other 71,036 121,418
---------- ----------
6,179,638 6,230,020
Less: accumulated depreciation and
depletion 2,767,860 2,767,078
---------- ----------
3,411,778 3,462,942
---------- ----------
Manufacturing Property and Equipment
- ------------------------------------
Tooling 146,225 112,727
Machinery and equipment 34,640 34,640
Office furniture and equipment 8,106 6,129
Leasehold improvements 234,533 232,918
---------- ----------
423,504 386,414
Less: accumulated depreciation and
depletion 131,039 100,548
---------- ----------
292,465 285,866
---------- ----------
$3,704,243 $3,748,808
========== ==========
F-17
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)
OIL AND GAS PROPERTIES
MITCHEL LEASES
The Mitchel leases located in Kern County, California consist of 380 acres, on
which 52 oil wells have been drilled and completed.
During 1998, 1997 and 1996 the Company did not drill any wells on this lease as
to which all drilling requirements have been satisfied.
Landowner and overriding royalty interests in the property total 21.66 percent.
The Company has obtained a report from an independent petroleum engineer which
combines the estimated proved reserves and revenues as of June 1996 of the
Mitchel leases and the contiguous Bacon Hills leases. These combined leases
comprise an entire section of the Chico-Martinez field (see below, "Bacon Hills
lease"). Reference is also made to the supplemental information on Standardized
measure of Discounted Future Net Cash Flows elsewhere in this Form 10-K.
During 1998 and 1997, the Company produced approximately 500 gross barrels of
oil, on the combined Mitchel and Bacon Hills leases. No oil was produced on
these leases in 1996. During 1998, 1997 and 1996, the Company had no steaming
operations.
BACON HILLS LEASE
This sublease, located in the Chico-Martinez field, Kern County, California, was
acquired in December 1980, and consists of approximately 260 acres, in which the
Company has interests to the depth of 5,000 feet. The landowners and overriding
royalty interest holders are identical with the Mitchel leases, which total
21.67 percent, and the Company owns the remaining 78.33 percent working interest
in this lease. The acquisition of this sublease, in conjunction with the
Mitchell subleases, provided the Company with an entire leasehold interest in a
full section of land. Under the terms of this sublease, the Company committed to
the drilling of an initial six
F-18
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)
OIL AND GAS PROPERTIES (CONTINUED)
BACON HILLS LEASE (CONTINUED)
wells on or before March 31, 1982, and at least six additional wells each
12-month period thereafter, until at least 52 wells have been drilled without
regard to whether they are producing or abandoned. The Company has drilled a
total of 14 wells - under its Commitment. No wells have been drilled on this
lease since 1984.
In March 1990, the sublessor declared the sublease terminated and requested
return of the undrilled portion of the sublease. The Company does not
acknowledge the declaration of termination, and has not complied with the
sublessor's request. To date, no litigation, action or further request has been
undertaken by the sublessor in connection with this matter. The Company believes
that this breach can be cured, but irrespective of the breach, the Company holds
a five acre well tract and the oil and gas rights to each of the aforementioned
fourteen wells on this sublease.
COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION
The major activity of the Company concerning the properties during the past ten
years was directed toward the implementation of a proposed COGEN/TEOR Project to
be located on the Mitchel leases, with the capability of serving the combined
Mitchel and Bacon Hills leases with a steam flood enhanced oil recovery
operation and provide for the sale of power to a California Public Utility. ERES
Cogenics, Inc., a wholly owned subsidiary, was formed in August 1987 to be the
builder/owner/operator of the COGEN/TEOR facilities. The Company signed a power
purchase agreement with the Pacific Gas and Electric Company (PG&E) for the
delivery by the Company of 20.5 megawatts of electricity no earlier than June 1,
1989 and no later than December 1991. The agreement further provided for
delivery and the purchase of up to 45 megawatts of power in later years.
Contracts were signed or negotiated with responsible and experienced suppliers
and contractors for the Cogen construction, engineering, supervision, natural
gas delivery, maintenance and operation and the TEOR installation including the
laying of steam lines for the steam flood operations. The estimated cost of the
F-19
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
COGEN/TEOR NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)
COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION (CONTINUED)
20.5 megawatt facility was between $45,000,000 and $50,000,000 by independent
engineers.
The power purchase agreement with PG&E terminated on December 24, 1991 after a
decision by the utility not to defer the deadline date. In 1992, the Company
filed a complaint with the California Public Utility Commission (CPUC) alleging
bad faith conduct by PG&E and requesting a reinstatement of a new power purchase
contract. In October 1993, the CPUC hearing on the complaint was concluded. In
June, 1997, the Company and PG&E reached a settlement agreement of the
complaint, which was approved by the CPUC in the amount of $3,500,000 which was
received by the Company in February 1998.
OTHER MATTERS
Geological and geophysical costs for the years ended April 30, 1998 and 1997
were not significant.
To continue to operate and further develop its oil and gas properties, the
Company will require significant amount of additional capital in 1998 and future
years from the sale of debt and/or equity securities, or through other financial
arrangements.
NOTE F - INCOME TAXES
The provisions for income taxes consists of:
April 30
------------------------------
1998 1997 1996
---- ---- ----
Current payable:
Federal $10,500 $32,000
State 70,000 $ 800 1,017
------- ------- -------
80,500 800 33,017
------- ------- -------
Deferred:
Federal 30,000 98,933 29,304
F-20
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES (CONTINUED)
April 30
------------------------------
1998 1997 1996
---- ---- ----
State 33,959 10,296
------- -------- -------
30,000 132,892 39,600
------- -------- -------
50,500 133,692 72,617
------- -------- -------
Less: utilization of net operating
loss carryforward 0 0 (33,000)
------- -------- -------
$50,500 $133,692 $39,617
======= ======== =======
The Company and its subsidiaries file consolidated Federal income tax returns.
There is an aggregate Federal net operating loss carryover of approximately
$10,100,000 available to reduce future federal taxable income of the parent
company. These net operating loss carryovers will expire in various amounts
between 2001 and 2010.
The Company also has available unused investment tax credits of $184,000 which
will expire in various amounts between 1999 and 2001.
The reconciliation of income tax computed at U.S. Federal and State statutory
rates to the income tax provision for the years ended April 30, 1998 and 1997
are as follows:
1998
-------------------------
Currently Payable
-------------------------
Consolidated Deferred
------------ --------
Pre-tax accounting income $ 3,117,068 $
=========== =======
Tax at statutory rates:
F-21
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE F - INCOME TAXES (CONTINUED)
Federal 968,100 (30,000)
State 185,000
Utilization of net operating
loss carryforward (1,072,600)
---------- --------
$ 80,500 $(30,000)
========== ========
1997
-------------------------
Currently Payable
-------------------------
Consolidated Deferred
------------ --------
Pre-tax accounting income $1,019,333 $
Abandonment of property (594,000) 594,000
--------- --------
Taxable income $ 425,333 $594,000
========= ========
Tax at statutory rates:
Federal $ 148,800 $ 98,933
State 7,900 33,959
Utilization of net operating
loss carryforward (155,900)
--------- --------
$ 800 $132,892
========= ========
The deferred tax asset at April 30, 1998 is attributable to accrued State income
taxes.
NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at April 30, 1998 and 1997 consist of
the following:
F-22
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (CONTINUED)
1998 1997
---- ----
Trade accounts payable $103,356 $211,961
Accrued vacation payable 73,121 67,443
Accrued salaries and wages payable 170,398 134,623
Other accounts payable and accrued
liabilities 9,936 75,713
-------- --------
$356,811 $489,740
======== ========
NOTE H - NOTES AND CONTRACTS PAYABLE
The following is a summary of notes and contracts payable at April 30, 1998 and
1997:
1998 1997
---- ----
Unsecured notes payable to individuals due
in monthly installments of $2,955, including
interest at 8%, through December 2001 (see Note I). $72,091 $103,875
Note payable secured by treasury stock, due in
monthly installments of $2,000 plus accrued
interest at 6.67% through March, 2000. 42,422
Stipulated judgement for $201,875 for
settlement of litigation involving a well
drilling contractor at the Company's
Mitchell and Bacon Hills lease. Interest
at accruing 10% per annum. 394,271 358,429
Note payable to individual at 10%, due on demand. 7,057
F-23
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE H - NOTES AND CONTRACTS PAYABLE (CONTINUED)
1998 1997
---- ----
Unsecured notes payable to individuals, due
on demand, including interest at 8%. 125,000
Unsecured note payable at 10%, due on demand. 4,500
Note payable to bank, secured under general
security agreement, due in monthly installments
of $7,560, including interest at 8.5%, through
January 2002. 282,291 345,684
--------- ---------
TOTAL 791,075 944,545
Less: current portion (510,369) (585,859)
--------- ---------
$ 280,706 $ 358,686
========= =========
Aggregate maturities of long-term borrowings over the next five fiscal years are
as follows:
Year Ended April 30 Amount
- ------------------- ------
1999 $510,369
2000 $123,055
2001 $101,236
2002 $ 56,415
--------
$791,075
========
NOTE I - ACQUISITION OF TWIN-CHART, INC.
In April 1993, the Company exchanged 50,000 shares of its common stock for a
combination of 1,000,000 shares and 5,000,000 warrants of Twin-Chart, Inc.'s
F-24
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE I - ACQUISITION OF TWIN-CHART, INC. (CONTINUED)
(TCI) common stock, which represented approximately 20% of the outstanding
shares. In October 1994, the Company acquired the remaining issued and
outstanding shares of TCI which amounted to 4,098,000 shares for 4,587,000
shares of the Company's common stock and 5,000,000 warrants for the purchase of
the Company's stock at an initial price of $5.00 per share. The price per share
increases at a rate of $.50 per share per year for five years following the
initial year, then at a rate of $1.00 per share per year for the second five
years and finally at a rate of $2.00 per share per year for the final three year
period. The acquisition has been accounted for as a purchase. The results of
operations of TCI have been included in the accompanying consolidated financial
statements since the date of acquisition, which was October 31, 1994. The total
cost of the acquisition was approximately $1,050,000, which approximated the
fair value of the net assets of TCI acquired as of that date.
In January, 1996, TCI acquired all of the minority interest (13.7%) in its
subsidiary Transit Services, Inc. The purchase price was $110 per share on five
year installment notes, due in monthly installments of $2,955, including
interest at 8% (see Note H). The total cost was $167,750.
NOTE J - ACQUISITION OF NATIONAL ON-SITE CHECK CASHING, INC. OF NEVADA
In March, 1997, the Company issued 350,000 shares of common stock in exchange
for 75% of the issued and outstanding stock of "National On-Site Check Cashing,
Inc. of Nevada" (NOCC). NOCC cashes payroll checks for a fee using mobile
armored trucks for facilitating the transactions. The Company recorded the
transaction using the purchase method of accounting and valued the shares issued
at $.10 per share. The transaction was rescinded in April, 1998. There was no
significant gain or loss in the transaction.
F-25
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE K - COMMON STOCK
SHARES ISSUED IN EXCHANGE FOR INTEREST-BEARING NOTES
The Company has issued shares of its common stock in exchange for notes
receivable. The financial statements show the outstanding shares and the related
notes receivable as an offset against stockholders' equity.
NOTE L - RELATED-PARTY MATTERS
As discussed below, certain transactions have been consummated with parties
related to the Company and its management.
OWNERSHIP INTERESTS
Mr. Sprenger is the trustee of two liquidating trusts for two formerly
affiliated corporations in which he was an officer and director. These trusts,
Progressive Investment Corporation Liquidating Trust (PICLT) and PIC Research
and Development Liquidating Trust (PICR&DLT) are shareholders of Company common
stock.
The ownership of the Company's common stock by Mr. Sprenger, Mr. Cox, PICLT,
PICR&DLT, Company employees and other related parties (relatives, friends and
business associates of Mr. Sprenger) is summarized as follows at April 30, 1998:
Percentage
----------
Mr. Sprenger * 4.5
Mr. Cox 23.3
PICLT 1.9
PICR&DLT 1.2
Company employees 2.5
Other related parties * 24.3
* Includes stock issued under subscription rights (Refer to discussion in this
Note L).
Mr. Sprenger, Mr. Sherer's Estate and other related parties own the following
beneficial percentages in the two liquidating trusts at April 30, 1998.
F-26
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE L - RELATED-PARTY MATTERS (CONTINUED)
OWNERSHIP INTEREST (CONTINUED)
PICLT PICR&DLT
----- --------
Mr. Sprenger 0 0
Mr. Sherer (Estate) 7.0 1.1
PICLT -- 44.1
Other related parties 31.0 6.0
TRANSACTIONS INVOLVING MR. SPRENGER AND OTHER RELATED PARTIES
A. In October 1984, the Company and the then President, Alfred P. Sprenger,
and his wife Dorothy V. Sprenger (Sprengers), entered into an agreement
(the agreement) for the issuance to the Sprengers of 2,000,000 investment
shares of Company stock at a price of $1.00 per share. The price quoted by
NASDAQ as of the date of agreement was $.875 to $1.00 per share. The
agreement was mutually extended to December 31, 1991 for payment of the
$2,000,000 which evidenced by a promissory note secured by the issued
shares.
In December 1991, the Company reviewed the status of the arrangement with
issuances for employee options and settlement of liabilities. Accordingly,
the stock price for this agreement was adjusted to $0.625 per share. This
action resulted in a decrease of $750,000 in the amount of the original
agreement. The maturity date of the promissory note has been extended to
December 31, 2000.
In December 1992, Mr. Sprenger assigned his interest in 1,950,000 of those
investment shares to a non profit organization. From December 1991 to April
30, 1998, a total of $728,321 has been credited to the common stock
promissory note by application of $598,000 in accrued salary compensation
from 1988 to date and a $130,321 debt due Mr. Sprenger. At April 30, 1998
and 1997, the unpaid balance of the promissory note is $521,929,
respectively, which is secured by 1) 870,800 shares of the issued common
stock and 2) further collateralized by mortgages on real estate. At April
F-27
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE L - RELATED-PARTY MATTERS (CONTINUED)
TRANSACTIONS INVOLVING MR. SPRENGER AND OTHER RELATED PARTIES
(CONTINUED)
30, 1998, a total of 1,079,200 shares of the 1,950,000 shares of Company
stock assigned by Mr. Sprenger had been transferred to the non profit
organization.
B. In December 1985, the Company issued 1,300,000 investment shares of common
stock to certain parties in exchange for promissory notes secured by the
issued shares at a price of $0.625 per share. The quoted market price
according to the National Market Quotation Bureau was $0.62 to $0.875 per
share at the date of issuance of the shares. The aggregate dollar amount of
the promissory notes was $812,500. A total of $458,779 has been paid on the
promissory notes to date by the various parties. The $353,721 balance due
at April 30, 1998 is reflected in the consolidated Balance Sheet as a
deduction from shareholders' equity. This balance due is secured by 508,394
of the issued shares. None of the promissory notes are due from officers of
the company.
NOTE M - COMMITMENTS AND CONTINGENCIES
GENERAL
The Company's operations are subject to various governmental and regulatory
controls (particularly those of the Department of Energy and the Environmental
Protection Agency), the effect of which on the nature of the Company's future
operations, if any, is not known.
COMMITMENTS
The Company leases its offices and manufacturing plant facilities under
noncancellable operating leases which expire in 2005. The total minimum
commitments under these leases are as follows:
F-28
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE M - COMMITMENTS AND CONTINGENCIES (CONTINUED
COMMITMENTS (CONTINUED)
Year ending April 30
--------------------
1999 $ 67,642
2000 $ 67,642
2001 $ 67,642
Through 2005 $248,043
Rent expense for the years ended April 30, 1998, 1997 and 1996 is $103,814,
$134,852, and $125,380, respectively.
LITIGATION
A complaint for infringement of patent was filed in October 1995 in the United
States District Court for the Eastern District of California. The complaint was
settled in 1997 for a nominal amount.
NOTE N - SUBSEQUENT EVENT
In November, 1997, the Company acquired a nominal interest in VITSAB, AG,
(VITSAG) a corporation formed under the laws of the Country of Switzerland for
$300,000. In June, 1998 the Company acquired all of the outstanding shares of
Visual Indicators Tag Systems, AB, (VITSAB) a corporation formed under the laws
of the Country of Sweden and a wholly-owned subsidiary of VITSAG. The
acquisition was accomplished by the issuance of 3,375,734 shares of the
Company's unregistered common stock, 950,000 shares of the common stock of
VITSAB, USA, Inc., a previously wholly-owned subsidiary of the Company with
4,750,000 issued shares of common stock outstanding, and the assumption of
certain debt owed by VITSAB to an unrelated company.
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated:
ENERGY RESERVE, INC.,
an Arizona Corporation
7-29-98 By /s/ James L. Cox
---------------------------
James L. Cox, President and
Chief Executive Officer
7-29-98 By /s/ R.W. Dupree
---------------------------
R.W. Dupree, Controller and
Chief Financial Officer
7-29-98 By /s/ David K. Caskey
---------------------------
David K. Caskey
Secretary-Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dated indicated:
Dated: SIGNATURES
- ------ ----------
7-29-98 James L. Cox
---------------------------
James L. Cox
President and Director
7-29-98 /s/ Alfred P. Sprenger
---------------------------
Alfred P. Sprenger
Chairman - Board of Directors
7-29-98 /s/ David K. Caskey
---------------------------
David K. Caskey
Secretary-Treasurer and Director
7-29-98 /s/ George M. Pigott
---------------------------
George M. Pigott
Director
7-29-98 /s/ Michael E. Fonzo
---------------------------
Michael E. Fonzo
Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FINANCIAL REPORT OF COX TECHNOLOGIES, INC. AS SUBMITTED TO THE SECURITIES
AND EXCHANGE COMMISSION FOR THE YEAR ENDED APRIL 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,575,945
<SECURITIES> 39,500
<RECEIVABLES> 1,627,074
<ALLOWANCES> 0
<INVENTORY> 1,043,531
<CURRENT-ASSETS> 5,701,696
<PP&E> 3,704,243
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,766,536
<CURRENT-LIABILITIES> 919,450
<BONDS> 0
0
0
<COMMON> 20,041,562
<OTHER-SE> (11,475,851)
<TOTAL-LIABILITY-AND-EQUITY> 9,766,536
<SALES> 8,138,756
<TOTAL-REVENUES> 8,138,756
<CGS> 3,704,857
<TOTAL-COSTS> 7,115,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72,188
<INCOME-PRETAX> 3,117,068
<INCOME-TAX> 50,500
<INCOME-CONTINUING> 1,023,263
<DISCONTINUED> 0
<EXTRAORDINARY> 2,093,805
<CHANGES> 0
<NET-INCOME> 3,066,568
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
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