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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, 2004
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the transition period from _______ to ________
Commission file number: 0-8006
COX TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 86-0220617
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 McADENVILLE ROAD
BELMONT, NORTH CAROLINA 28012-2434
(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:
$6,106,732 as of August 17, 2004
- --------------------------------------------------------------------------------
Number of shares of Common Stock, no par value, as of the latest practicable
date:
38,167,077 shares as of August 17, 2004
- --------------------------------------------------------------------------------
Documents incorporated by reference: None
COX TECHNOLOGIES, INC.
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED APRIL 30, 2004
--------------
TABLE OF CONTENTS
Item Page
PART I
1. Business.............................................................. 1
2. Properties............................................................ 4
3. Legal Proceedings..................................................... 4
4. Submission of Matters to a Vote of Security Holders................... 4
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters.............................................................. 4
6. Selected Financial Data............................................... 7
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 7
8. Financial Statements and Supplementary Data ..........................14
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................35
9a. Internal Controls and Procedures......................................35
PART III
10. Directors and Executive Officers of the Registrant....................35
11. Executive Compensation................................................38
12. Security Ownership of Certain Beneficial Owners and Management........40
13. Certain Relationships and Related Transactions........................40
14. Principal Accountant Fees and Services ...............................42
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......43
Signatures............................................................47
i
PART I
ITEM 1. BUSINESS
General
Cox Technologies, Inc. (the "Company"), is engaged in the process of orderly
liquidation of its remaining assets, the winding up of its business operations,
the dissolution of the Company and the distribution of cash to shareholders.
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. As a result of this change in focus, the Company changed
its name to Cox Technologies, Inc. in April 1998. The Company reincorporated in
the State of North Carolina in December 2000.
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, Inc., Vitsab USA, Inc., Fresh Tag Research &
Manufacturing, Inc., Qualtag Engineering, Inc. and Cox Recorders Australia, Pty.
Ltd. ("Cox Recorders Australia"), a 95% owned Australian distribution company.
During July 2001, all domestic subsidiaries were merged into the parent company,
Cox Technologies, Inc. On March 15, 2003, the Company sold all of its shares in
its Vitsab Sweden subsidiary to its Copenhagen distributor.
On December 12, 2003, the Company entered into an Asset Purchase Agreement (such
agreement, as amended on January 29, 2004, the "Asset Purchase Agreement") with
Sensitech Inc., a Delaware corporation ("Sensitech") and Cox Acquisition Corp.,
a Delaware corporation and a wholly owned subsidiary of Sensitech, formed for
purposes of consummating the Asset Purchase Agreement ("Buyer") to sell
substantially all of the Company's assets ("the Asset Sale").
Effective April 16, 2004, the Company and Sensitech completed Sensitech's
acquisition of substantially all of the assets of the Company pursuant to the
terms of the Asset Purchase Agreement dated December 12, 2003, as amended
January 29, 2004, among the Company, Sensitech and Cox Acquisition Corp. The
aggregate consideration received by the Company at the closing was comprised of
$10,595,589 in cash. In addition, Sensitech assumed $233,569 of the Company's
payables and certain other liabilities. At closing, Sensitech retained a
$250,000 holdback amount in the Asset Sale. Determination of the final
consideration is subject to adjustment based upon finalization of the Company's
balance sheet as of the closing date. Under the terms of the Asset Purchase
Agreement, the Company retained certain assets and liabilities in connection
with the transaction, including certain cash, production equipment, office
equipment, machines, tools, fixtures, furniture and certain retained
liabilities.
In connection with the Asset Sale, the Company and Sensitech entered into a
Manufacturing Services Agreement under which the Company continued to
manufacture the Company's products on behalf of Sensitech from April 16, 2004
through July 2, 2004.
The parties completed the Asset Sale following a special meeting of the
Company's shareholders on April 15, 2004, whereby the holders of a majority of
the Company's common stock approved the Asset Sale and the subsequent
liquidation and dissolution of the Company pursuant to the Plan of Complete
Liquidation and Dissolution (the "Plan").
On January 29, 2004 the Company entered into an Asset Purchase Agreement with
Rask Holding ApS, to sell its Vitsab division for $175,000 plus assumed
liabilities. The transaction was consummated on the same date. Rask Holding
acquired all of the assets associated with the Vitsab division except cash and
accounts receivable, and assumed all liabilities associated with the Vitsab
division except liabilities associated with a raw material purchase from a
specific vendor and for taxes resulting from operations of the Vitsab division
prior to January 29, 2004.
The Company sold most of its remaining assets (principally furniture and
equipment) at auction on July 17, 2004.
1
Business Operations prior to the Asset Sale
Prior to the Asset Sale the core business of the Company was to provide reliable
temperature monitoring products and develop new and technologically advanced
monitoring systems. The Company produced and distributed transit temperature
recording instruments, including electronic "loggers," graphic temperature
recorders and visual indicator tags, both in the United States and
internationally.
Temperature Recorder Operations
The Company's temperature recorder activities included production and
distribution of graphic temperature recording instruments, the sale and
distribution of electronic temperature and humidity recorders (sold for
non-transit quality monitoring purposes as well as for transit monitoring),
production and distribution of visual indicator labels, the sale of fixed based
temperature monitoring systems, and the sale and distribution of various
temperature sensing probes and thermometers.
The graphic 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 is later
retrieved by transferring the information to a personal computer.
The graphic recorders were marketed under the trade name Cox Recorders and
produced a record which was documentary proof of temperature conditions useful
for compliance with governmental regulations, the monitoring of 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 were used for the same
purpose, but also were used for internal checking of temperature conditions in
storage and processing.
The Company sold two different types of electronic "data loggers" which were
manufactured by an offshore contractor. The Tracer(R) product line, which can
record data for both temperature and humidity, is a research-grade instrument
used in a broad variety of laboratory, environmental, process control, and
quality assurance applications. A lower cost electronic data logger, the
DataSource(R), is used primarily for transit temperature monitoring and
recording. Both loggers deliver their data via a cable link to a personal
computer using specialized software.
The Company purchased for resale the TempList(R), which is a data collection or
"listing" temperature recorder that is used for point-of-measurement recording.
The TempList(R) delivers the data via a cable link to a personal computer using
specialized software. The Company also purchased digital thermometers with
penetration probes for resale from a variety of manufacturers.
The Cox1 product accounted for approximately 62% of the Company's revenues for
the period beginning May 1, 2003 and ending April 15, 2004. The balance of
revenues was generated through the sale of electronic data loggers, probes and
other temperature monitoring products.
During fiscal 2002, the Company contracted with a third party to manufacture and
assemble certain base versions of the Cox1 units at an offshore location. During
the period beginning May 1, 2003 and ending April 15, 2004, that offshore
location supplied approximately 40% of the total number of units utilized by the
Company. Because of this manufacturing arrangement, the Company realized
significant cost savings on units manufactured in both the offshore and Belmont,
North Carolina facilities. The Company did not experience foreign currency
exchange risks as all transactions were denominated in U.S. dollars.
The temperature recorder operations of the Company did not depend upon a single
or a few customers. However, the Company did have significant business
relationships with several large retail customers and foreign distributors.
Backlog of orders was not a major factor in the temperature recorder operations
of the Company.
The Company was a major competitor in the temperature recording industry with
regards to its production and distribution activities. The Company encountered
significant competition from a variety of companies in all major areas of its
business activity. The Company competed primarily on product performance and
price. Reliability, technology, customer service and company reputation were
also important competitive factors.
The Company generally did not maintain company owned distribution entities.
However, in 1999, the Company established Cox Recorders Australia to retain its
market share and presence in this geographic area. Except for this subsidiary,
all distributors were contracted. All other distribution and sales operations
were through individual sales persons operating on salary, sales commission
basis or salary plus incentive basis. The shares of Cox Recorders Australia
stock owned by the Company were sold to Sensitech in the Asset Sale.
2
Vitsab(R) Product
Vitsab(R) is a technology that employs enzymatic color indicators inside a
transparent label to show the amount of temperature exposure of a stored or
shipped temperature-sensitive commodity. These labels 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 that parallels the monitored food or drug product as it reaches a
certain definable state.
During the period from May 1, 2003 through January 29, 2004, the Vitsab(R) line
of products generated sales equaling approximately 3% of the Company's total
revenues.
Oilfield Operations
Until September 30, 2002, the Company owned working interests through subleases
in developed oil and gas properties located in California. These developed
properties contained drilled wells that were capable of producing crude oil or
natural gas. The Company attempted to manage and improve production in the
fields by employing an independent oilfield operator through several contractual
agreements dating back to 1999. The Company sold its interest in these
properties on September 30, 2002.
Intellectual Property
The Company owned a number of patents, trademarks, trade secrets and other
intellectual property directly related to, and important to, the Company's
business. All of these assets were sold to either Sensitech or Rask Holding.
Research and Development
No research and development expenses were incurred during fiscal 2004, 2003 or
2002.
Government Regulation
The Company is not currently subject to direct regulation by any governmental
agency other than rules and regulations that apply to businesses generally.
Employees
On June 1, 2004, the Company had 35 full-time employees compared to 64 on June
1, 2003. On August 17, 2004, the Company had four employees. None of the
Company's employees are covered by collective bargaining agreements.
EXECUTIVE OFFICERS OF THE REGISTRANT
Date Elected
Name and Age (1) Title (1) An Officer
- ---------------- --------- ----------
Dr. James L. Cox Chairman, President and 08/01/95
Age - 59 Chief Technology Officer
Brian D. Fletcher Co-Chief Executive Officer and 03/10/00
Age - 42 Director of Marketing
Kurt C. Reid Co-Chief Executive Officer and 03/10/00
Age - 44 Director of Operations
John R. Stewart Chief Financial Officer 06/11/03
Age - 56 and Secretary
(1) As of August 17, 2004
The officers of the Company will serve in their respective capacities until the
liquidation of the Company is completed.
Dr. James L. Cox has been employed by the Company as President for more than
five years and as Chief Technology Officer since April 1, 2003. Prior thereto
and for more than five years, he was employed by the Company as Chief Executive
Officer. He has served continuously as Chairman for the past five years.
3
Brian D. Fletcher has been employed by the Company as Co-Chief Executive Officer
and Director of Marketing since April 1, 2003. Prior thereto and since March 10,
2000, he was employed as Chief Operating Officer. Prior to joining the Company,
he was a private investor for more than the previous two years.
Kurt C. Reid has been employed by the Company as Co-Chief Executive Officer
since April 1, 2003 and Director of Operations since March 10, 2000. Prior to
joining the Company, he was a private investor for more than the previous two
years.
John R. Stewart has been employed by the Company as Chief Financial Officer and
Secretary since June 11, 2003. Prior to joining the Company, he was
self-employed as an independent accounting and financial consultant for more
than the previous five years.
Available Information
As of August 1, 2004, we began maintaining a temporary office at 77 McAdenville
Road, Belmont NC 28012. Our phone number is (704) 825-8146 and our mailing
address is 137 Cross Center Dr - #329, Denver, NC 28037. The books and records
of the Company are in the possession of Kurt C. Reid, Co-Chief Executive Officer
and John R. Stewart, Chief Financial Officer.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d)
of the Securities Exchange Act of 1934, as amended, are available. The public
may read and copy any materials filed by the Company with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov. The content
of the website is not incorporated in the filing. Further, the Company's
references to the URL for this website is intended to be an inactive textual
reference only.
ITEM 2. PROPERTIES
The Company had leased manufacturing facilities located in Belmont, North
Carolina through July 31, 2004. The facility in Belmont served as the Corporate
Office and as a manufacturing facility during the Contract Manufacturing period
for Sensitech. As of August 1, 2004, the Company began maintaining a space at 77
McAdenville Road, Belmont NC, 28012 and maintaining certain computer operations
and books and records in that space to facilitate customer, vendor and
shareholder communications. The space is being occupied without cost to the
Company.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 15, 2004, the Company held a Special Meeting of shareholders (the
"Special Meeting"). At the Special Meeting, the shareholders of the Company
voted to approve the Asset Sale and the Plan of Dissolution (the "Plan"). The
vote to approve the Asset Sale was 20,946,072 shares in favor and 904,671 shares
opposed. The vote to approve the Plan was 20,912,318 shares in favor and 926,399
shares opposed.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
We intend to close our stock transfer books and discontinue recording transfers
of our common stock at the close of business on the date we file the Articles of
Dissolution with the North Carolina Secretary of State, referred to as the
"final record date". The articles of dissolution will be filed at such time as
the Board of Directors, in its absolute discretion deems necessary, appropriate
or desirable. It is anticipated that this action will be taken in the second
half of 2004.
The Company's Common Stock is traded on the nationwide over-the-counter market
and is listed under the symbol "coxt.ob" on the electronic bulletin board
provided by the National Quotation Bureau, Inc.
4
The table below presents the reported high and low common stock sale prices for
each quarter of fiscal 2004 and 2003. The Company has not declared any dividends
during the last two fiscal years.
2004 2003
----------------------------------------------
High Low High Low
---- --- ---- ---
First Quarter $0.09 $0.05 $0.30 $0.07
Second Quarter $0.30 $0.05 $0.15 $0.06
Third Quarter $0.25 $0.13 $0.08 $0.02
Fourth Quarter $0.18 $0.14 $0.07 $0.04
At August 12, 2004, the Company had approximately 2,062 holders of record of the
Company's Common Stock.
The table below presents the information related to the equity compensation
plans that have been previously approved by shareholders and equity compensation
plans not approved by shareholders, as of April 15, 2004.
Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding future issuance under
outstanding options, options, warrants equity compensation plans
warrants and rights and rights
------------------------------------------------------------------------
Equity compensation plans approved by
security holders (2000 Stock Incentive
Plan) 4,289,000 $ .1737 2,957,972
Equity compensation plans not approved by
security holders (Non-Qualified Stock
Option Agreements) 6,600,000 $ .6534 -
------------------------------------------------------------------------
Total 10,899,000 $ .4510 2,957,972
========================================================================
The table below presents the information related to the equity compensation
plans on a liquidation basis and presents only the "in-the-money" options, as of
April 15, 2004. In-the-money options are those granted to individuals with an
exercise price below the expected liquidation distribution amount per common
share.
Number of securities with an Weighted-average exercise
exercise price below the price of outstanding
estimated distribution amount options, warrants and rights
--------------------------------------------------------------------
Equity compensation plans approved by security
holders (2000 Stock Incentive Plan) 690,000 $ .1057
Equity compensation plans not approved by
security holders (Non-Qualified Stock Option
Agreements) 1,800,000 $ .1100
--------------------------------------------------------------------
Total 2,490,000 $ .1088
====================================================================
5
Since its inception, the Company has not paid any cash dividends on its common
stock and does not anticipate paying such dividends in the foreseeable future.
In calendar 2004, we expect to make cash distributions to shareholders of record
at the final record date. Since the Asset Sale to Sensitech, we have been taking
the necessary steps to liquidate and convert the remaining non-cash assets of
the Company to cash and to pay the liabilities and obligations of the Company.
In lieu of satisfying all of our liabilities and obligations prior to making
distributions to our shareholders, we will create a contingency reserve to
provide for such liabilities and obligations. The actual amount of the
contingency reserve will be based upon estimates and opinions of management and
the Board of Directors and review of our estimated operating expenses and future
estimated liabilities, including, without limitation, anticipated compensation
payments, estimated legal and accounting fees, operating lease expenses, payroll
and other taxes payable, miscellaneous office expenses, and expenses accrued in
our financial statements. There can be no assurance that the contingency reserve
in fact will be sufficient.
After the liabilities, expenses and obligations for which the contingency
reserve is established have been satisfied in full, we will distribute to our
shareholders any remaining portion of the contingency reserve.
Under the North Carolina Business Corporation Act, in the event we fail to
create an adequate contingency reserve for payment of our expenses and
liabilities, or should such contingency reserve be exceeded by the amount
ultimately found payable in respect of expenses and liabilities, each
shareholder could be held liable for the repayment to creditors out of the
amounts theretofore received by such shareholder from us.
Management's current estimate is that the accumulative distribution will be in a
range from $0.16 to $0.18 per common share.
The following is a list of all unregistered stock issued during the last three
fiscal years.
Fiscal 2004
Pursuant to an Amended Employment Agreement between Mr. Peter Ronnow and the
Company dated August 17, 2000, the Company issued 148,148 shares of restricted
stock to satisfy compensation due Mr. Ronnow. The shares were issued under the
exemption set forth in Rule 701 under the Securities Act of 1933.
Fiscal 2003
Pursuant to an April 10, 2001 amendment to an agreement between the Company and
BEN Acquisition, LLC, dated June 23, 2000, the Company issued 10,000 shares of
restricted stock to each of the three members of BEN Acquisition, LLC on July
18, 2002. The shares were issued under the exemption set forth in Rule 506 of
Regulation D of the Securities Act of 1933.
Pursuant to the TI Stock Purchase Agreement, the Company issued
12,500,000 shares of restricted stock to TI. The shares were issued under the
exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933.
Fiscal 2002
Pursuant to an April 10, 2001 amendment to an agreement between the
Company and BEN Acquisition, LLC, dated June 23, 2000, the Company issued 9,500
shares of restricted stock to each of the three members of BEN Acquisition, LLC
on November 20, 2001. The shares were issued under the exemption set forth in
Rule 506 of Regulation D of the Securities Act of 1933.
Pursuant to an April 30, 2001 agreement between the Company and McManus
Financial Consultants, Inc., under which they provided consulting services
related to investor relations, the Company issued 41,667 and 41,666 shares of
restricted stock, respectively, to the two partners. The shares were issued
under the exemption set forth in Rule 506 of Regulation D of the Securities Act
of 1933.
Pursuant to a February 15, 2002 agreement between the Company and Stock
Enterprises, Inc., under which Mr. James R. Stock, president, agreed to cancel
for consideration an investor relations services agreement dated November 1,
2002, the Company issued to Mr. Stock 30,000 shares of restricted stock. The
shares were issued under the exemption set forth in Rule 506 of Regulation D of
the Securities Act of 1933.
6
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
information as of and for each of the fiscal years, which have been derived
from, and should be read together with, the audited consolidated financial
statements and the related notes, which are included elsewhere in this report.
The information presented below should also be read together with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Upon the sale of substantially all of the assets of the Company on April
16, 2004, we ceased normal operations and began contract manufacturing for
Sensitech. Accordingly, a comparison of the selected financial data for the
period from May 1, 2003 through April 15, 2004 should take into account the fact
that the Company ceased it operations 15 days before completing a full year of
operations.
May 1, 2003 Fiscal Years Ended April 30,
thru April 15,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Sales $ 9,770,512 $ 8,492,522 $ 8,475,146 $ 9,678,339 $ 9,710,976
Income (loss) from continuing
operations $ 1,476,873 $ 705,773 ($ 4,322,370) ($ 5,403,922) ($ 1,955,191)
Loss from discontinued
operations ($ 613,391) ($ 595,325) ($ 840,674) ($ 1,370,087) --
Basic and diluted income (loss)
from continuing operations per
average common share $ .04 $ .02 ($ .17) ($ .22) ($ .08)
Weighted average number of
Common shares outstanding 38,293,667 27,907,224 25,360,071 24,661,104 24,222,547
Total assets $ 3,512,201 $ 4,072,391 $ 8,654,189 $ 14,369,529
Long-term debt (1) $ 4,189,893 $ 3,233,913 $ 3,090,044 $ 2,908,359
Stockholders' equity (deficit) ($ 1,500,418) ($ 2,305,523) $ 2,528,355 $ 9,041,805
(1) Excludes current maturities
Net assets in liquidation: April 30, 2004
--------------
Cash and cash equivalents $7,597,606
Accounts receivable 319,613
Other assets 36,711
Total assets 7,953,930
Total liabilities 1,337,575
-----------
Net assets in liquidation $6,616,355
==========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Upon the sale of substantially all of the assets of the Company on April 16,
2004, we ceased normal operations and began contract manufacturing for
Sensitech. Accordingly, a comparison of the selected financial data for the
period from May 1, 2003 through April 15, 2004 should take into account the fact
that the Company ceased it operations 15 days before completing a full year of
operations.
We cannot list here all of the risks and uncertainties that could cause our
actual future financial results to differ materially from our present
expectations or projections regarding estimated distribution to shareholders but
we can identify many of them. For example, our future results could be affected
by the cost of satisfying known liabilities for which we have estimated the
value, the need to satisfy unanticipated liabilities arising in the future and
the expenses of dissolving and winding up the Company.
7
The following discussion and analysis should be read in conjunction with the
selected financial data in Item 6 and our financial statements and notes thereto
in Item 8.
The Company operated in one reporting segment, Temperature Recorder Operations.
The "Temperature Recorder Operations" segment involves the production and
distribution of temperature recording and monitoring devices, including
electronic "loggers," graphic temperature recorders and visual indicator tags.
Critical Accounting Policies
The Company's accounting and reporting policies are in accordance with
accounting principles general accepted in the United States of America. The
application of certain of these principles involves a significant amount of
judgment and the use of estimates based on assumptions that involve significant
uncertainty at the time of estimation. We have identified the following policies
as being particularly sensitive to estimate or otherwise critical based on the
potential impact on the financial statements: accrued cost of liquidation,
revenue recognition, asset impairment, stock options, and income taxes. We
periodically review these policies, the estimation processes involved, and the
related disclosures.
Accrued cost of liquidation and effects of change to liquidation basis -
Pursuant to the Plan of dissolution approved by shareholders on April 15, 2004,
we plan to file articles of dissolution with the North Carolina Secretary of
State in the second half of calendar 2004. Since April 15, 2004 , the Company
has been engaged in contract manufacturing for Sensitech (which services ended
on July 2, 2004), selling and converting its non-cash assets, discharging its
liabilities and otherwise winding-up the business and affairs in preparation for
liquidation. We expect to distribute the remaining assets to our shareholders,
all in accordance with the Plan of dissolution. As a result, we changed our
basis of accounting to the liquidation basis as of April 16, 2004. The
accompanying statements of operations, shareholders' equity and cash flows for
the period from May 1, 2003 to April 15, 2004 and for each of the years in the
two-year period ended April 30, 2003 have been presented on a going concern
basis comparable to prior periods, which assumes the realization of assets and
the liquidation of liabilities in the normal course of business. Under the
liquidation basis of accounting, assets are stated at their estimated net
realizable value and liabilities are stated at their anticipated settlement
amounts. As a result of the Asset Sale and change to liquidation basis of
accounting, we recorded a $7.27 million increase in net assets. Included in the
adjustment to net assets recorded in connection with the change from the
going-concern to the liquidation basis of accounting, we recorded $0.63 million
of accrued costs of liquidation representing the estimate of the costs to be
incurred during dissolution; however, actual costs could vary from those
estimates. Distributions ultimately made to shareholders upon liquidation will
differ from the "net assets in liquidation" recorded in the accompanying
Statement of Net Assets in Liquidation as a result of future changes in
estimated investment income, settlement of liabilities and obligations and final
costs of liquidation.
At April 30, 2004, the following represent the estimated costs of liquidation:
Officer compensation and benefits $131,000
Legal, audit and tax services 124,500
Insurance 212,000
Other costs, including utilities, rent,
supplies and miscellaneous expenses 162,631
--------
Total $630,131
========
Revenue recognition - Revenue was recognized as products are shipped, net of an
allowance for estimated returns.
Asset impairment - Goodwill was evaluated for impairment annually, or more
frequently when there were indications of impairment. Based on an analysis of
acquired goodwill as of April 30, 2002, the goodwill previously recorded was
deemed impaired and was written off as of that date. Specifically identified
intangible assets subject to amortization, such as patents, and long-lived
assets were evaluated for recoverability whenever events or changes in
circumstances indicated that the carrying amount of an asset or asset group may
not be recoverable. During fiscal year 2002, it was determined that the carrying
amount of certain equipment under development was not recoverable, and an
impairment loss was recognized in the period ended April 30, 2002.
8
Stock options - The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," which disclosures are
presented in Note 1, "Significant Accounting Policies - Stock-based
Compensation." In accordance with this policy, the Company continues to account
for its employee stock-based compensation plans under Accounting Principles
Board (APB) Opinion No. 25 and related interpretations. No stock-based
compensation cost is reflected in net income for options granted under those
plans having an exercise price equal to the market value of the underlying
common stock on the date of grant.
Income taxes - Until adopting the liquidation basis of accounting, the Company
accounted for income taxes using the asset and liability method. The Company has
deferred tax assets related principally to net operating loss carry forwards and
impairment losses recognized for financial reporting purposes. Valuation
allowances have been recorded to offset these deferred tax assets. Certain net
operating loss carry forwards have been utilized to offset income from the asset
sale to Sensitech and were considered in the determination of net assets in
liquidation.
Quantitative and Qualitative Analysis
The Company has identified certain areas that potentially subject it to
significant concentrations of credit risk. These areas for potential risk
include cash and cash equivalents and trade accounts receivable. At times, cash
balances at financial institutions are in excess of FDIC insurance coverage. The
cash balances are maintained at financial institutions with high credit -
quality ratings and the Company believes no significant risk of loss exists with
respect to those balances. The Company believes that amounts reported for cash
and cash equivalents and accounts receivable are considered to be reasonable
approximations of their fair values due to their short term nature.
Results of operations for the period May 1, 2003 to April 15, 2004 and fiscal
years ended April 30, 2003 and 2002
Fiscal period ended April 15, 2004
The discussion of the results of operations does not include the Vitsab
division, which has been presented as discontinued operations.
Revenues from sales increased $1,277,990, or approximately 15%, as compared to
fiscal 2003. For fiscal 2004, revenues from data logger sales increased by
approximately $1,259,000, or approximately 59%, over revenues from sales of the
same product in fiscal 2003, while revenues from sales of graphic recorders
decreased by approximately $48,000, or approximately less than 1% over revenues
from sales of the same product in fiscal 2003. Unit sales of Cox 1 improved by
less than 1% and unit sales of DataSource improved by 68% over fiscal 2003. The
unit selling price for both Cox 1 and DataSource eroded by approximately 4% as
compare to unit selling prices of the same products in fiscal 2003. During
fiscal 2004, revenues from the sale of graphic recorders represented
approximately $6,149,000, or approximately 62%, of total revenues, revenues from
the sale of electronic data loggers represented approximately $3,387,000, or
approximately 34% of total revenues, revenues from the sale of probes and
related products represented approximately $234,000, or approximately 2%, of
total revenues. Revenues from the sale of other miscellaneous products
represented approximately 1% of total revenues.
Cost of sales increased by $58,841, or less than 1%, as compared to fiscal 2003.
The Company continues to benefit from the lower cost of units purchased from an
offshore contract manufacturer; however, those decreases in cost were more than
offset by increases in rebate fees, shipping costs and increases in both medical
and workman's compensation insurance expenses.
The Company continued to contract with a third party to manufacture and assemble
certain base versions of the Cox1 units at an offshore location. During fiscal
2004, this location supplied approximately 40% of the total number of units
utilized by the Company. Because of this manufacturing arrangement, the Company
realized cost savings on units manufactured in both the offshore and Belmont,
North Carolina facilities.
General and administrative expenses for fiscal 2004 increased $255,278, or
approximately 15%, as compared to fiscal 2003. This increase was due to higher
costs associated with bad debt, labor, legal fees and outside services,
partially offset by decreases in telephone costs and other general expenses.
Selling expenses for fiscal 2004 increased $180,281, or approximately 21%, as
compared to fiscal 2003. The principal increase is due to higher sales salaries,
partially offset by decreases in travel expenses, commissions, trade show costs
and outside sales services expenses.
No research and development costs were incurred during fiscal 2004.
9
Other income (expense) decreased $60,709, or approximately 41%, in fiscal 2004
as compared to fiscal 2003. The decrease was primarily attributable to the
cessation of option payments for the purchase of the Company's wholly owned
subsidiary, Vitsab Sweden, upon the consummation of the sale of the subsidiary
in fiscal 2003. Other expenses decreased because the Company did not realize
negative valuation adjustments against a long term receivable in fiscal 2004 as
compared to fiscal 2003.
Interest expense decreased $39,215 or approximately 9%, in fiscal 2004 as
compared to fiscal 2003. Interest payments to Centura decreased due to the
continued retirement of the debt balance payable to Centura combined with a
lower interest rate for the full fiscal year of 2004. These decreases were
substantially offset by the interest that accrued on the $2,500,000 note payable
to TI, dated March 10, 2000, that was due in March 2005.
Liquidity and Capital Resources
Effective April 16, 2004, the Company and Sensitech completed Sensitech's
acquisition of substantially all of the assets of the Company pursuant to the
terms of the Asset Purchase Agreement. The aggregate consideration received by
the Company at the closing was comprised of $10,595,589 in cash. In addition,
Sensitech assumed $233,569 of the Company's payables and certain other
liabilities. At closing, Sensitech retained a $250,000 holdback amount in the
Asset Sale.
After the closing and for the period from April 16 through April 30, 2004 the
Company used a portion of the proceeds to retire remaining outstanding
indebtedness and to pay normal costs of operations and expenses associated with
the liquidation process.
As of April 30, 2004, our principal assets consisted of $7,597,606 of cash and
cash equivalents. We are now engaged in the process of orderly liquidation of
the remaining assets, the winding up of its business operations, the dissolution
of the Company and the distribution of cash to shareholders.
Off-Balance Sheet Arrangements
The Company is not a party to or bound by any long-term guarantee agreements.
Contractual Obligations
The amounts set forth below represent the Company's material contractual
obligations to be paid in future periods:
Payments due by period
----------------------
Less than More than
Contractual obligations Total 1 year 1-3 years 3-5 years 5 years
- --------------------------------------------------------------------------------
Operating leases $ 22,432 $ 22,432 $ - $ - $ -
- --------------------------------------------------------------------------------
Total $ 22,432 $ 22,432 $ - $ - $ -
================================================================================
Fiscal 2003
The discussion of the results of operations does not include Vitsab division,
which has been presented as discontinued operations.
Revenues from sales increased $17,376, or less than 1% in fiscal 2003 as
compared to fiscal 2002. As a whole both unit sales and average selling price
remained relatively flat in fiscal 2003. For fiscal 2003, revenues from data
logger sales increased by approximately $630,000, or approximately 42%, over
revenues from sales of the same product in fiscal 2002, while revenues from
sales of graphic recorders decreased by approximately $604,000, or approximately
9%, over revenues from sales of the same product in fiscal 2002. During fiscal
2003, revenues from the sale of graphic recorders represented approximately
$6,197,000, or approximately 73%, of total revenues, revenues from the sale of
electronic data loggers represented approximately $2,128,000, or approximately
25% of total revenues, revenues from the sale of probes and related products
represented approximately $154,202, or approximately 2%, of total revenues.
Revenues from the sale of other miscellaneous products represented less than 1%
of total revenues.
Cost of sales decreased by $373,614, or approximately 7%, as compared to fiscal
2002. The decrease was realized principally because of a reduction in labor
costs and related fringe benefits, lower raw material costs, and the lower cost
of units purchased from an offshore contract manufacturer. The Company also
experienced lower cost in the areas of freight and postage and shop supplies
used in manufacturing. These decreases in cost were partially offset by
increased cost of retriever fees.
10
General and administrative expenses for fiscal 2003 decreased $457,935 or
approximately 21%, as compared to fiscal 2002. This decrease is due to lower
costs associated with bad debt, labor, legal fees and outside services,
partially offset by increases in insurance premium costs and other general
expenses.
Selling expenses for fiscal 2003 decreased $161,581, or approximately 16%, as
compared to fiscal 2002. The decrease is due to lower sales salaries,
commissions, trade show expenses, travel expenses and freight out expense,
partially offset by increases in advertising, temporary labor and outside sales
services expenses.
No research and development costs were incurred during fiscal 2003.
Depreciation expense in fiscal 2003 decreased $215,237, or approximately 67%, as
compared to fiscal 2002. The decrease occurred principally because older assets
of the Company are becoming fully depreciated.
Amortization of intangible assets decreased $231,988, or 100%, in fiscal 2003 as
compared to fiscal 2002. The decrease is primarily related to the impairment of
goodwill during fiscal 2002.
Other income (expense) decreased $37,998, or approximately 20%, in fiscal 2003
as compared to fiscal 2002. The decrease was primarily attributable to the
cessation of option payments for the purchase of the Company's wholly owned
subsidiary, Vitsab Sweden, upon the consummation of the sale of the subsidiary.
Other expenses decreased because the Company is no longer paying patent
licensing fees.
Interest expense decreased $70,565, or approximately 13%, in fiscal 2003 as
compared to fiscal 2002. The decrease was primarily attributable to interest
expense in fiscal 2002 related to the construction of manufacturing equipment
that will not be completed, and that did not reoccur in fiscal 2003. Interest
payments to Centura decreased due to the retirement of a portion of the debt
balance payable to Centura. These decreases were substantially offset by the
interest that accrued on the $2,500,000 note payable to TI, dated March 10,
2000, that was due in March 2005.
The decrease in inventory of $237,072 is related to the decrease in the number
of units in finished goods inventory and a decrease in work-in-progress
inventory. The Company has also lowered its costs of purchasing raw materials
through negotiations with vendors. Decreased direct labor and benefits costs and
overheads incurred in the production of the Cox1 units resulted in a decrease in
the valuation of finished goods. The Company also established a $50,000 reserve
for slow moving or obsolete inventory in fiscal 2003.
The net decrease in property and equipment of $258,939 is primarily due to
depreciation and the transfer of assets owned by the Company related to Vitsab
Sweden. This decrease was partially offset by the acquisition of approximately
$84,000 of new assets.
Fiscal 2002
Prior to fiscal 2002, the Company had two operating segments: (1) Temperature
Recorder Operations and (2) oilfield operations and other, which included all
economic activity related to the oil production and the holding of the oil
subleases and the operation of its Phoenix, Arizona office. The Company closed
its Phoenix office effective October 31, 2000. The activities performed in its
Phoenix office were transferred to the Corporate Office in Belmont, North
Carolina. The Company entered into an agreement with a group in Dallas, Texas,
to sell the subleases on behalf of the Company. The group contacted and
solicited potential buyers to make purchase offers to the Company for the
subleases. The Company terminated the agreement in April 2001 after receiving no
purchase offers from potential buyers. As a result of the inability of the
Company to attract a potential buyer, the high cost and difficulty in producing
crude oil of the type found in the field and losses incurred in the oilfield
operations, the Company evaluated the recoverability of the carrying amount of
the oilfield net assets. In analyzing expected future cash flows from potential
offers, the Company determined that $300,000 of net assets should be accounted
for as property held for sale. As a result, the Company recognized a loss on
impairment of $3,062,196 in the fourth quarter of fiscal 2001. The Company
determined that no change in the valuation of this asset was necessary for
fiscal 2002. The Company sold the oilfield leases on September 30, 2002 and now
operates in one reporting segment, Temperature Recorder Operations.
Temperature Recorder Operations
Revenues from sales decreased $1,082,458, or approximately 11% in fiscal 2002 as
compared to fiscal 2001, due to a 13% decrease in the number of Cox1 units sold
as a result of decreased demand and a 4% decrease in average sales price. Sales
of DataSource(R) units increased approximately 129%, slightly offset by a 4%
11
decrease in average sales price during fiscal 2002. During fiscal 2002, a large
grocery store chain started requiring its shippers to use the DataSource(R)
units exclusively. Fiscal 2002 reflects a 22% decrease in the number of
Tracer(R) products sold and a 4% decrease in average sales price. During fiscal
2002, revenues from the sale of graphic recorders represented $6,751,000 or
approximately 78% of total revenues, revenues from the sale of electronic data
loggers represented $1,472,000 or approximately 17%, revenues from the sale of
probes and related products represented $129,000 or approximately 2%, and
revenues from the sale of Vitsab(R) products represented $112,000 or
approximately 1%. Revenues from the sale of oil and other miscellaneous products
represented the balance.
Cost of sales for fiscal 2002 increased $85,162, or approximately 2% as compared
to fiscal 2001. The increase was due to a reduction in the price the Company now
pays for raw material components and labor costs, increased retriever fees,
shipping costs and supplies used in the manufacturing process, partially offset
by decreased purchases of raw materials, decreasing labor and benefits costs and
postage expenses.
During fiscal 2002, the Company contracted with a third party to manufacture and
assemble certain base versions of the Cox1 units at an offshore location. During
fiscal 2002, this location supplied approximately 6% of the total number of
units utilized by the Company. Because of this manufacturing arrangement, the
Company realized significant cost savings on units manufactured in both the
offshore and Belmont, North Carolina facilities.
General and administrative expenses for fiscal 2002 decreased $2,014,515, or
approximately 44% as compared to fiscal 2001. This decrease was due to lower
costs associated with legal fees, professional services, salaries, payroll taxes
and employee benefits, partially offset by increases in outside services and
other general expenses.
Selling expenses for fiscal 2002 decreased $551,400, or approximately 30% as
compared to fiscal 2001. The decrease was due to lower sales salaries,
commissions, trade shows and travel expenses.
No research and development costs were incurred during fiscal 2002 as the
Company reached the final development stages of the Vitsab(R) product and halted
the development of the EDS(TM) product in fiscal 2001.
Depreciation and depletion expense in fiscal 2002 decreased $90,422, or
approximately 18% as compared to fiscal 2001. There was no depletion expense
associated with the oilfield operations recorded in fiscal 2002 as a result of
the impairment of the oilfield operations.
Amortization of patents and goodwill increased $36,261, or approximately 17% in
fiscal 2002 as compared to fiscal 2001. This increase was related to the
additional goodwill recognized from the acquisition of Vitsab Sweden. In fiscal
2002, the Company evaluated the fair value of goodwill from the acquisition of
Vitsab Sweden and determined the goodwill to be impaired and recognized an
impairment loss of $2,695,689 in the fourth quarter of fiscal 2002, as discussed
in Note 8 to the consolidated financial statements.
Other income increased $317,335, or approximately 248% in fiscal 2002 as
compared to fiscal 2001. This increase was related primarily to the payments
received as a result of the agreement between the Company and its Copenhagen
distributor for an option to purchase all of the shares and assets of the
Company's wholly owned subsidiary, Vitsab Sweden, as discussed in Note 1 to the
consolidated financial statements.
Interest expense increased $28,820, or approximately 6% in fiscal 2002 as
compared to fiscal 2001. Reasons for this increase included the increase in
interest accrued on the note payable to TI, dated March 10, 2000, in the amount
of $2,500,000, interest on the Revolving Loan with RBC Centura Bank ("Centura")
and the reclassification of interest paid on progress payments made by Centura,
on behalf of the Company, from deposits to interest expense.
The fiscal 2002 decrease in inventory of $509,824 was related to the decrease in
the number of units in finished goods inventory and a decrease in
work-in-progress inventory. The Company also lowered its costs of purchasing raw
materials through negotiations with vendors. Decreased direct labor and benefits
costs and overheads incurred in the production of the Cox1 units resulted in a
decrease in the valuation of finished goods and an increase in cost of goods
sold by an equal amount.
The fiscal 2002 decrease in property and equipment, net of $397,836, was
primarily due to depreciation. There were no significant additions or deletions
to property and equipment in fiscal 2002.
Forward-Looking Statements
Statements contained in this document that are not historical in nature are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. Forward-looking statements give our current expectations of
12
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such
as "estimate," "intend," "plan," and other words and terms of similar meaning in
connection with any discussion of future operating and financial performance.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements. The Company undertakes no obligation to update forward-looking
statements to reflect events or circumstances after the date hereof. Such risks
and uncertainties with respect to the Company include, but are not limited to,
its ability to successfully implement internal performance goals, performance
issues with suppliers, regulatory issues, competition, the effect of weather on
customers, exposure to environmental issues and liabilities, variations in
material costs and general and specific economic conditions. From time to time,
the Company may include forward-looking statements in oral statements or other
written documents.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF NET ASSETS IN LIQUIDATION
April 30, 2004
--------------
ASSETS
Cash and cash equivalents $7,597,606
Accounts receivable 319,613
Other assets 36,711
----------
TOTAL ASSETS $7,953,930
==========
LIABILITIES
Accounts payable and accrued liabilities $ 707,444
Accrued costs of liquidation 630,131
----------
Commitments and contingencies
TOTAL LIABILITIES 1,337,575
----------
NET ASSETS IN LIQUIDATION $6,616,355
==========
See Notes to Consolidated Financial Statements.
14
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
Period from April
16, 2004 thru April
30, 2004
----------------------
NET INCREASE IN NET ASSETS IN LIQUIDATION:
- -----------------------------------------
Interest Income $ 1,982
-----------
NET INCREASE IN ASSETS IN LIQUIDATION 1,982
NET ASSETS IN LIQUIDATION AT APRIL 16, 2004 $ 6,614,373
-----------
NET ASSETS IN LIQUIDATION AT APRIL 30, 2004 $ 6,616,355
===========
See Notes to Consolidated Financial Statements.
15
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 2003
-----------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $572,149
Accounts receivable, net 874,668
Inventory, net 1,078,966
Notes receivable - current portion 75,000
Prepaid expenses 17,733
----------
TOTAL CURRENT ASSETS 2,618,516
Property and equipment, net 223,579
Due from officer, net 8,928
Other assets 71,510
Assets of discontinued operations 589,668
----------
TOTAL ASSETS $3,512,201
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $282,517
Current portion of long-term debt 387,927
Liabilities of discontinued operations 152,282
----------
TOTAL CURRENT LIABILITIES 822,726
----------
OTHER LIABILITIES:
Long-term debt 862,393
Long-term debt - related party 3,327,500
----------
TOTAL OTHER LIABILITIES 4,189,893
----------
TOTAL LIABILITIES 5,012,619
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized
100,000,000 shares; issued and outstanding;
38,339,094 shares 23,252,804
Accumulated other comprehensive loss (32,591)
Accumulated deficit (24,696,452)
Less - Notes receivable for common stock (24,179)
----------
TOTAL STOCKHOLDERS' DEFICIT (1,500,418)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $3,512,201
==========
See Notes to Consolidated Financial Statements.
16
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
May 1, 2003 thru
April 15, Fiscal Years Ended April 30,
2004 2003 2002
---- ---- ----
REVENUE:
Sales $ 9,770,512 $ 8,492,522 $ 8,475,146
COSTS AND EXPENSES:
Cost of sales 4,854,624 4,795,783 5,169,397
General and administrative 1,955,487 1,700,210 2,158,146
Selling 1,059,073 878,791 1,040,372
Depreciation 98,550 107,554 322,791
Loss on impairment -- -- 3,537,597
Amortization of intangibles -- -- 231,988
------------ ------------ ------------
TOTAL COSTS AND EXPENSES 7,967,734 7,482,338 12,460,291
------------ ------------ ------------
OPERATING INCOME (LOSS) 1,802,778 1,010,184 (3,985,145)
OTHER INCOME (EXPENSE):
Other income 88,891 149,600 187,598
Interest expense (414,796) (454,011) (524,823)
------------ ------------ ------------
TOTAL OTHER EXPENSE (325,905) (304,411) (337,225)
------------ ------------ ------------
CONTINUING INCOME (LOSS) BEFORE INCOME TAXES 1,476,873 705,773 (4,322,370)
PROVISION FOR INCOME TAX -- -- --
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,476,873 705,773 (4,322,370)
OPERATING LOSS FROM DISCONTINUED OPERATIONS 364,703 595,325 840,674
LOSS ON SALE OF ASSETS OF DISCONTINUED OPERATIONS 248,688 -- --
PROVISION FOR INCOME TAXES ON DISCONTINUED OPERATIONS -- -- --
------------ ------------ ------------
LOSS ON DISCONTINUED OPERATIONS 613,391 595,325 840,674
------------ ------------ ------------
NET INCOME (LOSS) $ 863,482 $ 110,448 ($ 5,163,046)
============ ============ ============
EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ .04 $ .02 ($ .17)
DISCONTINUED OPERATIONS ($ .02) ($ .02) ($ .03)
NET INCOME (LOSS) $ .02 $ .00 ($ .20)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 38,293,667 27,907,224 25,360,071
See Notes to Consolidated Financial Statements.
17
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
Period from April 16, 2004 to April 30, 2004 (Liquidation Basis), and Fiscal
Period from May 1, 2003 to April 15, 2004 and Fiscal Years Ended April 30, 2003
and 2002
Accumulated Subscribed
Other Stock
Common Comprehensive Accumulated Less Note
Stock Income (Loss) Deficit Receivable Total
----- ------------- ------- ---------- -----
Balance, April 30, 2001 $ 22,311,921 ($ 108,581) ($19,643,854) ($ 31,131) $ 2,528,355
Comprehensive income (loss) -
Net income (loss) -- -- (5,163,046) -- (5,163,046)
Foreign currency
translation
adjustment -- 40,413 -- -- 40,413
------------
Total comprehensive
income (loss) -- -- -- -- (5,122,633)
Payment on subscribed stock -- -- -- 6,952 6,952
Common stock issued 281,803 -- -- -- 281,803
------------ ------------ ------------ ------------ ------------
Balance, April 30, 2002 22,593,724 (68,168) (24,806,900) (24,179) (2,305,523)
Comprehensive income (loss) -
Net income -- -- 110,448 -- 110,448
Foreign currency
translation
adjustment -- 35,577 -- -- 35,577
------------
Total comprehensive
income -- -- -- -- 146,025
Common stock issued 659,080 -- -- -- 659,080
------------ ------------ ------------ ------------ ------------
Balance, April 30, 2003 23,252,804 (32,591) (24,696,452) (24,179) (1,500,418)
Comprehensive income (loss) -
Net income -- -- 863,482 -- 863,482
Foreign currency
translation
adjustment -- (10,438) -- -- (10,438)
------------
Total comprehensive
income -- -- -- -- 853,044
Adjust stock subscription -- -- 24,179 24,179
Common stock redeemed (30,233) -- -- -- (30,233)
------------ ------------ ------------ ------------ ------------
Balance, April 15, 2004 23,222,571 (43,029) (23,832,970) -- (653,428)
Effect of change to
liquidation basis 43,029 7,224,772 7,267, 801
Change in net assets in
liquidation April 16,
2004 to April 30, 2004 -- -- 1,982 -- 1,982
------------ ------------ ------------ ------------ ------------
Balance, April 30, 2004 $ 23,222,571 -- ($16,606,216) -- $ 6,616,355
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
18
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
May 1, 2003 thru
April 15 Fiscal Years Ended April 30,
2004 2003 2002
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 863,482 $ 110,448 ($5,163,046)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and depletion 206,705 306,349 423,398
Amortization of patents 28,711 33,951 255,564
Loss on sale of assets of discontinued operations 248,688 -- --
Loss on impairment -- -- 3,537,597
Loss on disposal of property and equipment -- -- 2,242
Gain on sale of property held for sale -- (19,503) --
Loss on sale of subsidiary -- 17,013 --
Allowance for doubtful accounts 49,921 19,250 3,190
Other 3,953 13,129 (63,209)
Increase in valuation allowance -- 32,139 12,499
----------- ----------- -----------
1,401,460 512,776 (991,765)
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable (282,055) 89,607 65,183
Inventory (382,402) 237,072 509,824
Prepaid expenses (100,397) 27,099 (14,339)
Other receivable and investments -- -- 19,230
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 338,575 (276,175) 55,345
----------- ----------- -----------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 975,181 590,380 (356,522)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (43,675) (84,315) (25,562)
Proceeds from sale of Vitsab 175,000 -- --
Proceeds from sale of property held for sale -- 54,504 --
Equipment under development -- -- 28,603
Collection of note receivable from property
held for sale 75,000 100,000 --
----------- ----------- -----------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 206,325 70,189 3,041
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Retirement of common stock, net (30,233)
Issuance of common stock, net -- 659,080 281,803
Repayment on debt (1,020,309) (1,301,620) (370,813)
Decrease in subscriptions receivable 24,179 -- 6,952
Amounts borrowed under short-term debt -- -- 252,548
Amounts borrowed under long-term debt -- 302,500 315,000
----------- ----------- -----------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,026,363) (340,040) 485,490
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (16,207) 35,577 40,413
----------- ----------- -----------
NET INCREASE IN CASH 140,904 356,107 172,422
CASH AND CASH EQUIVALENTS, beginning of period 572,149 216,042 43,620
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 713,053 $ 572,149 $ 216,042
=========== =========== ===========
Supplemental Cash Flow Information
Interest paid $ 414,796 $ 154,787 $ 250,262
Income taxes paid $ -- $ -- $ --
Note Receivable resulting from sale of property
held for sale $ -- $ 175,000 $ --
See Notes to Consolidated Financial Statements.
19
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, SALE OF SUBSTANTIALLY ALL ASSETS AND SIGNIFICANT
ACCOUNTING POLICIES
Business
Prior to the Asset Sale (see below), Cox Technologies, Inc. (the "Company")
was engaged in the business of producing and distributing transit temperature
recording instruments, including electronic "loggers," graphic temperature
recorders and visual indicator labels, both in the United States and
internationally. Temperature recorders and loggers work by creating a strip
chart record of temperature changes over time, or record temperatures
electronically according to a preset interval ("logging"). Visual indicator
labels are a relatively new technology that employs enzymatic color indicators
inside a transparent label to show the amount of temperature exposure of a
stored or shipped temperature-sensitive commodity. The visual indicator products
are marketed under the trade name Vitsab(R). The Company was 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.
In April 2001, the Company executed an agreement with its Copenhagen
distributor ("Purchaser") for an option to purchase all of the shares and assets
of the Company's wholly owned subsidiary, Vitsab Sweden, AB ("Vitsab Sweden").
The option agreement gave the Purchaser until November 30, 2001 to exercise the
option. On October 18, 2001 the Company entered into a verbal agreement with
Purchaser to extend the agreement through February 2002, and thereafter on a
month-to-month basis. On April 15, 2002, the Purchaser notified the Company that
he was terminating the agreement effective June 15, 2002. During May 2002, the
Purchaser rescinded the termination notice and both parties agreed verbally to
extend the agreement until September 15, 2002, and then on a month-to-month
basis. On December 10, 2002, the Company executed an additional amendment with
the Purchaser that extended the option period until March 31, 2003. On March 15,
2003, the Company, under a Share Purchase Agreement, sold all of its shares in
Vitsab Sweden to its Copenhagen distributor. The purchase price for all of the
Company's shares in Vitsab Sweden was $1.00. The Company recognized a loss of
approximately $17,000 that is included in other income (expense).
On January 29, 2004 the Company entered into an Asset Purchase Agreement
with Rask Holding ApS, to sell its Vitsab division for $175,000 plus assumed
liabilities. The transaction was consummated on the same date. Rask Holding
acquired all of the assets associated with the Vitsab division except cash and
accounts receivable, and assumed all liabilities associated with the Vitsab
division except liabilities associated with a raw material purchase from a
specific vendor and for taxes resulting from operations of the Vitsab division
prior to January 29, 2004. As the Vitsab division was sold prior to the
shareholder approval and closing of the Asset Sale to Sensitech, the operations
of the Vitsab division have been reflected as discontinued operations for
periods prior to the adoption of the liquidation basis of accounting effective
April 16, 2004. Revenues and pre-tax losses, respectively, generated by the
Vitsab division were $288,385 and ($364,703) for the fiscal period ended April
15, 2004, $281,330 and ($595,325) for fiscal 2003, and $151,957 and ($840,674)
for fiscal 2002.
Sale of Substantially All of the Assets of the Company
On December 12, 2003, the Company entered into an Asset Purchase Agreement
(the "Asset Purchase Agreement") with Sensitech Inc., a Delaware corporation
("Sensitech") and Cox Acquisition Corp., a Delaware corporation and a wholly
owned subsidiary of Sensitech, formed for purposes of consummating the Asset
Purchase Agreement ("Buyer") to sell substantially all of its assets ("the Asset
Sale").
Effective April 16, 2004, the Company and Sensitech completed the Asset
Sale. The aggregate consideration received by the Company at the closing was
comprised of $10,595,589 in cash. In addition, Sensitech assumed $233,569 of the
Company's payables and assumed other liabilities. At closing, Sensitech retained
a $250,000 holdback amount in the Asset Sale. The final consideration is subject
to adjustment based upon finalization of the Company's balance sheet as of the
closing date. Under the terms of the Asset Purchase Agreement, the Company
retained certain assets and liabilities in connection with the transaction,
including certain cash, receivables, production equipment, office equipment,
machines, tools, fixtures, furniture and certain retained liabilities.
In connection with the Asset Sale, the Company and Sensitech entered into a
Manufacturing Services Agreement under which the Company continued to
manufacture the Company's products on behalf of Sensitech for a period from
April 16, 2004 through July 2, 2004.
20
The parties completed the Asset Sale following a special meeting of the
Company's shareholders on April 15, 2004, whereby the holders of a majority of
the Company's common stock approved the Asset Sale and the subsequent
liquidation and dissolution of the Company pursuant to the Plan of Complete
Liquidation and Dissolution (the "Plan").
Significant Accounting Policies
Accrued Cost of Liquidation and Effects of Change to Liquidation Basis
Pursuant to the Plan of dissolution approved by shareholders on April 15,
2004, we plan to file articles of dissolution with the North Carolina Secretary
of State in the second half of calendar 2004. Since April 15, 2004, the Company
has been engaged in contract manufacturing for Sensitech (which services ended
on July 2, 2004), selling and converting its non-cash assets, discharging its
liabilities and otherwise winding-up the business and affairs in preparation for
liquidation. We expect to distribute the remaining assets to our shareholders,
all in accordance with the Plan of dissolution. As a result, we changed our
basis of accounting to the liquidation basis as of April 16, 2004. The
accompanying statements of operations, shareholders' equity and cash flows for
the period from May 1, 2003 to April 15, 2004 and for each of the years in the
two-year period ended April 30, 2003 have been presented on a going concern
basis comparable to prior periods, which assumes the realization of assets and
the liquidation of liabilities in the normal course of business. Under the
liquidation basis of accounting, assets are stated at their estimated net
realizable value and liabilities are stated at their anticipated settlement
amounts. As a result of the Asset Sale and change to the liquidation basis of
accounting, we recorded a $7.27 million increase in net assets. Included in the
adjustment to net assets recorded in connection with the change from the
going-concern to the liquidation basis of accounting, we recorded $0.63 million
of accrued costs of liquidation representing the estimate of the costs to be
incurred during dissolution; however, actual costs could vary from those
estimates. Distributions ultimately made to shareholders upon liquidation will
differ from the "net assets in liquidation" recorded in the accompanying
Statement of Net Assets in Liquidation as a result of future changes in
estimated investment income, settlement of liabilities and obligations and final
costs of liquidation.
The components of the effect of the change to the liquidation basis of
accounting are summarized below.
Gain on Asset Sale $8,374,000
Costs of liquidation and dissolution, including
losses to be incurred
winding down operations, impairment of remaining
assets, and accrued liquidation costs (814,199)
Provision for federal and state income taxes (292,000)
----------
Net effect of change to liquidation basis of accounting $7,267,801
==========
At April 30, 2004, the following represent the estimated costs of
liquidation:
Officer compensation and benefits $ 131,000
Legal, audit and tax services 124,500
Insurance 212,000
Other costs, including utilities, rent, supplies
and miscellaneous expenses 162,631
-------
Total $ 630,131
=========
Stock-based Compensation
The Company elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations in accounting for its employee stock options. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." This statement defines a fair value method of
21
accounting for stock options or similar equity instruments. SFAS No. 123 permits
companies to continue to account for stock-based compensation awards under APB
No. 25, but requires disclosure in a note to the financial statements of the pro
forma net income and earnings per share as if the Company had adopted the new
method of accounting. SFAS No. 123 has been amended by Financial Accounting
Standards Board pronouncement number 148 ("FASB No. 148), "Accounting for
Stock-based Compensation - Transition and Disclosure". FASB No. 148 requires
prominent disclosure in the annual and quarterly statements of the Company on
stock-based compensation.
The Company has two stock option plans, the Stock Option Agreements By and
Between Cox Technologies, Inc. and Certain Executives ("Executive Plan") and the
2000 Stock Incentive Plan ("2000 Plan"). In accordance with the Executive Plan,
options to purchase an aggregate of up to 6,652,500 shares of the Company's
Common Stock were granted to certain executives of the Company. Options
generally were granted at the fair market value of the Company's Common Stock
determined on the date of the grant. Certain options were granted at an exercise
price below fair market value and $600,000 of compensation expense was charged
to operations in fiscal 2000. Options from the Executive Plan are exercisable on
various dates and expire on various dates. In accordance with the 2000 Plan, up
to 8,000,000 shares of the Company's Common Stock can be issued through the use
of stock-based incentives to employees, consultants and non-employee members of
the Board of Directors. The exercise price of options granted through the 2000
Plan cannot be less than 85% of the fair market value of the Company's Common
Stock on the date of the grant. All outstanding options have been granted at the
fair market value; therefore, no compensation expense has been recorded. Options
from the 2000 Plan are exercisable on various dates from the date of the grant
and expire on various dates. Exceptions to the exercise date for both plans are
allowed upon the retirement, disability or death of a participant. An exception
is also allowed upon a change in control as defined in both plans.
Options granted, exercised and canceled under both plans for the three
years ended April 30, 2004 were as follows:
Options Weighted-Average
Outstanding Exercise Price
----------- --------------
April 30, 2001 7,910,000 $ .63
Granted 3,742,500 $ .12
Exercised -- --
Canceled (120,000) $ .38
----------
April 30, 2002 11,532,500 $ .45
Granted 777,500 $ .11
Exercised -- --
Canceled (439,500) $ .19
----------
April 30, 2003 11,870,500 $ .45
Granted -- --
Exercised -- --
Canceled (981,500) $ .29
----------
April 30, 2004 10,889,000 $ .45
==========
The Company applied APB No. 25 in accounting for both Plans. Accordingly,
compensation cost is determined using the intrinsic value method under APB No.
25. Had compensation cost for both Plans been determined consistent with the
fair value method for compensation expense encouraged under SFAS No. 123, the
Company's net income and earnings per share (EPS) would have been the pro forma
amounts shown below for the fiscal period ended April 15th, 2004 and the fiscal
years ended April 30, 2003 and 2002. For purposes of pro forma disclosures, the
estimated fair value of options is recorded in its entirety in the year granted.
May 1, 2003 April 30,
thru April 15, --------------------------
2004 2003 2002
---- ---- ----
Net income (loss) As reported $863,482 $110,448 ($5,163,046)
Net income (loss) Pro forma $842,378 $ 95,587 ($5,191,687)
Basic and diluted EPS As reported $.02 $.00 ($.20)
Basic and diluted EPS Pro forma $.02 $.00 ($.20)
22
For purposes of pro forma disclosure, the fair value of each option grant
was estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions used for nonqualified stock option grants in the
fiscal period from May 1, 2003 through April 15, 2004 and fiscal 2003 and 2002,
respectively (there were no options granted in the fiscal period May 1, 2003 to
April 15, 2004):
2003 2002
---- ----
Risk free interest rate(s) 4.9% to 5.3% 4.8% to 6.0%
Volatility factor(s) 285% to 304% 224% to 249%
Expected life 7 to 10 years 7 to 10 years
The weighted average fair value of nonqualified stock options granted
during fiscal years 2003 and 2002 was $.11, and $.12, respectively. No options
were granted during fiscal year 2004. Options outstanding at April 15, 2004 had
exercise prices ranging from $.08 to $1.25, and a weighted average remaining
contractual life of 8.2 years. The number of shares and weighted average
exercise price of those shares exercisable at the end of each fiscal year was
5,007,500 shares at $.61 for 2003, and 3,733,500 shares at $.70 for 2002. The
total number of shares exercisable and the weighted average exercise price at
April 15, 2004 was 5,502,000 shares at $.54. As a result of the Asset Sale and
the subsequent acceleration of vesting of in-the-money options (options with an
exercise price of less than $.16 per share) there were 2,490,000 options
exercisable at April 30, 2004 with an average exercise price of $.11 per share.
The Asset Sale constitutes a change in control as defined in the two stock
option plans. As provided by the plans, the Board of Directors elected to
accelerate the vesting of certain options. Options to purchase 1,002,000 shares
at a weighted average exercise price of $0.11 per share were accelerated. The
estimated expense associated with the accelerated options of $152,400 is
included in the effect of the change to the liquidation basis of accounting.
Restricted stock was issued out of the 2000 Plan to consultants and
employees in lieu of cash payments totaling 30,000 and 723,028 shares,
respectively for fiscal 2003 and 2002. At April 30, 2003, there were 2,957,972
shares reserved for issuance under the 2000 Plan.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Cox Technologies, Inc. (the Company) and its wholly owned subsidiary, Vitsab
Sweden, through March 15, 2003, the date it was sold, and Cox Recorders
Australia, Pty. Ltd., a 95% owned Australian distribution company through April
16, 2004, the date it was sold as part of the Asset Sale. Vitsab Sweden carried
out development, production and marketing activities that were a part of the
Vitsab(R) operation. Such activities were not considered a component of an
entity as defined in SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets". In July 2001 all domestic subsidiaries were merged into the
parent company, Cox Technologies, Inc. All material intercompany transactions
and balances among the Company and its subsidiary companies have been eliminated
in the accompanying consolidated financial statements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and investments with a maturity of three months or less.
Accounts Receivable
Until the Asset Sale, accounts receivable consisted of trade accounts
receivable and were stated at cost less an allowance for doubtful accounts.
Credit was extended to customers after an evaluation of the customer's financial
condition and generally collateral was not required. Management's determination
of the allowance for doubtful accounts was based on an evaluation of the
accounts receivable, past experience, current economic conditions and other
risks inherent in the accounts receivable portfolio. The balance in the
allowance for doubtful accounts was $45,750 at April 30, 2003.
Depreciation and Amortization
Depreciation for property and equipment was provided on a combination of
straight-line and accelerated cost recovery methods over the respective
estimated lives over a range of five to twenty years.
23
Inventory
Prior to the Asset Sale, inventories were stated at the lower of cost
determined by the FIFO (first-in, first-out) method or market. Inventory
consists primarily of raw material, work-in-process and finished goods related
to the transit temperature recording segment. The Company established a $50,000
reserve for slow moving or obsolete inventory in fiscal 2003.
Goodwill
Goodwill represented the excess of the cost of companies acquired over the
fair value of their net assets at dates of acquisition and was being amortized
on the straight-line method over a range of six to seventeen years. Goodwill was
written off as of April 30, 2002, therefore no amortization expense was
recognized for 2003 (see Note 8 to the consolidated financial statements).
Amortization expense for goodwill charged to operations totaled $220,094 and
$200,910 for fiscal 2002 and 2001, respectively. As goodwill was written off as
of April 30, 2002, the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets" had no effect on goodwill.
Patents
The Company owned a number of patents directly related to and important to
the Company's business. The Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets", effective May 1, 2002. Under SFAS No.
142, intangible assets that have finite useful lives are amortized over their
estimated useful lives, but without the constraint of the 40-year maximum life
required by APB Opinion No. 17. Intangible assets with finite useful lives were
reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires the Company
to evaluate the recoverability of long-lived assets whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable. The
adoption of the provisions of SFAS 142 did not have a significant impact on the
Company's financial position or results of operations. Amortization expense for
patents charged to operations totaled $28,711, $33,951and $35,470 for the fiscal
period from May 1, 2003 through April 15, 2004 and fiscal 2003 and 2002,
respectively.
Long-lived Assets
Long-lived assets held and used by the Company were reviewed for impairment
whenever changes in circumstances indicate that the carrying value of the asset
may not be recoverable.
Income Taxes
Prior to the Asset Sale, the Company accounts for income taxes pursuant to
the Statement of Financial Accounting Standards (SFAS) No. 109, which requires a
liability method of accounting for income taxes. Under this method, the deferred
tax liability represents the tax effect of temporary differences between the
financial statement and tax bases of assets and liabilities and is measured
using current tax rates. Valuation allowances were established when management
believed it was more likely than not that deferred tax assets would not be
realized.
Revenue Recognition
The Company recognized revenue when products were shipped, net of estimated
allowance for product returns.
Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, accounts
receivable, notes receivable, accounts payable, accrued expenses, short-term
debt and long-term debt. The amounts reported for financial instruments other
than long-term debt are considered to be reasonable approximations of their fair
values due to their short-term nature. Based on borrowing rates currently
available to the Company for loans with similar terms and maturities, the fair
value of the Company's long-term debt approximates the carrying value.
Comprehensive Income (Loss)
The effects of exchange rate changes on the translation of the financial
statements of Cox Recorders Australia from Australian dollars to U.S. dollars
are included in Other Comprehensive Income.The Company recorded foreign currency
translation adjustments in the period from May 1, 2003 to April 15, 2004 and
fiscal years 2003 and 2002 of ($10,438), $35,577 and $40,413, respectively.
24
Research and Development Costs
The costs of research and development activities are charged to operations
as incurred.
Basic and Diluted Earnings Per Share
Earnings per share have been calculated in conformity with SFAS No. 128,
"Earnings Per Share." The Company has a complex capital structure with
significant potential common shares. However, basic earnings per common share
are based on the weighted average number of common shares outstanding during
each year. Potential common shares from the Senior Subordinated Convertible
Promissory Note with Technology Investors, LLC ("TI") are anti-dilutive for
fiscal 2004, 2003 and 2002, and potential common shares from stock options are
anti-dilutive for 2003 and 2002, and as such have been excluded for the earnings
per share calculations.
For the period from May 1, 2003 to April 15, 2004, the dilutive effect of
stock options with an exercise price less than the average market price of the
Company's stock have been reflected in the computation of diluted earnings per
share. The earnings per share calculation is summarized below.
Period from May 1, Fiscal Year ended April 30,
2003 to April 15, ---------------------------
2004 2003 2002
---- ---- ----
Basic
Income from continuing operations $1,476,873 $705,773 $(4,322,370)
Weighted average shares outstanding 38,293,667 27,907,224 25,360,071
Basic earnings per share $0.04 $0.02 $(0.17)
Diluted
Income from continuing operations $1,476,873 $705,773 $(4,322,370)
Weighted average shares outstanding 38,293,667 27,907,224 25,360,071
Dilutive effect of stock options 393,281
Average diluted shares outstanding 38,686,948 27,907,224 25,360,071
Diluted earnings per share $0.04 $0.02 $(0.17)
Reclassifications
Certain amounts previously reported on the consolidated financial
statements have been reclassified to conform to the current period's
presentation. Common stock and paid in capital have been combined in their
presentation on the consolidated balance sheet and on the consolidated
statements of changes in stockholder's equity (deficit).
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and, until the
Asset Sale, accounts receivable. Credit risk of accounts receivable was
generally diversified due to the large number of entities comprising the
customer base. At times, cash balances at financial institutions are in excess
of FDIC insurance coverage. The cash balances are maintained at financial
institutions with high credit - quality ratings and the Company believes no
significant risk of loss exists with respect to those balances.
25
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These 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.
Recent Accounting Pronouncements
SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The provisions of SFAS No. 143 are required to be
applied starting with fiscal years beginning after June 15, 2002. The Company
adopted the provisions of SFAS No. 143 effective May 1, 2003, and the adoption
of the provisions of SFAS No. 143 did not have a significant effect on its
financial position or results of operations.
SFAS No. 150 addresses the accounting for certain financial instruments
with characteristics of both liabilities and equity, and is effective for
interim periods beginning after June 15, 2003. The adoption of the provisions of
SFAS No. 150 did not have a significant effect on its financial position or
results of operations.
2. INVENTORIES
Inventory at April 30, 2003 consists of the following:
2003
----
Raw materials $ 328,744
Work-in-process 103,059
Finished goods 800,467
------------
1,232,270
Less reserve 50,000
------------
1,182,270
Less inventory of discontinued
operations 103,304
------------
Total $ 1,078,966
============
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at cost, by major
classification, less accumulated depreciation at April 30, 2004 and April 30,
2003:
2004 2003
---- ----
Manufacturing Property and Equipment
- ------------------------------------
Tooling $ 394,339 $ 518,840
Machinery and equipment 399,900 1,567,752
Office furniture and equipment 71,913 175,780
Leasehold improvements 276,958 300,665
----------- -----------
1,143,110 2,563,037
Less: Accumulated depreciation 979,854 2,057,349
----------- -----------
Total manufacturing property and equipment 163,256 505,688
Equipment, net of accumulated depreciation of
discontinued operations (282,109)
Impairment for liquidation (126,545) --
----------- -----------
Total property and equipment $ 36,711 $ 223,579
=========== ===========
Property and equipment is included in other assets in the statement of net
assets in liquidation.
4. PATENTS
Patents were being amortized over their estimated useful lives in
accordance with SFAS No. 142. The carrying value and amortization of patents are
as follows:
As of April 30, 2003
--------------------
Gross Carrying Accumulated
Value Amortization
----- ------------
Amortized intangible asset
Patents $ 206,597 $ 91,752
Aggregate amortization expense
Period from May 1, 2003 to April 15, 2004 $28,711
2003 $33,951
26
5. DEBT
Prior to April 30, 2004, the Company repaid all long-term debt. The
following is a summary of long-term debt obligations and lease contracts payable
at April 30, 2003:
2003 10% Senior Subordinated Convertible Promissory Note due
March 2005 (from related party, see Note 6) (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) $3,327,500
Note payable to bank, secured by accounts receivable and
inventory. See details set forth in the narrative below. 1,184,999
Unsecured note payable to a vendor in 24 monthly
installments of $2,000. 12,000
Capital leases secured by equipment, expiring in various
years, with terms ranging from 36 months to 60 months, due
in monthly installments ranging from $496 to $5,467 196,172
-------
4,720,671
Less: Current maturities (including $142,851 related to
discontinued operations) 530,778
-------
Total long-term debt $ 4,189,893
===========
In March 2000, the Company entered into an agreement with TI whereby the
Company issued to TI a 10% subordinated convertible promissory note in the
amount of $2,500,000 (the "TI Note"), the entire principal and interest of which
are due on March 10, 2005. Alternatively, the principal amount of the TI Note
and interest accrued thereon may be converted, at the option of holder, into
shares of the Company's Common Stock at a conversion price of $1.25 per share.
As of April 30, 2003, the principal and accrued interest of $3,327,500 would be
converted into 2,662,000 shares of the Company's Common Stock. Mr. Fletcher and
Mr. Reid serve as the sole managers of TI and share voting and dispositions
power with respect to the Common Stock issuable upon conversion of the TI Note.
Prior to the Asset Sale, the Company's cash flow from operations was not
adequate to retire the TI Note, and it was unlikely that cash flow would
increase in an amount sufficient for the Company to meet its obligations under
the TI Note when the principal and accrued interest become due on March 10,
2005. Upon completion of the Asset Sale, the Company paid TI $3,700,362 and
retired the TI Note.
On July 13, 2000 the Company entered into a five-year term loan ("Term
Loan") with its primary lender, Centura in the amount of $1,190,000. Initial
principal payments of $9,920, in addition to accrued interest, were due monthly
from August 2, 2000 to July 2, 2001. The rate of interest on the Term Loan was
Centura's prime rate plus .625% per annum. Thereafter, principal payments of
$22,313, in addition to accrued interest, were due monthly until July 13, 2005.
On July 13, 2000 the Company also established a revolving line of credit
with Centura for working capital in the amount of up to $1,000,000 ("Revolving
Loan"), subject to a maximum percentage of eligible trade accounts receivable
and inventories. The rate of interest on the Revolving Loan was Centura's prime
rate plus .25% per annum and was due monthly beginning in August 2000. The
principal of the Revolving Loan was due on September 2, 2001.
27
On November 29, 2001, the Company executed (a) an amendment to the original
Revolving Loan agreement, (b) a new security agreement and (c) a note
modification agreement for the Term Note and for the Revolving Loan that were
effective October 30, 2001 (collectively "Modified Agreements"). These Modified
Agreements extended the maturity date of the Revolving Loan to January 31, 2002
and changed the rate that interest will accrue on the Term Note and the
Revolving Loan from prime rate plus .625% per annum and prime rate plus .25% per
annum, respectively, to 30-day LIBOR plus 500 basis points per annum. These
Modified Agreements also stated that Centura would forbear exercise of its
rights and remedies under the Modified Agreements until January 31, 2002, so
long as the Company continued to pay the principal and interest on the Term Note
and pay interest on the Revolving Loan. On February 21, 2002 the Company
executed documents with Centura, effective January 31, 2002, that amended the
Modified Agreements to extend the maturity dates of the Revolving Loan and the
Term Loan to July 31, 2002. As a result, the full balance of theses loans was
classified as current portion of long-term debt at April 30, 2002.
The Company borrowed $1,000,000 related to this line of credit at April 30,
2002. On June 7, 2002, the Company paid $200,000 down on the amount outstanding
on this line of credit, leaving a balance of $800,000.
Centura also agreed to finance the lease of two major pieces of production
equipment related to the manufacturing of the Vitsab(R) product. The Company had
advanced approximately $842,000 in progress payments on the cost of both pieces
of equipment, of which $464,000 had been advanced directly by Centura. Through
January 31, 2002, the Company had accrued and paid approximately $57,000 of
interest related to the progress payments made by Centura on behalf of the
Company.
In November 2001, the Company met with representatives of the engineering
firm that designed, and was in the later stages of constructing, the new
production equipment for manufacturing the Vitsab(R) product. In that meeting,
the engineering firm stated it was still having technical problems with the
production equipment. These problems were preventing the engineering firm from
delivering a machine that would meet the Company's production requirements at
the agreed upon fees. It was agreed by both parties that the design and
construction of the new production equipment would be put on hold indefinitely.
It was also agreed that the Company could have possession and/or title to the
equipment at its current state of development.
As a result of the indefinite delay in the design and construction of the
equipment, the Company and Centura agreed to execute documents on February 21,
2002 that converted the $464,000 advanced under the lease by Centura to a
five-year note payable ("Lease Loan"), effective January 31, 2002. The executed
documents also incorporated the note into the Modified Agreements. The interest
rate on the note was the 30-day LIBOR plus 500 basis points per annum, with
monthly payment