UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - FOR THE FISCAL YEAR ENDED APRIL 30, 2000
[ ] 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)
ARIZONA 86-0220617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
69 MCADENVILLE ROAD
BELMONT, NORTH CAROLINA 28012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 825-8146
Securities registered pursuant to Section 12 (b) of the Act: (None)
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Estimated aggregate market value of the voting stock held by non-affiliates of
the registrant:
$17,504,036 as of July 6, 2000
Number of shares of Common Stock, no par value, as of the latest practicable
date:
24,414,725 shares as of July 6, 2000
Documents incorporated by reference: NONE
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Cox Technologies, Inc. (the Company), was incorporated as Mericle Oil
Company in July 1968, under the laws of the State of Arizona. The name was
changed to Energy Reserve, Inc. in August 1975. In November 1994, Energy Reserve
acquired Twin-Chart, Inc. and altered its primary business focus from crude oil
operations to temperature recording and monitoring operations. Subsequently, in
April 1998, to better reflect this focus, the Company changed its name to Cox
Technologies, Inc.
Executive offices are located at 69 McAdenville Road, Belmont, North
Carolina 28012; its telephone number is (704) 825-8146. Except where the context
otherwise indicates, all references to the "Company" are to Cox Technologies,
Inc., its wholly owned subsidiaries, Twin-Chart, Inc., Transit Services, Inc.,
Vitsab Sweden, AB, Vitsab, Inc. and Cox Recorders Australia, Ltd., Pty., a 95%
owned Australian distribution company.
The Company is engaged in the business of producing and distributing
transit temperature recording instruments, both domestically in the United
States and internationally. Transit temperature recording instruments work by
creating a strip chart record of temperature changes over time, or record
temperatures electronically according to a present interval ("logging"). The
Company has been involved in the sale and manufacture of both types of transit
monitoring products, and has established an international market presence and
reputation for reliable temperature recording products.
A major recent effort of the Company has been research and development into
new technologies in electronic data "logging." The result of this investment,
the EDS logger and the EDM software system (used to read the information in the
loggers), is projected as a new and technologically novel temperature monitoring
system.
Concurrent with this electronic hardware/software research and development
effort, the Company has expended funds to further the development of
enzyme-based "smart labels" that detect temperature abuse in packages of
perishable goods. The Company has introduced this new technology, known as
Vitsab(R), to the food and pharmaceutical industries as a monitoring label
applied to packages of temperature sensitive products. Initial indications for
demand of this product have been very positive.
The core expertise of the Company has been established as a reliable
provider of temperature monitoring products, and as an innovator and developer
of new and technologically advanced monitoring systems.
Historically, the Company has held oil leases in California (the
Chico-Martinez field) for many years, but has not produced in any significant
volume. The intent of this asset holding has been a strategy to hold the asset
in anticipation of future larger-scaled oil production, as economic conditions
permit.
Low market prices for crude oil of the type produced by the field have
hampered production in recent years. However, in tandem with the recent rise in
oil prices, the market price for the Company's crude has more than tripled over
the last two years.
Increasing oil prices and the Company's desire to focus on its core
business--temperature monitoring of perishables--have changed the Company's
strategy with respect to the oil field. The Company now has a strategy to
improve production in the field while simultaneously pursuing a buyer of the
subleases.
The Company entered into an agreement with an independent oilfield operator
in April 1999. The primary function of the operator has been to increase
production by overhauling the surface equipment, establishing steam and hot
water injection operations, and improving field conditions at the property. In
July 2000 the Company entered into a new agreement with the operator that
replaces the previous agreement. Under the terms of the new agreement the
Company intends to increase production more rapidly. The new agreement will also
allow the Company to buyout the operator at any time, thus making the subleases
immediately available for sale.
It is the Company's strategy that productive activity at the field will
help to increase the revenues while establishing a greater asset value, thus
making the Company's sublease holdings more attractive to a potential buyer.
2
<PAGE>
Additionally, the Company has entered into an exclusive agreement with a
group in Dallas, Texas, to sell the subleases on behalf of the Company. The
group will contact and solicit potential buyers to make purchase offers to the
Company to buy the subleases.
(b) FINANCIAL INFORMATION
The Company has two current operating segments that involve the (1)
production and distribution of temperature recording and monitoring devices,
both electronic "loggers" and graphic temperature recorders (referred to as
"Temperature Recorder Operations" as a group) and (2) oilfield operations and
other, which include all economic activity related to the oil production and the
holding of the oil leases and the operation of its Phoenix office.
Financial information for these operating segments is summarized below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED APRIL 30 2000 1999 1998
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES:
(1) Temperature Recorder Operations $9,700,282 $8,943,883 $ 8,135,197
(2) Oilfield Operations and Other 10,695 1,428 3,559
OPERATING PROFIT (LOSS):
(1) Temperature Recorder Operations $ 839,853 $ 919,087 $ 1,094,285
(2) Oilfield Operations and Other (143,888) 46,946 1,972,283(1)
IDENTIFIABLE ASSETS:
(1) Temperature Recorder Operations $4,906,328 $5,639,936 $ 2,958,066
(2) Oilfield Operations and Other 3,576,309 4,596,239 6,808,470
</TABLE>
----------
(1) This figure reflects a single event litigation settlement. See page 11 of
this document under "Oilfield Operations".
Research and development (R & D) segments are not currently operating
entities. All of the expenditures in these segments have been dedicated to
various aspects of business development, including formal research, development
of production techniques, and product research aimed at market readiness of the
product. Some small revenues have been generated in the sale of pre-production
materials.
Research and development segments are the (1) "Smart Label" project,
involving the research, technical and market development of the Vitsab(R) "smart
label" tags (and other allied tag technologies) and (2) EDS and Ancillary
Software Development Project, involving "logger" hardware engineering, software
development, systems integration and market research. The following data
summarize investment and income activity in these segments.
FOR THE YEARS ENDED APRIL 30 2000 1999 1998
---------- ---------- -----------
PROJECT REVENUES:
(1) Smart Label Project -0- $ 9,233 -0-
(2) EDS/Software Project -0- -0- -0-
R & D EXPENSES:
(1) Smart Label Project $1,148,591 $ 768,127 -0-
(2) EDS/Software Project 667,095 -0- -0-
IDENTIFIABLE ASSETS:
(1) Smart Label Project $ 999,677 $ 478,132 -0-
(2) EDS/Software Project 228,168 -0- -0-
3
<PAGE>
(c) NARRATIVE DESCRIPTION OF BUSINESS
TEMPERATURE RECORDER OPERATIONS
The Company's temperature recorder activities include production and
distribution of transit temperature recording instruments and the sale and
distribution of electronic temperature recorders (sold for non-transit quality
monitoring purposes as well as for transit monitoring) manufactured for the
Company on contract. The Company also performs contract manufacturing.
The transit temperature recording instruments, known as temperature
recorders, are self-contained, battery-powered and designed to create a
graphical "time vs. temperature" record. The electronic temperature recorders
are battery-powered devices that record temperature in a computer memory chip.
The data are later visualized by transferring the information to a PC computer.
The Company also sells digital thermometers as adjuncts to their primary
temperature recorder activity.
The transit 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 electronic temperature recording products are used for the same
purpose, but also are used for internal checking of temperature conditions in
storage and processing.
The Company produces two separate graphic recorders. The COX(1) and
COBRA(R) record the air temperature in the truck or container. The COBRA(R) 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. COBRA(R) design was recently
granted a U.S. patent.
The Company also manufactures (through a contract manufacturing arrangement
with a producer in New Zealand) and distributes an electronic temperature
recorder, or "data logger", named the TRACER(R). The TRACER(R) delivers its data
via a cable link to a personal computer using specialized software. This
software is used under contract issued by the New Zealand supplier. TRACER(R) is
used primarily in quality control and safety applications in the foods
industries.
A lower cost transit or "shipping" version of the TRACER(R), the
DataSource(TM) transit temperature logger, has been recently introduced. This
logger product is encased in a postage-prepaid mailer sleeve and is used
exclusively for transit temperature monitoring.
COX(1), COBRA(R) and DataSource(TM) are all currently selling into the
ongoing markets for the Company's recorder products.
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 in
regards to its production and distribution activities.
The Company generally does not maintain company owned distribution
entities. However, in 1999, the Company established Cox Recorders Australia,
Ltd., Pty., as a means to retain its market share and market presence in this
geographic area.
Except for this subsidiary, all distributors are on contract. Major
distributors are located in Copenhagen, Denmark, Singapore and Santiago, Chile.
All other distribution and sales operations are through individual sales persons
operating on a sales commission basis or a salary plus incentive basis.
Digital thermometers with penetration probes are purchased wholesale and
retailed to customers for the Company's manufactured products. The company also
sells data collection or "listing" temperature recorders that are used for
point-of-measurement recording. The Company does not manufacture these probe and
electronic recorder products.
The COX(1) product accounts for 93% of the Company's revenues. The balance
is accounted for through the sale of probes and of other temperature monitoring
products. The COBRA(R) product is new and no substantial volume has yet been
achieved.
4
<PAGE>
OILFIELD OPERATIONS
The Company owns working interests in certain developed oil and gas
properties located in California. 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 oil and gas properties are the Mitchel and
Bacon Hills subleases.
For further information reference is made to Note E -Property and
Equipment, Oil and Gas Properties of the notes to consolidated financial
statements.
MITCHEL AND BACON HILLS SUBLEASES
The Mitchel subleases and the Bacon Hills sublease are located in the
Chico-Martinez field, Kern County, California. Together they comprise one entire
section of land. The Mitchel subleases 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 Bacon Hills sublease was acquired
in December 1980 and consists of 260 acres, in which the Company has interests
to the depth of 2,250 feet. The Company owns all of the working interest in both
these subleases that equates to a 78.33 percent revenue interest. There are 62
completed oil wells that produce from the 500 to 1,600 foot levels on these
subleases. The oil produced is heavy crude of approximately 12.7 API gravity.
The Company has no drilling requirements under these subleases, which are held
for an indefinite term by production. The sublessor has a 21.67 percent royalty
revenue interest in these subleases.
As previously disclosed in earlier reports, the sublessor had declared this
sublease in default due to the failure by the Company to meet certain well
drilling requirements. In May 2000, the Company paid the sub-lessor $50,000 to
cure the default. By agreement and amendment to the sublease, the sublessor
acknowledged that all drilling requirements had been fulfilled, and that the
Company had no further obligation to drill any additional wells, and that any
and all notices of default were cancelled, and that the sublease was in full
force and effect.
The latest independent petroleum studies and reports for the leases were by
a respected petroleum engineer 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 agencies other
than the Securities and Exchange Commission. The petroleum engineer confirmed
the level of reserves in a recently issued letter.
The Company has engaged the services of an independent operator to commence
production at its Chico-Martinez field. Higher oil prices have made it
economical for the Company to invest capital in an effort to increase
production. It is the Company's strategy to increase production at the field in
an effort in increase revenues and establish a greater value. The Company has
recently raised its commitment to increasing production. Additionally, the
Company has increased its commitment to sell the subleases, thus providing
additional capital to focus on the growth of the Company's core business
operations.
The Company has entered into a one-year exclusive agreement with a group in
Dallas, Texas, to act as an agent on behalf of the Company and to identify
potential buyers of the subleases. Once potential buyers are identified, the
group will solicit offers and present them to the Company. The Company intends
to weigh the increased production against potential offers to purchase that may
be presented by the agent.
SMART LABEL PROJECT
Vitsab(R) is a new technology which employs enzymatic color indicators
inside a label to show the amount of temperature exposure of a stored or shipped
temperature-sensitive commodity. The enzyme indicator reaction is activated at
the beginning of the monitoring period by applying pressure on a plastic bubble
strip that is a structure part of the label. This strip contains sealed packets
of the non-toxic liquids are broken by the pressure, which mix to form the
indicating solution.
These tags are programmable devices that run as a "biological clock"
parallel to the biological clock of the product it is set to monitor. They
integrate both time and temperature and give a visual indication when parallel
processes with the monitored food or drug product has reached a certain
definable state. This device is known as a TTI (time-temperature integrator).
The Company plans to produce two distinct Vitsab(R) TTI configurations: a
"three dot" indicator (for wholesale distribution of perishables) and a "one
dot" indicator (primarily for food safety and consumer packages). Each can be
produced on high-speed automated machinery. The Company has engaged the services
of a respected automation engineering and equipment development firm to develop
new machinery for accelerated Vitsab(R) production.
5
<PAGE>
The Company is in the final formative stages of the development, production
and marketing of these Vitsab(R) temperature history indicating tags. Final
development of this technology has required substantial effort to refine
manufacturing procedures to achieve a reliable and consistent product delivery.
In addition, the chemical formulation of the tag itself, including the specific
chemical nature of the enclosure has required exhaustive testing and validation.
The Company's visual indicator tag operations also include the development,
production and distribution of FreshTag(TM) food spoilage indicators.
FreshTag(TM) is based on a licensed and patented technology developed by the
U.S. Food and Drug Administration (FDA), and is a tag technology that enables
the detection or "sniffing" of specific chemical odors that signal the incipient
spoilage of seafood and other food types. The Company is currently the sole
licensee for this patent from the FDA. Research and development on this part of
the project is less complete than the Vitsab(R). The Company has not currently
set a date for product announcement for the FreshTag(TM) technology, and is
pursuing a policy of seeking new external funding for the continued research and
development efforts for the FreshTag(TM) product.
The source and availability of certain raw materials may be a critical and
significant factor for Vitsab(R) TTI when it begins production in significant
volumes. The source and availability of raw materials for FreshTag(TM) are not
likely to be a critical and significant factor in the future production of
FreshTag(TM) product forms.
The Company plans to manufacture the Vitsab(R) TTI at two locations: Malmo,
Sweden and Belmont, North Carolina. Preliminary production operations have been
periodically started and stopped in Malmo, Sweden as development progresses.
Machinery testing and preparation of solutions is currently being set up in
Belmont, North Carolina.
The Company maintains both company owned distribution entities and certain
contract distributors associated with the Company's temperature recorder
operations. The Company plans to use these same distribution entities as future
Vitsab(R) outlets.
EDS/SOFTWARE PROJECT
The Company has initiated a major new design effort in the EDS temperature
logger. The EDS is a slim package about the size of a credit card and less than
a quarter of an inch thick. The large LCD screen displays detailed information
about the temperature recording, and the user can scroll to display additional
items of information. This "smart card" design departs from the normal
configuration for such products in that it is small in size, is engineered to be
very inexpensive, and displays much of the information that the users of graphic
transit temperature instruments now obtain from a visual inspection of a paper
chart. The Company has invested in design consultants, outside engineers, new
high-level personnel and other expenditures to bring the EDS/Software Project to
a near-completed state.
The price and performance characteristics of the EDS temperature logger
should create an additional market position for the Company.
EDS manufacturing will be based on subcomponent fabrication in China
combined with assembly, testing and programming in Belmont, North Carolina.
Production planning is in process, but no product is currently being produced.
The Company expects to bring this product to market during fiscal 2001.
All temperature logger products need software to interpret and display the
data that have been collected and stored in the electronic device. A major
shortcoming of existing software used for this purpose is that each recording
episode creates a separate file in the computer after downloading. Typical
practice in corporate use of temperature loggers for time-temperature
maintenance regimes requires that hundreds to thousands of recording episodes
are obtained and stored. This creates a substantial problem for logistics,
analysis and sorting of the information. As a part of the EDS Project, the
Company has engaged the services of programming professionals to create a
database storage software system for rational treatment of recording episode
data. Initial introduction of this program, EDM-2000, has met with positive
responses from prospective corporate customers.
As an adjunct to its EDS/Software development program, the Company has
developed a UNIX-type software operating system (OS) designed for data gathering
and reporting of temperature recording data. During development it was
recognized that the OS could be expanded to include significantly more
functionality than its initial design. Accordingly, the OS has a range of 14
separate product functionalities that are completed and awaiting final
documentation to be ready for marketing. The OS functions from memory without
the use of a hard drive. This is the significant difference between it and other
operating systems in the market. Independent markets for the OS may exist, but
the Company is not examining these independent markets at this time.
The source and availability of certain raw materials may be a critical or
significant factor in the planned EDS operations of the Company. A current
global shortage of EPROM memory chips may limit production, dependent upon the
6
<PAGE>
scale of impending demand for the product. There are no raw material source and
availability factors other than this single component for any other aspect of
the EDS/Software development.
The projected EDS operations of the Company are non-seasonal. The Company
will be required to carry significant amounts of inventory for its EDS
operations and neither Company nor industry practices provide extended payment
terms to customers. The projected EDS operations of the Company are not
dependent upon a single or a few customers, nor would the loss of any one
customer have a material adverse effect upon earnings or the financial position
of the Company.
ITEM 2. PROPERTIES
Disclosure of properties is contained in Note E - Property and Equipment of
the notes to consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS
Disclosure of legal proceedings is contained in Note N - Commitments,
Litigation and Contingencies of the notes to consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On November 20, 1999 pursuant to Notice for the Annual Meeting of
Shareholders and accompanying Proxy Statement, the annual meeting of
shareholders of the Company was held at the Shelter Pointe Hotel and Marina in
San Diego, California 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 Bylaws of the Company.
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, 2000.
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 on the nationwide over-the-counter
market and is listed under the symbol "coxt.ob" 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 common stock, was as
follows:
<TABLE>
<CAPTION>
2000 1999 1998 1997
------------- ------------- ------------- -------------
LOW HIGH LOW HIGH LOW HIGH LOW HIGH
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 47/64 35/64 3/8 5/16 1/4 1/4 1/4 1/4
Second Quarter 47/64 30/64 5/16 9/32 5/16 5/16 1 1/4 1/8
Third Quarter 4 5/16 31/64 13/32 5/16 3/4 3/8 13/16 3/8
Fourth Quarter 3 3/8 1 1/4 5/8 19/32 3/4 3/8 3/4 3/8
</TABLE>
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of April 30, 2000 the approximate number of holders of record for the
single existing class of common stock (no par value) equity securities of the
Company was approximately 3,500.(2)
----------
(2) Included in the number of stockholders of record are shares held as
"nominee" or "street name.
7
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(c) DIVIDENDS
The Company has not declared any dividends during the past three years
ended April 30, 2000.
ITEM 6. SELECTED FINANCIAL DATA
Following is a summary of selected financial data for each of the last
three fiscal years ended April 30:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues
Profit (loss) from continuing operations $ 9,710,976 $ 8,943,883 $ 8,138,757
(A) Excluding R&D segments(1) 695,965 794,595 1,095,451
(B) Including R&D segments (1,005,478) 163,292 1,095,451
Profit (loss) from continuing operations
per average share of common stock
(A) Excluding R&D segments $ .02 $ .04 $ .05
(B) Including R&D segments $ (.04) $ .01 $ .05
Total assets $14,719,242 $12,877,192 $ 9,766,536
Long-term obligations $ 2,928,359 $ 581,374 $ 280,706
Cash dividends declared -0- -0- -0-
Cash dividends declared per common share -0- -0- -0-
</TABLE>
----------
(1) R&D segments refers to the Smart Label Project and the EDS/Software
Project.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates cash from operations, equity investment, and
borrowing from long-term lending sources adequate to meet cash requirements.
Although at present the cash flow from operations is not adequate to meet cash
requirements and commitments of the Company, the Company intends to 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. In this connection, reference is made to Note O -
Subsequent Event of notes to consolidated financial statements.
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COMPARISON OF OPERATIONS FOR 2000 AND 1999
Presented here is a summary of the operational business segments for the
years ended April 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999 2000 1999
----------- ----------- ----------- -----------
Temperature Temperature Oilfield Oilfield
Recorder Recorder Operations Operations
Operations Operations and Other and Other
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 9,700,282 $ 8,943,883 $ 10,694 $ 1,428
----------- ----------- ----------- -----------
Cost of sales 5,134,172 4,193,586 21,248 13,130
General & administrative 2,183,123 2,307,732 133,333 160,467
Sales expense 1,459,339 1,388,232 -0- -0-
Depreciation & amortization 83,795 87,569 -0- -0-
----------- ----------- ----------- -----------
Income (loss) from operations 839,853 966,764 (143,888) (172,169)
Interest expense (14,266) (12,590) -0- (2,716)
Other income (expense) 43,396 7,031 (78,424) 241,322
Income taxes (41,754) (42,119) -0- 19,491
----------- ----------- ----------- -----------
Net earnings (loss) $ 827,229 $ 919,086 $ (222,312) $ 46,946
=========== =========== =========== ===========
</TABLE>
TEMPERATURE RECORDER OPERATIONS
Sales increased $756,399 or 8.5 % for the current year as compared to the
prior year. Cost of sales as a percent of sales was 52.9% for 2000 as compared
to 46.9% in 1999. This change was primarily due to increased material and labor
costs.
Sales expense remained relatively constant for both years. This category of
expense increased $71,107 or 1% in 2000 as compared to 1999. As a percent of
sales, these expenses were 15% for 2000 and 15.5% for 1999.
General and administrative expense decreased $124,609 or 1.4 % for 2000 as
compared to 1999. Expressed as a percent of sales, the general and
administrative expenses for 2000 was 22.5% and 25.8% for 1999. This reduction
reflects a reassignment of certain staff to the Smart Label project.
OILFIELD OPERATIONS AND OTHER
There were no oil production operations conducted directly by the Company
during the year ended April 30, 2000. However, financial results from the
farm-out arrangement are reflected in the figures presented. The Company
maintained certain insurance and other compliance matters pertaining to the
oilfield operations during this period, and these expenses are reflected in the
schedule above.
Subsequent to the end of the April 30, 2000 fiscal year, by mutual
agreement, the aforementioned farm-out arrangement was terminated and replaced
by a new agreement. For further information regarding this matter, please refer
to Note O-Subsequent Events of notes to consolidated financial statements.
The other expenses relate to the Phoenix office of the Company which has
functioned as a management office for certain of the overall affairs of the
Company, the center for administration of oilfield activities and transactions,
and as a developmental location for aspects of software development.
9
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COMPARISON OF SMART LABEL PROJECT AND EDS PROJECT FOR 2000 AND 1999
Expenses for the research and development (R&D) business development
projects are summarized in the following table:
<TABLE>
<CAPTION>
2000 1999 2000 1999
----------- ----------- ---------- ----------
Smart Label Smart Label EDS/Software EDS/Software
Project Project Project Project
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ -0- $ 9,233 $ -0- $ -0-
----------- ----------- ---------- ----------
Expenses(1) 836,974 610,536 667,095 -0-
Depreciation & amortization 197,552 30,000 -0- -0-
----------- ----------- ---------- ----------
Income (loss) operations (1,034,526) (631,303) (667,095) -0-
Interest expense (155,819) (137,824) -0- -0-
----------- ----------- ---------- ----------
Net Expenses Invested in R&D $(1,190,523) $ (769,127) $ (667,095) -0-
=========== =========== ========== ==========
</TABLE>
----------
(1) Expenses include salaries, rent, materials, equipment purchases,
consulting, travel and office costs. Some of these are PRORATA expenses
based on US facilities and activities, but the majority of the line total
is for the Malmo, Sweden, Vitsab(R) facility and related activities.
The Vitsab(R) facility and associated activities was acquired in June 1998.
Income of $9,233 for prototype materials delivered for testing is reflected for
the nine months ended April 30, 1999. Other related expenditures for this
project are included in this line.
The EDS/Software project started during the year ended April 30, 2000, so
there are no expenditures reflected in 1999 for this project.
COMPARISON OF OPERATIONS FOR 1999 AND 1998
The following schedule reflects the operational business segments for the
years ended April 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998 1999 1998
----------- ----------- ----------- -----------
Temperature Temperature Oilfield Oilfield
Recorder Recorder Operations Operations
Operations Operations and Other and Other
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Sales $ 8,943,883 $ 8,135,197 $ 1,428 $ 3,559
----------- ----------- ----------- -----------
Cost of sales 4,193,586 3,676,082 13,130 28,775
General & administrative 2,307,732 1,925,715 160,467 153,492
Sales expense 1,388,232 1,223,991 -0- -0-
Depreciation & amortization 87,569 34,468 -0- 782
----------- ----------- ----------- -----------
Income (loss) from operations 966,764 1,274,941 (172,169) (179,490)
Other income (expense) 7,031 (127,203) 241,322 2,221,008
Interest expense (12,590) (34,938) (2,716) (37,250)
Income taxes (42,119) (50,500) (19,491) -0-
----------- ----------- ----------- -----------
Net earnings (loss) $ 919,086 $ 1,062,300 $ 46,946 $ 2,004,268
=========== =========== =========== ===========
</TABLE>
TEMPERATURE RECORDER OPERATIONS
Sales increased $808,686 or 10% for the current year as compared to the
prior year ended April 30.
Cost of sales increased $517,504 in 1999 as compared to 1998. As a percent
of sales, this costs were 46.9% in 1999 and 45.1% in 1998.
10
<PAGE>
Sales expense for 1999 increased by a total of $164,241 or 13.4% over 1998.
Expressed as a percent of sales, this expense remained constant at approximately
15% for both years.
General and administrative expense as a percent of sales increased to 25.8%
in 1999 as compared to 23.7% in 1998.
The increase in depreciation and amortization resulted from equipment
purchases and amortization of goodwill.
Interest expense declined due to reduction of debt attributable to this
segment of operations.
OILFIELD OPERATIONS
There were no crude oil sales in 1999. Income of $1,428 was derived from
other operating sources.
Cost of sales, which represent expenditures in maintaining the field
declined $15,645 in 1999 as compared to 1998
The increase of $6,975 in general and administrative expense was primarily
due to professional fees.
Interest decreased due to the reduction in interest bearing indebtedness
attributable to this business segment.
COMPARISON OF SMART LABEL PROJECT AND EDS PROJECT FOR 1999 AND 1998
Expenses for the R&D business development projects are summarized in the
following table:
<TABLE>
<CAPTION>
1999 1998 1999 1998
----------- ----------- ----------- -----------
Smart Label Smart Label EDS/Software EDS/Software
Project Project Project Project
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 9,233 -0- -0- -0-
----------- ----------- ----------- -----------
Expenses(1) 610,536 -0- -0- -0-
Depreciation & amortization 30,000 -0- -0- -0-
----------- ----------- ----------- -----------
Income (loss) operations (631,303) -0- -0- -0-
Interest expense (137,824) -0- -0- -0-
----------- ----------- ----------- -----------
Net expenses invested in R&D $ (769,127) -0- -0- -0-
=========== =========== =========== ===========
</TABLE>
----------
(1) Expenses include salaries, rent, materials, equipment purchases,
consulting, travel and office costs. Some of these are PRORATA expenses
based on US facilities and activities, but the majority of the line total
is for the Malmo, Sweden, Vitsab(R) facility and related activities.
Costs for fiscal 1999 related to the Vitsab(R) facility and associated
activities which was acquired in June 1998. Income of $9,233 for prototype
materials delivered for testing is reflected for the nine months ended April 30,
1999. Other related expenditures for this project are included in this line.
The EDS/Software project started during the year ended April 30, 2000, so
there are no expenditures reflected in fiscal 1999 for this project.
11
<PAGE>
MANAGEMENT COMMENTS ON RECENT DEVELOPMENTS
The following significant events took place during the period from May 1,
1999 to the date of this report:
1. REPLACED AUSTRALIAN DISTRIBUTOR WITH SUBSIDIARY OPERATION Due to
difficulties experienced the Company moved to preserve its market
position and aggressive sales stance by buying out the contract and
inventory of its existing distribution agency in Melbourne, Australia.
A new company was then formed to perform the sales and distribution
function. The Company hired the chief sales person away from the
previous distribution company and appointed him to the position of
chief of sales and administration of the new entity. This new entity
is Cox Recorders, Australia, Ltd., Pty., and is a corporation formed
under Australian law. The Company owns 95% of this subsidiary.
2. HIRED SENIOR VICE PRESIDENT OF ENGINEERING, MR. URI M. DAHAN, AND
BEGAN THE DEVELOPMENT OF THE EDS "SMART CARD" TEMPERATURE LOGGER As
part of its ongoing efforts to achieve market leadership in technical
products in temperature monitoring, the Company started development of
its EDS "Smart Card" electronic temperature recorder. The conceptual
origins of this product began in 1996 when plans were laid to create a
technologically novel device for temperature monitoring. Late in 1999,
the opportunity arose to hire a design expert in the field of design
for devices of this type. The Company took the opportunity and hired
Mr. Dahan to provide design and product development leadership for the
product. The final phase of realization of this product from concept
to prototype has been his primary responsibility. Mr. Dahan was
elected a director of the Company in 1999. His qualifications are
summarized in Part II, Item 1(c).
3. HIRED SENIOR VICE PRESIDENT OF INFORMATION SYSTEMS, MR. MOHAMED
HASSIM, TO COMPLEMENT THE HARDWARE DEVELOPMENT OF THE EDS "SMART CARD"
TEMPERATURE LOGGER WITH COMPANION SOFTWARE With the advent of
accelerated development of the EDS "Smart Card" electronic temperature
recorder, a parallel effort was required to develop custom software to
read the information from the device. Mr. Hassim, a software designer
and engineer was hired to head up this project. Mr. Hassim has a
distinguished background in software development, and is a talented
software designer.
4. INITIATED PURCHASE, DESIGN AND DEVELOPMENT OF A NEW HIGH-SPEED "SMART
LABEL" MACHINE The Company has performed an in depth market assessment
of demand for its Vitsab(R)"Smart Label" product. This assessment
revealed that market viability would be dependent upon the ability to
produce the product at high volumes during the initial phases of
commercial introduction. Existing machinery for production was
essentially "pilot plant" in scale; creation of new technology and
machinery would therefore be necessary to achieve commercial readiness
for the Vitsab(R)product. The Company engaged the services of a
recognized designer and producer of automated production machinery.
The machinery, as of the preparation of this document, is 90% complete
as of the date of this report, and has been successfully operated in a
preliminary trial. The value of the machinery is in excess of
$1,100,000 (see item 10 below).
5. OBTAINED FINANCING OF $2,500,000 FROM TECHNOLOGY INVESTORS, LLC Rapid
expansion by the Company into new technologies has necessitated the
acquisition of financing for investment purposes. The Company entered
into an agreement with Technology Investors, LLC and its principals,
Brian D. Fletcher and Kurt C. Reid, which yielded the $2,500,000 in
investment capital to the Company. The details of this financing
transaction appear in Note K - Related-Party Matters of the notes to
the consolidated financial statements.
6. HIRED CHIEF OPERATING OFFICERS, BRIAN D. FLETCHER AND KURT C. REID Mr.
Fletcher and Mr. Reid agreed to join the Company as Co-Chief Operating
Officers in 2000. Mr. Fletcher and Mr. Reid, along with President and
CEO, Dr. James L. Cox, constitute the new executive management
committee of the Company.
7. HIRED PRESIDENT OF VITSAB, INC., JAMES R. MCCUE The Company has
planned for the expansion of the Vitsab(R) operations in anticipation
of commercial readiness and high volume production. Mr. McCue was
hired to head up the expansion effort, and now serves as President of
Vitsab, Inc., the core subsidiary for the Company's Smart Label
operations. Mr. McCue has extensive experience in management and sales
administration. He was formerly involved in medical equipment sales
and sales administration for a large national firm.
12
<PAGE>
8. BEGAN PROCESS OF REDUCING EXPENSES IN THE COX RECORDERS ASSEMBLY
OPERATION A review of operations within the Company revealed that
reorganization of certain of its procedures, policies and
manufacturing protocols related to recorder operations could result in
substantial reductions in expenses. Management has started to make
significant changes aimed at greater efficiency in workflow, more
economic choices of outside services, and more competitive sourcing of
materials for operations. Some manufacturing processes are being
studied for automation, as well.
9. DOWNSIZING AND EXPENSE REDUCTION AT THE PHOENIX OFFICE The Phoenix
office of the Company has functioned as a management office for
certain of the overall affairs of the Company, the center for
administration of oilfield activities and transactions, and as a
developmental location for aspects of software development. Changes in
the focus of some of these activities have opened the possibility to
downsize the scope of these office functions. The Company has taken
significant steps to reduce expenditure at the Phoenix office by staff
reduction, reduction in leased space, and reduction of telecom service
expense.
10. ESTABLISHED BANKING RELATIONSHIP WITH LONG-TERM LOAN, LINE OF CREDIT
AND LEASE FOR SMART LABEL MACHINE The Company has restructured its
entire banking relationship. The need for restructuring arose from
prior bank debt maturity and impending requirements for lease
financing arising from the acquisition of automated machinery for the
high-speed production of the Vitsab(R)product. Expansion of the new
technologies, according to the Company's projections and budgetary
analyses, also required a new credit line for working capital. All of
these requirements have been recently resolved with the establishment
of a new banking relationship to supplant the prior banking service
provider. This refinancing/new financing transaction is a significant
event in the overall expansion plan for the Company's future.
Important details of this financing transaction appear in Note O -
Subsequent Events of the notes to the consolidated financial
statements.
11. SET UP FRESHTAG(TM) RESEARCH AND MANUFACTURING, INC., TO CONCENTRATE
ON THE DEVELOPMENT OF FRESHTAG(TM) PROJECT The Company was successful
in the acquisition of patent rights to technology developed by the
FDA, the FreshTag(TM). As sole patent rights holder, the Company is
positioned to offer FreshTag(TM) product in the future to what appeAR
to be a substantial market for this "Smart Label" technology.
Projections of cash needs for the commercial realization of this
technology, however, have necessitated a strategy of seeking of some
outside funding for the project. A new subsidiary, FreshTag Research
and Manufacturing, Inc., was formed to serve as the entity for
performing the development, and as a vehicle for possible future
equity financing of the project.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV of this Annual Report.
ITEM 9. DISAGREEMENT OF ACCOUNTING AND FINANCIAL DISCLOSURE
None
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) IDENTIFICATION OF DIRECTORS
The following table lists certain information concerning the directors of
the Company:
NAME, POSITIONS AND DIRECTOR TERM CERTAIN OTHER
OFFICES AGE SINCE EXPIRES CORPORATIONS
------- --- ----- ------- ------------
James L. Cox, President, 55 1995 (1) (2)
Chief Executive Officer
and Chairman of the Board
David K. Caskey, Secretary 38 1997 (1) (3)
and Treasurer
Uri M. Dahan 40 1999 (1) --
George M. Pigott 72 1997 (1) --
Michael E. Fonzo 60 1997 (1) --
Brian D. Fletcher 38 2000 (4) --
Kurt C. Reid 40 2000 (4) --
----------
(1) Serves until next meeting of the Company's stockholders.
(2) Serves as President, Chief Executive Officer and Chairman of the Board of
the Company's subsidiary, Twin-Chart, Inc.
(3) Serves as Secretary-Treasurer of Company's subsidiaries, Twin-Chart, Inc.
and Transit Services, Inc.
(4) Elected to serve until next meeting of the Company's stockholders.
(b) IDENTIFICATION OF EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
EXECUTIVE
NAME, POSITIONS AND OFFICER TERM CERTAIN OTHER
OFFICES AGE SINCE EXPIRES CORPORATIONS
------- --- ----- ------- ------------
<S> <C> <C> <C> <C>
James L. Cox, President and 55 1995 (1) (2)
Chief Executive Officer
David K. Caskey, Secretary and Treasurer 38 1997 (1) (3)
Uri M. Dahan, Senior V.P. - Engineering 40 1999 (4) --
Robert W. Dupree, Chief Financial Officer 78 1980 (5) --
Brian D. Fletcher, Chief Operating Officer 38 2000 (4) --
Kurt C. Reid, Chief Operating Officer 40 2000 (4) --
</TABLE>
----------
(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 and Treasurer of Company's wholly owned subsidiaries,
Twin-Chart, Inc., and Transit Services, Inc.
(4) Secured by employment contract and/or agreement.
(5) Retires October 31, 2000
14
<PAGE>
(c) BUSINESS EXPERIENCE
DR. JAMES L. COX - PRESIDENT, CHIEF EXECUTIVE OFFICER - CHAIRMAN OF THE BOARD
Dr. 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.
DAVID K. CASKEY - SECRETARY AND TREASURER - MEMBER, BOARD OF DIRECTORS
Mr. Caskey has served as Secretary and Treasurer of the Company since 1996. He
has served in the identical capacities in two wholly owned subsidiaries,
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.
URI M. DAHAN - SENIOR VICE PRESIDENT, ENGINEERING - MEMBER, BOARD OF DIRECTORS
Mr. Dahan has served as a director and officer of the Company since November
1999. He holds two engineering degrees, an MS in Manufacturing, Boston
University and a BS in Industrial Engineering, Northwestern University. Since
1988, he has been actively engaged in both manufacturing and industrial
engineering as a technical contributor in developing and introducing
mechanical/electrical products and supervision of R&D projects. From 1993, he
has been a designer and engineer for manufacturing of temperature monitoring
systems.
BRIAN D. FLETCHER - CHIEF OPERATING OFFICER - MEMBER, BOARD OF DIRECTORS
Mr. Fletcher became an officer and director of the Company in March 2000. He has
been a private investor for the past five years. Prior to that, he served for
ten years as an investment representative for Edward Jones Co. He holds a
B.S.B.A degree in Finance and Economics from Rockhurst College. He is a member
of the Board of Directors of Piedmont Bank, Statesville, NC. and a Managing
Director of Technology Investors, LLC, a group that has provided financing to
the Company.
KURT C. REID - CHIEF OPERATING OFFICER - MEMBER, BOARD OF DIRECTORS
Mr. Reid became an officer and director of the Company in March 2000. He has
been a private investor for the past 5 years. Previously, he served for twelve
years as an investment representative for Edward Jones Co. He holds a B.S.
Degree in Business Administration, Southern Illinois University at Carbondale.
He is a Managing Director of Technology Investors, LLC, a group that has
provided financing to the Company.
MICHAEL E. FONZO - MEMBER, BOARD OF DIRECTORS
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, coalmines
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 - MEMBER, BOARD OF DIRECTORS
Dr. Pigott was formerly 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 held these positions
from approximately 1985 to 1999. 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. He is a consultant in the field of shipment
and quality control for the transit of perishable foods.
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Disclosure of legal proceedings is contained in Note N - Commitments,
Litigation and Contingencies of the notes to consolidated financial statements.
15
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
(a) Remuneration, on an accrual basis, paid to the executive officers and
directors of the Company during the year ended April 30, 2000 was as follows:
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL SALARIES, FEES SECURITIES, PROPERTY,
(WITH JOB CAPACITY) DIRECTOR'S FEES INSURANCE, BENEFITS
OR NUMBER OF COMMISSIONS, REIMBURSEMENT,
PERSONS IN GROUP AND BONUSES PERSONAL BENEFITS
---------------- ----------- -----------------
<S> <C> <C>
James L. Cox, President, Chief Executive Officer $134,575 None
David K. Caskey, Secretary and Treasurer $ 78,440 None
President, Transit Services, Inc. Subsidiary
Uri M. Dahan, Senior V.P. - Engineering $ 73,006 Contract Contingency(1)
Robert W. Dupree, Chief Financial Officer $100,000 None
Brian D. Fletcher, Chief Operating Officer $ 1(2) None
Kurt C. Reid, Chief Operating Officer $ 1(2) None
James R. McCue, President Vitsab, Inc. Subsidiary $ 8,462(3) None
</TABLE>
----------
(1) Employment contracts of Uri M. Dahan and Mohamed Hassim have provisions for
bonuses based on sales of the EDS product line for the term of their
contract and have certain guarantees of personal legal services to be
provided.
(2) Brian D. Fletcher and Kurt C. Reid have received purchase options for Cox
Technologies, Inc., shares in lieu of compensation.
(3) James R. McCue was hired March 21, 2000
(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. Transactions with management are disclosed in Note K - Related Party
Matters of the notes to consolidated financial statements.
16
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table show as of April 30, 2000 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.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
-------------- ---------------- -------------------- -----
Common Stock James L. Cox 7,087,000 shares 23.7%
(no par value) 69 McAdenville Rd. Record and Beneficial
Belmont, NC
Common Stock Vitsab, AG 3,125,734 shares 10.4%
(no par value) Stenyxegatan 21 S-213 76 Record
Malmo, Sweden
Common Stock Technology Investors, LLC 2,000,000 shares
(no par value) 191 Bridgeport Drive Beneficial 6.7%
Mooresville, NC
Common Stock Brian D. Fletcher 2,503,000 shares(1)
(no par value) 191 Bridgeport Drive Beneficial 8.4%
Mooresville, NC
Common Stock Kurt C. Reid 2,500,000 shares(1) 8.4%
(no par value) 102 La Bellevue Street Beneficial
Morganton, NC
----------
(1) Includes the 2,000,000 shares beneficially owned by Technology Investors,
LLC of which Mr. Fletcher and Mr. Reid are principals.
For further information concerning ownership interests, see Note K -
Related-Party Matters of the notes to consolidated financial statements.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table shows as of April 30, 2000, all shares of the Company
stock beneficially owned by the officers and directors of the Company as a
group:
AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS NAME OF SECURITY BENEFICIAL OWNERSHIP OF CLASS
-------------- ---------------- -------------------- --------
Common Stock Cox Technologies, Inc. 8,937,811 29.9%
(no par value)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David K. Caskey, Secretary and Treasurer, and Director of the Company is
the brother-in-law of James L. Cox, President, Chief Executive Officer, and
Chairman of the Board of the Company.
17
<PAGE>
PART IV
ITEM 14. 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 as of April 30, 2000 and April 30, 1999
* Statement of operations and accumulated deficit for the years
ended April 30, 2000, 1999 and 1998
* Statement of shareholders' investment for the years ended April
30, 2000, 1999 and 1998
* Statement of cash flows for the years ended April 30, 2000, 1999
and 1998
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the three months ended April
30, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COX TECHNOLOGIES, INC.
(Registrant)
July 28, 2000 By /s/ James L. Cox
-------------------------------------
James L. Cox
President and Chief Executive Officer
July 28, 2000 By /s/ Robert W. Dupree
-------------------------------------
Robert W. Dupree
Chief Financial Officer
(Principal financial and accounting
officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on July 28, 2000.
By /s/ James L. Cox
-------------------------------------
James L. Cox
President and Chief Executive Officer
and Chairman of the Board
(Principal executive officer)
By /s/ David K. Caskey
-------------------------------------
David K. Caskey
Secretary and Treasurer and Director
By /s/ George M. Pigott
-------------------------------------
George M. Pigott
Director
By /s/ Michael E. Fonzo
-------------------------------------
Michael E. Fonzo
Director
By /s/ Brian D. Fletcher
-------------------------------------
Brian D. Fletcher
Chief Operating Officer and Director
By /s/ Kurt C. Reid
-------------------------------------
Kurt C. Reid
Chief Operating Officer and Director
By /s/ Uri M. Dahan
-------------------------------------
Uri M. Dahan
Executive Vice President and Director
19
<PAGE>
CONTENTS
PAGE
----
Independent Auditors' Report........................................ F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheets.................................... F-2
Consolidated Statements of Income.............................. F-3
Consolidated Statements of Changes in Stockholders' Equity..... F-4
Consolidated Statements of Cash Flows.......................... F-5 - F-6
Supplemental Schedule of Non-Cash Investing and
Financing Activities........................................... F-7
Notes to Consolidated Financial Statements .................... F-8 - F-32
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cox Technologies, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Cox
Technologies, Inc., as of April 30, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and of cash flows for the years
ended April 30, 2000, 1999 and 1998. 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, 2000 and 1999, and the results of its operations and cash
flows for the years ended April 30, 2000, 1999 and 1998, in conformity with
generally accepted accounting principles.
Certified Public Accountants
Bedinger & Company
June 14, 2000
(Except Note O, which is
July 13, 2000 and Note E
which is July 19, 2000)
F-1
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,225,192 $ 1,250,810
Accounts receivable, less allowance for doubtful
accounts of $28,524 and $28,664 at April 30, 2000
and 1999, respectively 1,627,601 1,599,079
Inventory (Note B) 1,625,615 1,542,663
Investment in securities (Notes C and I) 300,000 351,211
Notes receivable - current (Note D) 24,948 30,477
Prepaid expenses 3,113 65,860
------------ ------------
TOTAL CURRENT ASSETS 5,806,469 4,840,100
Property and equipment (Net) (Note E) 5,406,760 5,109,762
Deposits 124,129 23,692
Goodwill (Notes A and I) 3,158,706 2,886,783
Notes receivable-non-current portion (Note D) 19,970 16,855
Patents 203,208 0
------------ ------------
TOTAL ASSETS $ 14,719,242 $ 12,877,192
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note G) $ 912,451 $ 582,542
Income taxes payable (Note F) 0 34,720
Current portion of long-term debt (Notes H and K) 1,486,914 1,651,949
------------ ------------
TOTAL CURRENT LIABILITIES 2,399,365 2,269,211
Long-term debt (Notes H and K) 2,928,359 581,374
Minority interest (Note A ) 0 669
------------ ------------
5,327,724 2,851,254
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note N)
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized - 100,000,000
shares; issued and outstanding; 24,414,725 shares at
April 30, 2000 and 23,618,261 shares at April 30, 1999 20,868,467 20,306,098
Common stock subscribed 58,100 58,100
Contributed capital 420,982 420,982
Treasury stock 0 (45,920)
Accumulated deficit (11,920,132) (10,667,609)
Less - Notes receivable for common stock:
Subscribed (Notes J and K) (35,899) (45,713)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 9,391,518 10,025,938
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,719,242 $ 12,877,192
============ ============
</TABLE>
See Notes to Financial Statements
F-2
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Sales $ 9,710,976 $ 8,954,544 $ 8,138,756
------------ ------------ ------------
TOTAL REVENUE 9,710,976 8,954,544 8,138,756
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 5,277,651 4,410,208 3,704,857
General and administrative expenses 2,711,934 2,468,199 2,079,207
Sales expense 1,649,247 1,388,232 1,223,991
Depreciation and amortization 281,347 117,569 35,250
Research and development 796,275 407,044 0
------------ ------------ ------------
TOTAL EXPENSES 10,716,454 8,791,252 7,043,305
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,005,478) 163,292 1,095,451
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Other income (expense) (Notes C and E) (35,028) 248,353 2,093,805
Interest expense (170,263) (153,130) (72,188)
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (205,291) 95,223 2,021,617
------------ ------------ ------------
Earnings (loss) before income taxes (1,210,769) 258,515 3,117,068
Provisions for income taxes (Note F) 41,754 61,610 50,500
------------ ------------ ------------
NET EARNINGS (LOSS) $ (1,252,523) $ 196,905 $ 3,066,568
============ ============ ============
BASIC:
NET EARNINGS (LOSS) PER SHARE (NOTE A) $ (.05) $ .01 $ .15
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 24,222,547 21,368,188 19,905,313
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
ACCUMULATED DEFICIT, beginning of year $(10,667,609) $(10,598,719) $(13,665,287)
as previously reported
Prior period adjustment (Note M) 265,795
------------ ------------ ------------
Accumulated deficit beginning of year, as restated (10,667,609) (10,964,514) (13,665,287)
NET EARNINGS (LOSS) (1,252,523) 196,905 3,066,568
------------ ------------ ------------
ACCUMULATED DEFICIT, end of year $(11,920,132) $(10,667,609) $(10,598,719)
============ ============ ============
Common Stock
------------------------------------------------
Number of Contributed
Shares Amount Capital
------------ ------------ ------------
BALANCE at April 30, 1997 19,905,188 $ 20,041,562 $ 220,872
Shares issued 250
BALANCE at April 30, 1998 19,905,438 20,041,562 220,872
Shares issued:
Acquisition of subsidiary 3,375,734 843,933
Reimbursement of former officer (Note N) 525,483 65,685 200,110
Shares reacquired (188,394) (311,047)
Share value reduced (334,035)
BALANCE at April 30, 1999 23,618,261 20,306,098 420,982
Shares issued:
Acquisition of subsidiary 571,462 235,728
Issued 215,002 326,641
Share adjustment 10,000
------------ ------------ ------------
BALANCE at April 30, 2000 24,414,725 $ 20,868,467 $ 420,982
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(1,252,523) $ 196,905 $ 3,066,568
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities:
Depreciation and depletion 83,795 80,873 31,273
Minority interest (669) 0 (2,005)
Allowance for doubtful accounts (140) (863) (473)
Amortization of goodwill 197,552 36,696 3,977
Deferred taxes 0 0 (30,000)
(Acquisition) disposition of goodwill (469,475) (2,875,000) 26,231
Revaluation of shares 0 (334,035) 0
Prior period adjustment 0 (265,795) 0
CHANGES IN ASSETS AND LIABILITIES:
(Net of effect from purchase of Twin-Chart, Inc.
for the year ended April 30, 1997)
(Increase) decrease in current assets:
Accounts receivable (28,382) 139,481 (494,728)
Inventory (82,952) (499,132) (286,039)
Prepaid expenses 62,747 286,283 (341,635)
(Increase) decrease in non-current assets:
Deposits (100,437) (18,402) (1,400)
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 329,909 225,731 (132,929)
Income taxes payable (34,720) (17,550) 51,870
----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,295,295) (3,044,808) 1,890,710
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Patents (203,208) 0 0
Investment in securities 0 (11,711) (300,000)
Purchase of property and equipment (380,793) (1,456,392) (37,090)
Disposition of equipment 0 0 50,382
Loss realized on disposition of securities 51,211 180,500 50,000
Amounts repaid on notes receivable 0 0 58,100
----------- ----------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES (532,790) (1,275,892) (178,608)
----------- ----------- -----------
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended April 30,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Purchase) sale of treasury stock 45,920 0 (45,920)
Issuance of securities 562,369 1,109,728 0
Amounts loaned on notes receivable (40,111) (12,772) (9,006)
Amounts repaid on notes receivable 42,525 5,771 8,254
Amounts borrowed under notes payable 3,487,513 2,275,869 78,069
Amounts repaid on notes payable (1,305,563) (756,350) (231,539)
Repayment (additions) to subscriptions receivable 9,814 696,077 (54,034)
Reacquisition of common stock (net) 0 (311,047) 0
----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,802,467 3,007,276 (254,176)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 974,382 (1,313,424) 1,457,926
CASH AND CASH EQUIVALENTS, beginning of year 1,250,810 2,575,945 1,118,019
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 2,225,192 $ 1,262,521 $ 2,575,945
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE:
Interest paid $ 170,263 $ 153,130 $ 36,345
Income taxes paid $ 0 $ 19,039 $ 26,326
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
Years Ended April 30,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Write-down for unrealized loss on
available for sale securities $ 0 $180,500 $ 0
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cox Technologies, Inc. (the Company) was incorporated as Mericle Oil Company in
1968, an Arizona corporation. In August 1975 its name was changed to Energy
Reserve, Inc. In November 1994, Energy Reserve acquired Twin-Chart, Inc.
(Twin-Chart conducts its operations exclusively through a wholly owned
subsidiary Transit Services, Inc., under the name and style of Cox Recorders).
Following this acquisition, Dr. James L. Cox became an officer and director of
the Company and its primary business focus changed from crude oil operations to
temperature recording and monitoring operations.
In 1997 Dr. Cox become President, Chief Executive Officer and Chief Operating
Officer, and Mr. Alfred P. Sprenger, the former President became the Chairman of
the Board of Directors which was expanded to five members.
In April 1998, the Company changed its name to Cox Technologies, Inc. and in
June 1998 acquired Visual Indicator Tag Systems, AB (Vitsab) a Swedish
corporation. In 1999, the business and operations formerly conducted by Vitsab
were transferred to a wholly owned subsidiary corporation, Vitsab, Inc.
In March 2000, the Company formed Freshtag Research and Manufacturing, Inc. as a
wholly owned subsidiary.
In April 2000 the Company established a management executive committee comprised
of Dr. Cox, Mr. Fletcher and Mr. Reid to recommend strategy of the Company to
the Board of Directors and manage the overall Company.
For further information on organization matters, reference is made to Note K, in
the notes to the consolidated financial statements.
F-8
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Twin-Chart, Inc., Vitsab, Inc., Freshtag Research
and Mfg., Inc. (a development stage company) and Cox Temperature Recorders Ltd.,
Pty. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
h. INVENTORY
Inventory at April 30, 2000 and 1999 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 $584,820 and $202,483 at April 30, 2000 and 1999
respectively) with a high quality financial institution. At April 30, 2000 and
1999, substantially all cash and cash equivalents were on deposit with one
F-11
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
j. CONCENTRATION OF CREDIT RISK (CONTINUED)
financial institution. Concentrations of credit risk with respect to trade
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 the ten largest customers amounted to
approximately 37% of the total accounts receivable at April 30, 2000. Generally,
the Company does not require collateral or other security to support customer
receivables. At April 30, 2000 and 1999 the allowance for doubtful accounts was
$28,524 and $28,664, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
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 to 22 years. Accumulated amortization amounted to $248,248 and
$50,696 at April 30, 2000 and 1999, respectively.
n. BASIC AND DILUTED 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
complex capital structure with significant potential common shares. However,
basic earnings per common share is based on the weighted average number of
common shares outstanding during each year (2000 - 24,222,547; 1999 -
21,368,188; 1998 - 19,905,313). Potential common shares from the Senior
Subordinated Convertible Promissory Note are anti-dilutive for the period ending
April 30, 2000 and have been excluded from the earnings per share calculations.
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." In evaluating the recoverability of the Company's oil and gas
properties, management evaluated the current fair market value and expected
future cash flows of its assets and concluded that the fair market value of its
oil and gas properties is in excess of their cost as of April 30, 2000. The
Company had recently obtained a report from an independent petroleum engineer
which reconfirmed that the quantity of oil reserves in the oil properties
continues to be approximately 55,000,000 barrels and further stated that the
value thereof is equal to or greater than the recorded cost.
p. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements as of April 30, 1999 to conform to the classifications used as of
April 30, 2000.
F-13
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE B - INVENTORY
Inventory at April 30, 2000 and 1999 consists of the following:
2000 1999
---------- ----------
Raw materials $ 654,238 $ 367,752
Work-in-process 290,103 315,690
Finished goods 681,274 859,221
---------- ----------
$1,625,615 $1,542,663
========== ==========
NOTE C - INVESTMENT IN SECURITIES
In March 1992, as part of a February 1992 agreement to acquire securities of Pan
American Energy, Inc., (PAEC) a public corporation, the Company traded certain
California real estate lots in exchange for 4,000,000 Series "A" common stock
warrants and the right to purchase 2,000,000 additional such warrants at ten
cents ($.10) per warrant. The Company did not recognize a gain on the exchange
and has recorded the cost of the warrants at the $30,000 recorded cost of the
lots. The loss on these securities of $30,000 was realized during the year ended
April 30, 2000.
INVESTMENTS IN SECURITIES AVAILABLE FOR SALE
O.T.S. HOLDINGS, INC.
In February 1992, the Company entered into an agreement with O.T.S. Holdings,
Inc. (O.T.S.) a public corporation to sell certain mining equipment. The Company
issued 50,000 shares of its common stock in exchange for $10,000 cash and
190,000 shares of 10% Cumulative Convertible Income Preferred stock of O.T.S.
The transaction was valued at $200,000 comprised of $50,000 for the Company
common stock at $1.00 per share and $150,000 for the mining equipment.
Because of certain litigation in 1998, the value of the O.T.S shares was written
down to $9,500.
F-14
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE C - INVESTMENT IN SECURITIES (CONTINUED)
O.T.S. HOLDINGS, INC. (CONTINUED)
A valuation allowance was established reducing the carrying amount to $.05 per
share because the core business of O.T.S. was still considered sound. However in
1999 discussions with market makers indicated that the value of O.T.S. had
further declined and accordingly, the unrealized loss was written off. The loss
on these available for sale securities of $9,500 was realized during the year
ended April 30, 2000.
Securities held at April 30, 2000 and 1999 were comprised as follows:
2000
------------------------------------------
Current Unrealized
Cost Value Loss
-------- -------- --------
Vitsab AG $300,000 $300,000 $ 0
-------- -------- --------
$300,000 $300,000 $ 0
======== ======== ========
1999
------------------------------------------
Current Unrealized
Cost Value Loss
-------- -------- --------
Vitsab AG $300,000 $300,000 $ 0
Pan American Energy, Inc. Warrants 30,000 30,000 0
O.T.S. Holdings, Inc. Stock 190,000 9,500 0
Other 11,711 11,711 0
-------- -------- --------
$531,711 $351,211 $ 0
======== ======== ========
NOTE D - NOTES RECEIVABLE
Notes receivable at April 30, 2000 and 1999 consists of:
April 30
-------------------
2000 1999
------- -------
Unsecured note receivable, due October 6, 2000
plus accrued interest at 13% $ 6,395 $16,989
Other 38,523 30,343
------- -------
44,918 47,332
Less: current portion 24,948 30,477
------- -------
$19,970 $16,855
======= =======
F-15
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT
At April 30, 2000 and 1999, property and equipment are summarized by major
classification as follows:
OIL AND GAS PROPERTIES AND EQUIPMENT 2000 1999
---------- ----------
Intangible drilling costs $ 883,023 $ 883,023
Lease and well equipment 1,828,881 1,828,881
Leasehold improvements 722,630 715,891
Undeveloped leases 72,167 72,167
Repurchased participating interests 2,608,640 2,608,640
Other 173,196 170,696
---------- ----------
6,288,537 6,279,298
Less: accumulated depreciation and depletion 2,768,747 2,767,860
---------- ----------
3,519,790 3,511,438
---------- ----------
MANUFACTURING PROPERTY AND EQUIPMENT
Tooling 473,139 230,665
Machinery and equipment 1,680,498 1,306,132
Office furniture and equipment 84,510 8,106
Leasehold improvements 248,345 235,333
---------- ----------
2,486,492 1,780,236
Less: accumulated depreciation and depletion 599,522 181,912
---------- ----------
1,886,970 1,598,324
---------- ----------
$5,406,760 $5,109,762
========== ==========
F-16
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)
OIL AND GAS PROPERTIES (CONTINUED)
MITCHEL SUBLEASES
The Mitchel subleases located in the Chico-Martinez field of Kern County,
California consists of 380 acres, on which 52 oil wells have been drilled and
completed.
BACON HILLS SUBLEASE
This sublease, located in the Chico-Martinez field, Kern County, California,
consists of approximately 260 acres, on which ten oil wells have been drilled
and completed. 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.
As previously disclosed in earlier reports, the sublessor had declared this
sublease in default due to the failure by the Company to meet certain well
drilling requirements. In May 2000, the company paid the sublessor $50,000 to
cure the default. By agreement and amendment to the sublease, the sublessor
acknowledged that all drilling requirements had been fulfilled, and that the
Company had no further obligation to drill any additional wells, and that any
and all notices of default were cancelled, and that the sublease was in full
force and effect.
COMBINED MITCHEL AND BACON SUBLEASES
During 2000, 1999 and 1998 the Company did not drill any wells on the subleases
as to which all drilling requirements have been satisfied.
Landowner and overriding royalty interests in both subleases are 21.66 percent.
During 2000, 1999 and 1998, the Company produced approximately 2,000 gross
barrels of oil, on the combined Mitchel and Bacon Hills subleases. During 2000,
1999 and 1998, the Company had no steaming operations.
In July 2000, the Company entered into an agreement with the existing Operator.
The new agreement voids and replaces all previous agreements made with the
Operator.
F-17
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)
COMBINED MITCHEL AND BACON SUBLEASES (CONTINUED)
The terms and conditions of the new agreement are as follows:
1) The Operator will be reimbursed 120% his capital investment, or $106,800.
This reimbursement will be paid to the Operator in the net profit of the
field, not to exceed 50% of the net profit, up to the point that the
Operator is paid in full.
2) Afterwards, the Operator will receive the greater of $2,000 per month, or
7% of the net profit of the field.
3) The Operator agrees to allow the Company to cancel the agreement at any
time, with the full payment of the Operator's capital investment, including
the 20% markup.
4) The Operator will make phase-in proposals to the Company for logical
improvements of the field. The Company will approve and then fund these
improvements at its discretion.
Under the agreement, the Company retains all supervision over the Operator, and
will directly receive all revenue produced by the field.
Under this Agreement, the Company will not require any significant amount of
additional capital to continue operations of its oil properties in 2000 and the
next few years.
OIL AND GAS PROPERTIES
COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION (COGEN/TEOR)
The major activity of the Company concerning the properties during the period
from 1984 to 1991 was directed toward the implementation of a proposed
COGEN/TEOR Project to be located on the Mitchel sublease, with the capability of
serving the combined Mitchel and Bacon Hills subleases 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
F-18
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE E - PROPERTY AND EQUIPMENT (CONTINUED)
OIL AND GAS PROPERTIES
COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION (COGEN/TEOR)
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 20.5 megawatt COGEN/TEOR 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, 2000 and 1999
were not significant.
F-19
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE F - INCOME TAXES
The provisions for income taxes consists of:
Years Ended April 30
-----------------------------------------
2000 1999 1998
------- ------- -------
Current:
Federal $ 0 $46,500 $10,500
State 14,754 25,000 70,000
------- ------- -------
14,754 71,500 80,500
------- ------- -------
Deferred:
Federal 27,000 9,890 30,000
------- ------- -------
State 0 0 0
------- ------- -------
27,000 9,890 30,000
------- ------- -------
$41,754 $61,610 $50,500
======= ======= =======
The Company and its subsidiaries file consolidated federal income tax returns.
There is an aggregate federal net operating loss carryover of approximately
$8,500,000 available to reduce future federal taxable income of the parent
company. These net operating loss carryovers will expire in various amounts
between 2001 and 2020.
The Company also has available unused investment tax credits of $154,000 which
will expire in 2001
F-20
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE F - INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at federal and state statutory rates
to the income tax provision for the years ended April 30, 2000 and 1999 are as
follows:
2000
-----------------------------
Currently Payable
-----------------------------
Consolidated Deferred
----------- -----------
Pre-tax accounting income (loss) $(1,210,769)
===========
Tax at statutory rates
Federal $ 0 $ 27,000
=========== ===========
State $ 14,000 $ 0
=========== ===========
1999
-----------------------------
Currently Payable
-----------------------------
Consolidated Deferred
----------- -----------
Pre-tax accounting income $ 258,515
===========
Tax at statutory rates:
Federal 105,500 $ (9,890)
State 25,000
Utilization of net operating
loss carryforward (59,000)
----------- -----------
$ 71,500 $ (9,890)
=========== ===========
F-21
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE G - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at April 30, 2000 and 1999 consist of the
following:
April 30
----------------------
2000 1999
-------- --------
Trade accounts payable $767,063 $508,097
Accrued vacation payable 73,121 68,179
Other accounts payable and accrued expenses 72,267 6,266
-------- --------
$912,451 $582,542
======== ========
NOTE H - NOTES AND CONTRACTS PAYABLE
The following is a summary of notes and contracts payable at April 30, 2000 and
1999:
April 30
-------------------------
2000 1999
---------- ----------
Unsecured notes payable to individuals due in
monthly installments of $2,955, including
interest at 8%, through December 2001 (see
Note I). $ 19,485 $ 46,837
Note payable secured by treasury stock, due in
monthly installments of $2,000 plus accrued
interest at 6.67% through March 2000. 0 8,591
10% Senior Subordinated Convertible Promissory
Note due March, 2005 (principal amount of the
note and accrued interest are convertible into
the Company's no par common stock at a conversion
price of $1.25 per share.) 2,500,000 0
F-22
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE H - NOTES AND CONTRACTS PAYABLE (CONTINUED)
April 30
-------------------------
2000 1999
---------- ----------
Advance against full lease/purchase finance
which was not completed at April 30, 1999. 0 217,731
Other unsecured current notes payable 0 31,376
Note payable to bank, secured under general
security agreement, due in monthly installments
of interest only at prime plus 1% until July 2000. 100,000 99,270
Note payable to bank, secured under general
security agreement, due in monthly installments
of $18,352, including interest at 11.5%, through
March 2002. 476,033 616,301
Unsecured note payable to an individual, due
in June 2000 including interest at 12%. 100,000 0
Note payable to bank, secured by Certificate of
Deposit in the amount of $1,000,000. Interest
only due in monthly installments at 7.6% until
demand is made for principle. 0 1,000,000
Unsecured note payable to an individual, due
upon demand plus interest at 10%. 20,000 0
Capital lease payable, secured by equipment for
60 months. Monthly payments are $560 through
January 2005 21,681 0
F-23
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE H - NOTES AND CONTRACTS PAYABLE (CONTINUED)
April 30
-------------------------
2000 1999
---------- ----------
Capital lease payable, secured by equipment for
36 months. Monthly payments are $483 through
August 2002. 10,963 0
Capital leases payable, secured by equipment for
60 months. Monthly payments are $5,804 through
June 2004 226,239 0
Capital leases payable, secured by equipment for
60 months. Monthly payments are $8,156 through
June 2004 296,351 0
Unsecured Note payable to bank, due July 2000
plus accrued interest at prime plus 1%. 500,000 0
Note payable to bank, secured under general
security agreement, due in monthly installments
of $7,560, including interest at 8.5%, through
January 2002. 144,521 213,217
---------- ----------
TOTAL 4,415,273 2,233,323
Less: current portion 1,486,914 1,651,949
---------- ----------
$2,928,359 $ 581,374
========== ==========
F-24
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE H - NOTES AND CONTRACTS PAYABLE (CONTINUED)
Aggregate maturities of long-term borrowings over the next five fiscal years are
as follows: (See also information disclosed Note O to the notes to consolidated
financial statements)
YEARS ENDED APRIL 30 AMOUNT
-------------------- ------
2001 $1,486,914
2002 126,875
2003 123,154
2004 122,154
2005 2,555,655
NOTE I - ACQUISITION OF VITSAB AB
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 Indicator 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, Inc., a wholly owned subsidiary of the Company, in the formation stage,
with 4,750,000 issued shares of common stock outstanding, and the assumption of
certain debt owed by Vitsab to an unrelated company. The shares issued by the
Company represented approximately 14% of the outstanding shares after the shares
had been issued. The transaction has been accounted for as a purchase and the
results of Vitsab's operations have been included in the accompanying
consolidated financial statements since the date of acquisition, which was June
30, 1998. The total cost of the acquisition was approximately $2,594,000
including debt assumed of approximately $1,750,000, which exceeded the fair
value of the net assets of Vitsab at that date by approximately $864,000. The
excess of purchase price over net assets acquired, or goodwill, is being
amortized on a straight-line basis over 22 years.
F-25
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE I - ACQUISITION OF VITSAB AB (CONTINUED)
The summarized assets and liabilities of the purchased company at June 30, 1998
in U. S. dollars are as follows:
Cash $ 198,000
Other current assets 242,000
Property & equipment (Net) 2,242,000
----------
$2,682,000
==========
Current liabilities $ 752,000
Net worth 1,730,000
----------
$2,682,000
==========
The following summarized proforma (unaudited) information assumes the
acquisition had occurred on May 1, 1998 and 1997:
1999 1998
----------- -----------
Net assets $ 7,934,711 $ 4,435,997
=========== ===========
Income (loss) before taxes $ 76,515 $ (75,667)
=========== ===========
Net income (loss) $ 14,572 $ (209,359)
=========== ===========
In 2000, Vitsab filed for bankruptcy in Sweden and its activities were
transferred to a Swedish corporation and Vitsab, Inc. which is currently
operating as a wholly owned subsidiary of Cox Technologies, Inc. Neither of
these new entities had any revenues in the year ended April 30, 2000.
NOTE J - 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.
F-26
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE K - RELATED-PARTY MATTERS
As discussed below, certain transactions have been consummated with parties
related to the Company and its management.
The ownership of the Company's common stock by Dr. Cox, Vitsag, Company
directors, employees, and other related parties is summarized as of April 30,
2000 as follows:
Percentage
----------
Dr. Cox (of record & beneficial) 23.7
Vitsag (of record) 10.4
Technology Investors, LLC (Beneficial) 6.7
Brian D. Fletcher (Beneficial) 8.4
Kurt C. Reid (Beneficial) 8.4
In October 1998, the Board of Directors (Board) reviewed the status and
longevity of certain agreements with shareholders. As of the Board's review
date, there was an aggregate of $875,650 due on all of the promissory notes
secured by 1,325,800 of the issued shares. The ten (10) day running average
market price of the Company's common stock was $0.30 per share on the review
date. Mr. Sprenger and the certain related parties were each offered the
following options regarding their stock purchases:
1. Based upon $0.0625 per share price, the release of the shares or
refund of the monies paid therefore under the stock purchase
agreement. Further, if refund of the monies is requested, then Option
number two (2) is unavailable and the agreement is terminated and all
shares under the agreement are cancelled;
2. Provided the Option number one (1) relating to the release of shares
is accepted, the purchaser(s) are granted the right to purchase the
remaining unreleased restricted shares at seventy-five percent (75%)
of the ten (10) day running average market share price of $0.30, or
$0.225 per share.
Final disposition of the share purchase agreements was reached prior to April
30, 1999 with the cancellation of 188,394 common stock shares and the refund of
$25,300 to certain other parties and the realization of money or debt reduction
for the balance of the 1,137,406 common stock shares aggregating $255,916. By
resolution of the common stock purchase agreement the Company reduced it's
Common Stock Capital amount by $645,035.
F-27
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
NOTE K - RELATED-PARTY MATTERS (CONTINUED)
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 shares of the Company's common stock at a conversion
price of $1.25 per share. Two individuals Mr. Kurt C. Reid (Reid) and Mr. Brian
D. Fletcher (Fletcher) are the sole managers of TI and share voting and
dispositions power with respect to the common stock issuable upon conversion of
the note. In connection with TI's purchase of the note, Mr. Reid and Mr.
Fletcher each received an option to purchase notes with terms substantially
similar to those of the note referred to above in the aggregate principal amount
of up to $500,000. Also in connection with this transaction, Mr. Reid and Mr.
Fletcher were both retained as consultants to the Company and received
immediately exercisable options to purchase 300,000 shares of common stock at an
exercisable price of $1.25 per share for a period of up to 10 years. In addition
Mr. Reid and Mr. Fletcher were named directors of the Company for a three-year
term.
It is management's belief that this transaction was consummated on terms
equivalent to those in an arm's-length transaction.
NOTE L - SEGMENT INFORMATION
The Company has adopted FASB Statements No. 131, "Disclosure about Segments of a
Business Enterprise and Related Information."
The Company operates in three principal business segments: Temperature recorder
operations, Visual Indicator Tag operations and Oil Production operations.
Temperature Recorder segment manufactures and distributes transit temperature
recording instruments both domestically and internationally. These products
provide a permanent record of the temperature of perishable products in a
container during transit from loading until they reach their destination.
The Visual Indicator Tag segment is in the process of beginning to manufacture a
three layer, three-dot tag that will indicate deterioration in the consumability
of perishable food products. The Company owns the worldwide distribution rights
to this product.
F-28
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000 AND 1999 AND 1998
--------------------------------------------------------------------------------
NOTE L - SEGMENT INFORMATION (CONTINUED)
The Oil Production segment is located in Kern County, California. The Company
produced a minimal amount of oil on this property in 2000, 1999 and 1998. More
information on the property can be found in Note E in the notes to the
consolidated financial statements.
The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies.
<TABLE>
<CAPTION>
Years Ended North South Australia/ Segment
April 30 America Canada Europe America New Zealand Mexico Total
-------- ------- ------ ------ ------- ----------- ------ -----
Net Sales:
<S> <C> <C> <C> <C> <C> <C> <C>
2000 $7,497,224 $297,313 $927,785 $572,095 $ 318,663 $87,202 $9,700,282
1999 7,513,707 314,294 681,939 125,424 253,697 54,822 8,943,883
1998 6,832,095 325,477 511,510 278,424 137,753 49,938 8,135,197
Operating Profit (Loss)
2000 $ 119,132 $ 3,414 $ 10,884 $ 6,711 ($ 27,372) $ 1,023 $ 113,792
1999 21,001 34,260 68,521 8,565 25,695 5,250 163,292
1998 887,536 50,061 100,122 12,515 37,546 7,671 1,095,451
Identifiable Assets:
2000 $6,089,416 0 0 0 0 0 $6,089,416
1999 5,639,936 0 0 0 0 0 5,639,936
1998 3,987,904 0 0 0 0 0 3,987,904
</TABLE>
F-29
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000 AND 1999 AND 1998
--------------------------------------------------------------------------------
NOTE L - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
For the years ended April 30 2000 1999 1998
---------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net Sales to Unaffiliated Customers:
Temperature Recorder $ 9,700,282 $ 8,943,883 $ 8,135,197
Visual Indicator Tag 0 9,233 0
Oil Production 10,694 1,428 3,559
Intersegment sales or transfers 945,601 1,341,119 1,220,346
------------ ------------ ------------
10,656,577 10,295,663 9,359,102
Less: Intersegment sales or transfers (945,601) (1,341,119) (1,220,346)
------------ ------------ ------------
Consolidated sales $ 9,710,976 $ 8,954,544 $ 8,138,756
============ ============ ============
Net Earnings (loss):
Temperature Recorder $ 130,472 $ 781,262 $ 1,094,285
Visual Indicator Tag (649,588) (631,303) 0
Oil Production (733,407) 46,946 1,972,283
------------ ------------ ------------
Consolidated net earnings (loss) ($ 1,252,523) $ 196,905 $ 3,066,568
============ ============ ============
Intersegment Sales or Transfers:
Temperature Recorder ($ 945,601) ($ 1,341,119) ($ 1,220,346)
Visual Indicator Tag 0 0
Oil Production 945,601 1,341,119 1,220,346
------------ ------------ ------------
Consolidated intersegment sales or
transfers $ 0 $ 0 $ 0
============ ============ ============
Identifiable Assets:
Temperature Recorder $ 6,089,416 $ 5,750,559 $ 3,987,904
Visual Indicator Tag 4,858,092 2,530,394 0
Oil Production 3,771,734 4,596,239 5,778,632
------------ ------------ ------------
Consolidated identifiable assets $ 14,719,242 $ 12,877,192 $ 9,766,536
============ ============ ============
Capital Expenditures:
Temperature Recorder $ 371,554 $ 1,356,392 $ 37,090
Visual Indicator Tag 0 0 0
Oil Production 9,239 100,000 0
------------ ------------ ------------
Consolidated capital expenditures $ 380,793 $ 1,456,392 $ 37,090
============ ============ ============
Depreciation and Amortization:
Temperature Recorder $ 87,013 $ 87,569 $ 35,250
Visual Indicator Tag 193,552 30,000 0
Oil Production 782 0 0
------------ ------------ ------------
Consolidated depreciation and amortization $ 281,347 $ 117,569 $ 35,250
============ ============ ============
Interest Expense:
Temperature Recorder $ 14,444 $ 150,414 $ 72,188
Visual Indicator Tag 155,819 0 0
Oil Production 0 2,716 0
------------ ------------ ------------
Consolidated interest expense $ 170,263 $ 153,130 $ 72,188
============ ============ ============
</TABLE>
The only business segment with sales outside the continental United States is
the Temperature Recorder segment. Information on that segment by geographical
region is as follows:
F-30
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000 AND 1999 AND 1998
--------------------------------------------------------------------------------
NOTE M - PRIOR PERIOD ADJUSTMENT
During the period from 1993 through 1995, the former President of the Company,
Mr. Sprenger, used his own shares of Company common stock, from time to time, to
help meet the obligations of the Company. Most of these transactions occurred
when the Company's common stock was trading around $.125 per share. In 1998,
upon his resignation as Chairman of the Board, Mr. Sprenger requested that he be
reimbursed for the shares that he had issued. Accordingly, 525,483 shares were
issued to Mr. Sprenger for obligations he had met totaling $265,795. This
transaction has been treated as the correction of an error and recorded
prospectively.
NOTE N - 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 lease's are as follows:
YEARS ENDING APRIL 30
---------------------
2001 $67,642
2002 67,642
2003 67,642
2004 67,642
2005 &
thereafter 45,117
Rent expense for the years ended April 30, 2000, 1999 and 1998 is $158,306
$137,136, and $134,852, respectively.
F-31
<PAGE>
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 2000 AND 1999 AND 1998
--------------------------------------------------------------------------------
NOTE O - SUBSEQUENT EVENT
On July 13, 2000 the Company refinanced all of the short-term debt due to their
previous primary lender, including accrued interest, amounting to approximately
$1,177,000, through a secured long-term loan from their new primary lender
(Bank) in the amount of $1,190,000. The Bank has also provided a revolving line
of credit for working capital in the amount of up to $1,000,000 subject to a
maximum percentage of eligible accounts receivable and inventories.
Principal on the revolving line of credit is due on September 2, 2001. Interest
on the revolving line accrues at the rate of the Bank's prime rate plus .25% per
annum and is due monthly beginning in August of 2000.
Principal payments on the long-term loan in the amount of $9,920 plus accrued
interest, which initially is the Bank's prime rate plus .625% per annum, are due
monthly from September 2, 2000 to August 2, 2001, inclusive. Commencing
September 2, 2001 long-term loan payments of $22,312 plus accrued interest are
due monthly until July 13, 2005.
The Company has agreed to certain covenants with respect to both the revolving
line and the long- term loan.
In addition, the Bank has agreed to finance the lease of a major piece of Vitsab
production equipment to the Company. The cost of the equipment is approximately
$1,000,000 and the lease requires monthly lease payments of $17,040, including
interest at approximately 9.35% for a period of 84 months commencing December 1,
2000.
If the refinancing had occurred as of April 30, 2000, the current portion of
long-term debt would have been reduced by approximately $885,000.
F-32
