-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JFYfZ8C6YxB3x/z058teo5iTgNUcLLW3tiuey86vJxxMnebb6ZKj7dISOdfzhEnP AlAnGURJEdarlUIsc6ho8Q== 0000950147-98-000576.txt : 19980803 0000950147-98-000576.hdr.sgml : 19980803 ACCESSION NUMBER: 0000950147-98-000576 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980731 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENERGY RESERVE INC CENTRAL INDEX KEY: 0000065031 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 860220617 STATE OF INCORPORATION: AZ FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-08006 FILM NUMBER: 98675177 BUSINESS ADDRESS: STREET 1: 100 WEST CLARENDON STREET 2: SUITE 450 CITY: PHOENIX STATE: AZ ZIP: 85013 BUSINESS PHONE: 6022461897 MAIL ADDRESS: STREET 1: 69 MCADENVILLE ROAD STREET 2: SUITE 450 CITY: BELMONT STATE: NC ZIP: 28012 10-K405 1 ANNUAL REPORT OF COX TECHNOLOGIES, INC. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10K ANNUAL REPORT PURSUANT TO SECTION 113 OF 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 1998, Commission File #0-8006 COX TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- f.k.a. ENERGY RESERVE, INC. (Exact name of registrant as specified in its charter) Arizona 86-0220617 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification # ) 69 McAdenville Road, Belmont, North Carolina 28012 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) Registrant's telephone number, including area code: (704) 825-8146 Securities registered pursuant to Section 12 (b) of the Act: (None) Securities registered pursuant to Section 12 (g) of the Act: (None) Common stock, without par value - -------------------------------------------------------------------------------- ( Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the aggregate market value of the voting stock held by non-affiliates for the registrant's (the aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing.) $3,505,566 at July 1, 1998 - -------------------------------------------------------------------------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (applicable only to corporate registrants.) 19,905,438 as of July 1, 1998 - -------------------------------------------------------------------------------- Documents incorporated by reference: List the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 4249B) or (C) under the Securities Act of 1933. (The listed documents should be clearly described for identification purposes.) PART I ITEM 1. DESCRIPTION OF BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Cox Technologies, Inc. f.k.a. Energy Reserve, Inc. (the Company) has been primarily engaged in the business of producing and distributing transit temperature recording instruments, both domestically in the United States and internationally. The Company also engages in the business of acquiring, developing and selling oil properties and of producing and selling crude oil for its own account in the United States. As such the Company has not and does not engage in petroleum refining or retail marketing. The Company was incorporated as Mericle Oil Company in July 1968, under the laws of the State of Arizona. The name was changed to Energy Reserve, Inc. in August, 1975 and changed for the second time in April 1998 to Cox Technologies, Inc. Its executive offices, formerly located in Phoenix, Arizona are now located at 69 McAdenville Road, Belmont, North Carolina 28012 and its telephone number is (704) 825-8146. Except where the context otherwise indicates, all references to the "Company" are to Cox Technology, Inc. and its wholly owned subsidiaries, Twin-Chart, Inc. its wholly owned subsidiary Transit Services, Inc., ERES Cogenics, Inc., Energy Reserve Financial Corporation, Energy Reserve Holdings, Inc. and Digi-V, Inc., a 56% owned subsidiary. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company has two industry segments: (1) production and distribution of temperature recording devices; and (2) crude oil production and development. The following table summarizes the assets, revenues and operating results attributable to the Company's operations by industry segments for the date and periods indicated. 1998 1997 1996 ---- ---- ---- Revenues (1) Temperature recorders-Y/E 4/30 $8,135,197 $7,444,170 $6,864,519 (2) Oil production-Y/E 4/30 $3,559 $9,647 -0- Operating profit or loss: (1) Temperature recorders-Y/E 4/30 $1,094,285 $840,992 $531,885 (2) Oil production-Y-E 4/30 $1,972,283 $29,649 $(363,864) Identifiable assets (1) Temperature recorders-4/30 $2,958,066 $3,142,207 $2,798,723 (2) Oil production-Y/E 4/30 $6,808,470 $3,811,149 $3,756,947 (c) NARRATIVE DESCRIPTION OF BUSINESS TEMPERATURE RECORDER OPERATIONS The Company's temperature recorder activities include production and distribution of transit temperature recording instruments. These instruments, known as temperature recorders, are self contained, battery powered and designed to create a graphical "time vs. temperature" record. The recorders are marketed under the trade name Cox Recorders and produce a record which is documentary proof of temperature conditions useful for compliance with governmental regulations, the monitoring performance of refrigerated carriers, and for claims in the transport of valuable perishables such as produce, meat, pharmaceuticals, chemicals, live plants and animal material. The Company produces two separate graphic recorders. The COX1 and COBRA are single-channel recorders which record the air temperature in the truck or container. The COBRA is a new low-cost recorder with a transparent case, which allows viewing of the temperature record without opening the case itself. Both are used primarily in transit monitoring of temperature variations. 1 In addition to these graphic temperature recorders, the Company distributes an electronic temperature recorder, or "data logger", named the TRACER. The TRACER delivers its data via a cable link to a PC computer using specialized software. TRACER is used in quality control and safety applications in the foods industries and also in shipping. The shipping configuration is a new design with an integral mailer pack that has patents pending. The source and availability of raw materials are not critical or significant factors in the temperature recorder operations of the Company. The temperature recorder operations of the Company are non-seasonal. The Company does and is required to carry significant amounts of inventory for its temperature recorder operations and neither Company nor industry practices provide extended payment terms to customers. The temperature recorder operations of the Company are not dependent upon a single or a few customers, nor would the loss of any one customer have a materially adverse effect upon earnings or the financial position of the Company. Backlog of orders is not a major factor in the temperature recorder operations of the Company. The Company is a major competitor in the temperature recording industry as regards its production and distribution activities. The Company does not maintain company owned distribution entities. All distributors are on contract and major distributors are located in Copenhagen, Singapore and Melbourne. All other distribution and sales operations are through individual sales persons operating on a sales commission basis or a salary plus incentive basis. The product lines include a portable penetration probe thermometer, which is retailed but not manufactured by the Company. The Company also performs contract manufacturing. The COX1 product accounts for 90% of the Company's business. The balance is due to probes and retail sales of other temperature monitoring products, which are not manufactured. The COBRA and TRACER products are new and no substantial volume has yet been achieved. OIL PRODUCTION OPERATIONS The Company's oil activities include the drilling of development wells and the development and operation of such properties for production of oil. Since 1980, the Company has principally financed these activities by borrowings, sales of non-operating assets, issuance of its common stock and from operations. During the three years covered by this report the Company has only had modest crude oil production or sales from March 1997, when production sales were reactivated. In 1986, as a means to maximize production through steam enhancement of its significant heavy crude reserves, the Company undertook a project to construct a Cogeneration (COGEN) and Thermal Enhanced Oil Recovery (TEOR) at its oil leases in the Chico-Martinez field, Kern County, California. The COGEN/TEROR facility as contracted with Pacific Gas & Electric Company (PG&E), a California public utility, was a 45 MW project consisting of two phases; Phase One being 20.5 MW and Phase Two being 24.5 MW. Problems arose with PG&E, principally dealing with the power transmission routing and inter-connection, which prevented the Company from meeting the contract deadline. As a result of these problems, a complaint was filed with the California Public Utilities Commission against PG&E. The future plans of the Company pertaining to it's oil production and the COGEN/TEOR operation are discussed under the respective properties captions elsewhere in this report under Item 2., Description of Properties - Mitchel and Bacon Hills leases. The Company's plans to augment its oil operations in California include, by late 1998, a well-enhancement oil recovery project at the Chico-Martinez Field. It is anticipated that the project will be a "Qualified Enhanced Oil Recovery Project" as defined by the Omnibus Budget Reconciliation Act of 1990 with resultant entitlements of substantial federal income tax benefits. The organizational structure of the enhanced oil project will be such as to enable investor financing of the project and/or outsourcing of the field operations. Actual drilling operations are not undertaken by the Company, but are conducted by third-party drilling contractors. The Company, however, may act as operator of such projects, thereby supervising exploration, drilling, and production activities. Since 1980, virtually all of the Company's development activities have been on its Kern County Leases, which the Company acquired by cash and/or issuance of shares of its common stock to be held for investment( investment shares). The source and availability of raw materials are not critical or significant factors in the oil production operations of the Company. 2 The oil operations of the Company are non-seasonal. The Company does not and is not required to carry significant amounts of inventory for its oil operations and neither Company nor industry practices provide extended payment terms to customers. The oil operations of the Company are not dependent upon a single or a few customers, nor would the loss of any one customer have a materially adverse effect upon the earnings or financial position of the Company. Backlog of orders is not a factor in the crude oil operations of the Company. The oil and gas industry is extremely competitive and involves risk. The Company is a minor factor in the petroleum and natural gas industry as regards to its development and production activities. The ability of the Company to market oil and gas produced from its properties or from those which may be subsequently acquired depends on numerous factors beyond the control of the Company, including the extent of production and imports of oil and gas into the United States, the proximity and capacity of oil and gas pipelines, the availability of other transportation facilities, the marketing of competitive fuels, the effect of governmental regulations on the production of oil and gas and other matters affecting the availability of a ready market, such as fluctuation, supply and demand. Governmental agencies of the United States maintain a close watch on the ecological impact of development activities and the possibility of ecological disturbances. Such measures may substantially increase the cost of developing and producing oil and gas and may prevent or delay the commencement or continuance of a given operation. In the opinion of management of the Company, its operations comply with applicable legislation and regulations. The existence of such regulation has had no material effect on the Company's operations and the cost of such compliance has not been material to date. The cost and effect on operations of compliance with future environmental laws and regulations cannot be predicted and such measures may have an effect on the capital investment or the net revenues resulting from the Company's activities. ITEM 2. DESCRIPTION OF PROPERTIES The Company owns working interests in certain developed oil and gas properties in the United States. Developed acreage consists of properties on which oil and gas wells have been drilled which are capable of producing crude oil or natural gas. The Company's principal oil and gas properties are the Mitchel and Bacon Hills leases previously referred to in this report. Following is a description of each of these principal oil and gas properties: MITCHEL LEASES These subleases, located in the Chico-Martinez field, Kern County, California, were acquired in 1969 and consist of 380 acres in which the Company has interests to a depth of 2,000 feet on 320 acres and to a depth of 2,500 feet on 60 acres. The Company owns a 78.33 percent working interest in these subleases, with 52 completed oil wells which were unitized in 1976 and which produce from the 500 to 1,600 foot levels. Production interest of others in these wells was 1.1 percent at April 30, 1998, 1997 and 1996. The oil produced is heavy crude of approximately 12.7 API gravity. The Company has no drilling requirements under the subleases, which are held by production. There was no crude oil production on these leases during the three years ended April 30, 1998 until March 1997. BACON HILLS LEASE In March 1990, the sublessor declared this sublease terminated and requested return of the underlined portion of the sublease. The Company does not acknowledge the declaration of termination and has not complied with the sublessor's request. To date, no litigation, action or further request has been undertaken by the sublessor in a connection with this matter. The Company retains and holds a five-acre well tract and the oil and gas rights to each of fourteen wells drilled on this sublease. This sublease, located in the Chico-Martinez field, Kern County, California, was acquired in December, 1980 and consists of approximately 260 acres, 1 which the Company has interests to the depth of 5,000 feet. The landowners' and overriding royalty interest holders are identical with the Mitchel leases which total 21.67 percent and the Company owns the remaining 78.33 percent working interest in this lease. The acquisition of this sublease, in conjunction with the Mitchell subleases, provided the Company with an entire leasehold interest in a full section of land. Under the terms of this sub-lease, the Company committed to the drilling of an initial six wells on or before March 31, 1982, and at least six additional wells each 12-month period thereafter, until at least 52 wells have been drilled without regard to whether they are producing or abandoned. The Company has drilled a total of 14 wells under its commitment. No wells have been drilled on this lease since 1984. 3 COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION During the past ten years, the Company's oil activities have been directed toward the implementation of the COGEN/TEOR Project on the Mitchel leases which would be capable of serving the combined Mitchel and Bacon Hills leases with a steam flood enhanced oil recovery operation and provide for the sale of power to a California public utility company. ERES Cogenics, Inc., a wholly owned subsidiary, was formed in August 1987 to be the builder/owner/operator of the COGEN/TEOR facilities. The Company signed a power purchase agreement with Pacific Gas and Electric Company for the delivery to the utility of 20.5 megawatts of electricity by a date no earlier than June 1, 1989 and no later than December 24, 1991. The agreement further provided for delivery and purchase of up to 45 megawatts of power in later years. Contracts were signed for negotiated with responsible and experienced suppliers, supervision, natural gas delivery, maintenance and operation and the TEOR installation, including the laying of steam lines for the steam flood operations. As stated earlier in 1(c) under Oil Production Operations, certain problems arose with the public utility, which rendered the Company unable to satisfy the power purchase contract requirements by the December 24, 1991 deadline. The public utility denied a request for deferral of the deadline date. The Company filed a complaint with the California Public Utility Commission (CPUC) requesting continuation of the power purchase agreement. The matter was heard by the CPUC in October 1993 and a settlement in this litigation was reached in June 1997, which was approved by the CPUC in the amount of $3,500,000. The Company received the settlement amount in February 1998. The tables below set forth the gross and net developed acreage and the gross, net, and revenue net productive wells of all oil and gas properties of the Company at April 30, 1998. (a) "Gross Acreage" represents all acres in respect to which the Company has a working interest, "Net Acreage" represents the aggregate of the working interest of the Company in the gross acreage. Acreage (a) ---------------------- Gross Location Held By Expires Developed Net -------- ------- ------- --------- --- California Mitchel Production Indefinite 380.00 297.65 *Bacon Hills Production * 70.00 54.83 ------- ------ 450.00 352.48 * Reference is made to the descriptions of the Mitchel and Bacon Hills leases previously discussed in this Item 2 concerning the status of the leases and certain drilling commitments required of the Compnay pertaining to the California leases. (b) "Gross Wells" represents the total number of wells which the Company has a working interest; "Net Wells" represents the number of gross wells multiplied by the percentages of the working interests therein owned by the Company. "Revenue Net Wells" represents the number of gross wells multiplied by the percentages of the participating production interests therein retained by the Company. Oil Wells Revenue Location Gross Net Net - -------- ----- --- --- California 62.0 48.6 48.6 During the past five fiscal years, the Company has not drilled any oil or gas wells. The Company is not obligated under any existing contracts or agreements to provide a fixed and determinable quantity of oil and gas in the future. The latest independent petroleum studies and reports for the Kern County, California leases were by Douglass Petroleum Management Co., Bakersfield, California as follows: (1) Comprehensive Reservoir Engineering Study dated February 1986 which estimated the recoverable oil reserves at 21,103,341 barrels, and (2) a Steam Flood Development Plan, dated June 1987 which sets forth a plan including drilling and production costs for recovery of the oil reserves. The Company has not filed any reports concerning oil and gas reserve estimates with any regulatory authorities or agency other than the Securities and Exchange Commission. The net production of oil and gas for each of the last five years is shown below. Net production represents the gross production after deduction for royalties of other parties. 4 OIL/BBDS 1998 235 1997 500 1996 -0- 1995 -0- 1994 -0- None of the net production during each of these years is applicable to long-term supply or similar agreements with foreign governments or authorities in which the Company acts as producer. ITEM 3. LEGAL PROCEEDINGS Disclosure of legal proceedings is contained in Note M, "Commitments, litigation and contingencies," of the Notes to Consolidated Financial Statements incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS On November 15, 1997 pursuant to Notice and accompanying Proxy Statement for the Annual Meeting of Shareholders, the annual meeting of shareholders of the Company was held in Phoenix, Arizona at which meeting the following matters were submitted to a vote of the securities holders: 1. To elect five Directors to the Board of Directors for a one-year term in accordance with the articles of Incorporation. 2. To consider and act upon a proposal to ratify the selection of Bedinger & Company as the Company's independent public accountants for the fiscal year ending April 30, 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION FOR COMMON STOCK The Company's common stock is traded in the nationwide over-the-counter market and is listed in the electronic bulletin board provided by the National Quotation Bureau, Inc. The range of high and low bid quotations for each quarterly period during the past four years ended April 30, based upon information provided to the Company by the National Association of Securities Dealers or market makers in the Company's stock, was as follows: 1998 1997 1996 1995 ----------- ----------- ----------- ------------ High Low High Low High Low High Low ---- --- ---- --- ---- --- ---- --- First Quarter 1/4 1/4 1/4 1/4 5/8 3/8 3/16 7/64 Second Quarter 5/16 5/16 1 1/4 1/8 5/8 5/16 3/16 1/86 Third Quarter 3/4 3/8 13/16 3/8 5/8 5/16 7/16 3/16 Fourth Quarter 3/4 3/8 3/4 3/8 1/2 5/16 5/8 3/8 5 (b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS As of April 30, 1998 the approximate number of holders of record of each class of equity securities of the Company was as follows: Common Stock, no par value 3,000 (1) (1) Included in the number of stockholders of record are shares held as "nominee" or "street name. (c) DIVIDENDS The Company has not declared any dividends during the past three years ended April 30, 1996 through 1998. ITEM 6. SELECTED FINANCIAL DATA Following is a summary of selected financial data for each of the last three fiscal years ended April 30: 1998 1997 1996 ---- ---- ---- Operating Revenues $8,138,757 $7,453,817 $6,864,519 Profit (loss) from continuing operations 3,117,068 1,004,333 207,638 Profit (loss) from continuing operations per common stock 0.15 0.05 0.01 Total Assets 9,766,536 6,953,356 6,555,670 Long-term Obligation 280,706 358,686 465,895 Cash Dividends Declared Per Common Share -0- -0- -0- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Based upon its temperature recorder operations and the developed and undeveloped reserves of the Mitchel and Bacon Hills leases, the Company anticipates cash from operations, equity investment, and borrowing from long-term lending sources adequate to meet cash requirements. At present, cash flow from operations is adequate to meet cash requirements and commitments of the Company. However, the Company intends to enter into equity, debt of other financing arrangements to meet its further financial needs for expansion into food safety control products related to its temperature recorder operations and: (a) To resume and continue drilling and work over activities at its Chico Martinez oil field. (b) To repay outstanding current liabilities; (c) To provide for general working capital needs; COMPARISON OF OPERATIONS FOR 1998 AND 1997 Operations for the years ended April 30, 1998 resulted in a net earnings of $3,066,568 or 0.15 per share. Included in these net earnings is a one-time income amount of $2,043,305 net of the provision for income taxes. The income from operations was $1,023,263 for the current year and $985,119 for the prior year. The following schedule sets forth the two company segments for the years ended April 30, 1998 and 1997: 6 Y/E 1998 Y/E 1997 Temperature Oil Temperature Oil Recorders Production Recorders Production --------- ---------- --------- ---------- Revenues: Sales $8,135,197 $ 3,559 $ 7,444,170 $ 9,647 Cost of sales 3,676,082 28,775 3,472,256 3,649 General & Admin 1,925,715 153,492 1,745,691 88,915 Sales Expense 1,223,991 -0- 1,052,164 -0- Interest 34,938 37,250 40,851 24,249 Depreciation 34,468 782 36,946 3,977 Income(loss) operations 1,240,003 (216,740) 1,096,262 (111,143) Other income (expense) (127,203 2,221,008 (121,578) 140,792 Income taxes 18,515 31,985 133,692 -0- Net earnings (loss) 1,094,285 1,972,283 840,992 29,649 TEMPERATURE RECORDERS Sales increased approximately $700,000 or 9% for the current year as compared to the prior year ended April 30. There was an improvement in cost of sales as a percentage of sales from 46.6% in the 1996-97 year to 45.1% in the 1997-98 year. Sales expense increased $171,827 for the current year over the prior year. Such expenses expressed as a percent of sales, increased from 14% last year to 15% for the current year. This increase was due primarily to marketing activities in the introduction of the Company's new products concerning food safety monitoring. General and administrative expense as a percentage of sales remained constant at 23% for the two years of comparative operations. The decrease of 15% in interest expense was due to reduction in long term debt. The category of other expense increased by $5,625 or 5% due primarily to a reduction in interest income from the prior year. Overall, the improvement in Income from Operations of $143,741 is noteworthy by the fact that it represents 21% of the sales increase. This compares favorably with the Company's historically normal percentage of 15% for this category of income. OIL PRODUCTION Crude oil sales were down in the 1997- 98 year by $6,088 or 63%. This was the result of decreased production due to depressed oil prices and a well work-over program. Cost of sales increased $25,126 due to the above-mentioned work-over program, which accounted for all of the increase. General and administrative expenses increased $64,577 or 73%, due primarily to technological research and development costs of $32,000, shareholder meeting costs of $19,000 and increases aggregating approximately $13,500 for rent, travel, insurance and office relocation costs. The increase in interest expense of $13,000 was due primarily to an adjustment of the note payable balance pertaining to the stipulated judgement referred to in Note H of Notes to Consolidated Financial Statements incorporated herein by reference. Other income increased $2,080,216 over the prior year income of $140,792. As disclosed elsewhere in this report under Enhanced Oil Recovery Operations and by Note E of Notes to Consolidated Financial Statements incorporated herein by reference, the Company received $3.5 million in February 1998 in settlement of certain litigation with a public utility company. The Company realized a net settlement amount of $2,274,764 after payment of legal fees, consultant fees and litigation costs of the six-year litigation. The Company absorbed a charge to operations of $53,756 from a write off of certain investment securities valuation and other expenses which resulted in the $2,221,008 other income amount. COMPARISON OF OPERATIONS FOR 1997 AND 1996 Operations for the year ended April 30, 1997 resulted in a net profit of $870,641. This is a $702,620 or 418% improvement over the $168,020 net profit for the prior year ended April 30, 1996. 7 The following schedule reflects the two company segments for the years ended April 30, 1997 and 1996. Y/E 1997 Y/E 1996 Temperature Oil Temperature Oil Recorders Production Recorders Production --------- ---------- --------- ---------- Sales $ 7,444,170 $ 9,647 $ 6,864,519 -0- Cost of sales 3,472,256 3,649 3,525,156 6,715 General & Admin 1,745,691 88,915 1,649,384 62,076 Sales Expense 1,052,164 -0- 1,004,953 -0- Interest 40,851 24,249 42,028 45,709 Depreciation 36,946 3,977 39,116 3,977 Income(loss) 1,096,262 (111,143) 603,882 (118,477) operations Other income (expense) (121,578) 140,792 (32,380) (245,387) Income taxes 133,692 -0- 39,617 -0- Net earnings (loss) 840,992 29,649 531,885 (363,864) TEMPERATURE RECORDERS Net earnings were $840,992 for the year ended in 1997 as compared to $531,885 for 1996, an improvement of $309,107 or 58%. Sales were up approximately 8.5% for the current year over the prior year. There was a slight decrease in cost of sales. These two factors resulted in an improvement in gross margin on sales of $632,551 for 1997. The gross profit on sales in 1997 was $3,971,914 as compared to $3,339,363 for 1996. As a percentage of sales, all categories of operating expenses, remained relatively constant between the two years. Income from operations was up $492,380 for 1997 over 1996. Increases in other expense and income taxes of $183,273 reduced the improvement in net earnings to $309,107. OIL PRODUCTION The oil production segment reflects net earnings for the year ended April 30, 1997 of $29,649 as compared to a net loss of $363,864 for the prior year. This improvement of $393,513 is attributable primarily to other income gain as disclosed below. The only oil production sales for either of the past two years was approximately 500 barrels sold in March 1997. As disclosed elsewhere in this report, the oil field operations have been inactive for several years due to litigation involving the Company's cogeneration project. Production operations have been reactivated in the last quarter of the 1996-1997 fiscal year. General and administration expenses increased $26,839 or 43% due primarily to legal costs of $8,000 and increases in salaries, rentals and insurance expenses of approximately $19,000. Interest expense declined due to debt reduction. Other income in 1997 of $140,792 was the result of the settlement of liabilities at less than the recorded liability, which resulted in a gain of $386,179 for this category of operations. In the prior year the $245,387 expense was attributable principally to a loss on investment securities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV ITEM 9. DISAGREEMENT OF ACCOUNTING AND FINANCIAL DISCLOSURE None 8 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS (a) IDENTIFICATION OF DIRECTORS The following table lists certain information concerning the directors of the Company: Name, Positions and Director Term Certain Other Offices With Registrant Age Since Expires Corporations - ----------------------- --- ----- ------- ------------ Alfred P. Sprenger, Chairman of the Board 70 1968 (1) (2) James L. Cox, President, Chief Executive Officer, Chief Operating Officer 53 1995 (1) (3) David K. Caskey Secretary and Treasurer 36 1997 (1) (4) George M. Pigott 70 1997 (1) Michael E. Fonzo 58 1997 (1) (1) Serves until next meeting of the Company's stockholders. (2) Serves as the sole trustee of the Liquidating Trusts for Progressive Investment Corporation (PIC) and PIC Research & Development Corp. (3) Serves as President and Chief Executive Officer of the Company's subsidiary, Twin-Charts, Inc. (4) Serves as Secretary-Treasurer of Company's subsidiaries, Twin Chart, Inc. and Transit Services, Inc. (b) IDENTIFICATION OF EXECUTIVE OFFICERS Executive Name, Positions and Director Term Certain Other Offices With Registrant Age Since Expires Corporations - ----------------------- --- ----- ------- ------------ James L. Cox, President, Chief Executive Officer, Chief Operating Officer 53 1995 (1) (2) David Caskey Secretary-Treasurer 36 1997 (1) (3) (1) Serves until replaced by the Board of Directors. (2) Serves as President and Chief Executive Officer of Company's subsidiary, Twin-Chart, Inc. and Transit Services, Inc. (3) Serves as Secretary-Treasurer of Company's subsidiaries, Twin-Chart, Inc., and Transit Services, Inc. (c) BUSINESS EXPERIENCE Mr. James L. Cox has been an officer and director of the Company since August 1, 1995. He has served in the capacity of President and Chief Operating Officer from that date to the present. From November 1997 to the present, he has served as Chief Executive Officer. He has served in identical capacities in the two subsidiary corporations, Twin-Chart, Inc., and Transit Services, Inc., since 1986 and from 1977 to 1986, he served as Sales Manager and Executive Vice-President of Transit Services, Inc. He holds a Ph.D. from Stanford University and has held various teaching and research positions with Duke University, Stanford Research Institute and University of California, Santa Barbara. Mr. Alfred P. Sprenger has been a director of the Company since its incorporation. He served in the capacity as President and Chief Operating Officer from 1969 to August 1, 1995. He served as Chief Executive Officer of the Company from August 1, 1995 to November 1997, on which date he resigned as an executive officer and employee. He served in identical capacities in the two affiliated corporations, Progressive Investment Corporation (PIC) and PIC Research and Development (PIC R&D) until December 1983 and now serves as the sole trustee of the Liquidating Trusts for PIC and PIC and R&D. 9 In September 1996, Mr. David K. Caskey was elected Secretary/Treasurer of the Company to replace Roger Sherer, who died in August 1996. Mr. Caskey has served as Secretary/Treasurer in the two subsidiary corporations, Twin-Chart, Inc., and Transit Services, Inc., since 1990. He holds a B.A. degree from Long Beach State University and has been with the subsidiary corporations since 1987. Mr. Michael E. Fonzo has been Vice-President of AMS Industrial, Inc. since 1986, a firm engaged in engineering solutions for coal-fired power plants, coal-mines and in conducting seminars to engineering companies. He holds a Master of Science from Catholic University, Chile and has held a teaching position with the University of the North, Chile. He has been a Sales and Marketing manager and consultant to several companies in the petrochemical field. From 1991 to 1993 he represented Cox Recorders in selected countries. Dr. George M. Pigott is Professor of Food Engineering and is Director of the Institute for Food Science and Technology, School of Fisheries, College of Ocean and Fishery Sciences at the University of Washington. He has held these positions since approximately 1985. He is the author of many papers presented at symposiums around the world and is a lecturer at several universities in the United States. For years, Dr. Pigott has been involved in research and development activities for the processing, preservation and packaging of aquatic products presented to the customer. (d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS Disclosure of legal proceedings is contained in Note M "Commitments, Litigation and Contingencies," of the Notes to Consolidated Financial Statements incorporated herein by reference. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS (a) Remuneration, on an accrual basis, paid to the executive officers and directors of the Company during the year ended April 30, 1998, was as follows: CASH AND CASH EQUIVALENTS FORMS OF REMUNERATION
Securities or Property Insurance Aggregate Salaries, Fees Benefits or of Name of Individual Director's Fees Reimbursement Contingent or number of Capacities in Commissions, Personal Forms of persons in Group Which Served and Bonuses Benefits Remuneration ---------------- ------------ ----------- -------- ------------ James L. Cox Director, President $125,407 None None CEO & COO Alfred P. Sprenger Chairman of -0- None None the Board David K. Caskey Director & Sec/Treas. $ 71,431 None None Three All Officers & $196,838 None None Directors
(b) The Company does not have future plans to pay remuneration, directly or indirectly, to any of the above officers or directors other that direct salaries and bonuses as authorized by the Board of Directors. (c) The directors of the Company do not receive compensation for serving in their capacity other than reimbursement of expenses incurred related to company business. (d) Transactions with management are disclosed in Note L of the Notes to Consolidated Financial Statements incorporated herein by reference. 10 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table show as of April 30, 1998 the effective number of shares of common stock of the Company owned by every person owning of record or known by the Company as owning beneficially more than 5 percent of the outstanding common stock. (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The number of shares and percentage ownership represents effective ownership in the Company, including ownership through the affiliated corporations liquidating trusts, Progressive Investment Corporation (PIC) and PIC research and Development (PIC R&D). Title of Name and Address Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership Class ----- ---------------- -------------------- ----- Common James L. Cox 4,587,000 shares 23.3% stock, 69 McAdenville Rd. Record no par Belmont, NC Common Alfred P. Sprenger 895,800 4.5% stock, 2432 W. Peoria Record no par Suite 1167 Phoenix, AZ Common PIC Liquidating Trust 178,614 1.0% Stock, 2432 W. Peoria Record and Beneficial no par Suite 1167 Phoenix, AZ Common PIC R&D Liq. Trust 67,962 0.3% stock, 2432 W. Peoria Record no par Suite 1167 Phoenix, AZ Common Robert W. Dupree 704,000 3.5% stock, 2432 W. Peoria Record no par Suite 1167 Phoenix, AZ Common Other Related Parties* 4,522,304 22.7% stock, Record and Beneficial no par * Comprised of individuals being certain Company employees and relatives, friends and business associates of Mr. Sprenger. For further information concerning ownership interests, see Note L, "Related-party Matters, Ownership Interests," of the Notes to Consolidated Financial Statements, incorporated herein by reference. (b SECURITY OWNERSHIP OF MANAGEMENT The following table shows as of April 30, 1998, all shares of the Company stock and that of the affiliated corporations liquidating trusts, PICLT and PIC R&DLT, beneficially owned by the officers and directors of the Company as a group: Amount and Nature of Title of Class Name of Security Beneficial Ownership Percent of Class - -------------- ---------------- -------------------- ---------------- Common stock, Energy Reserve, Inc. 5,595,811 28.1% No par Common stock PIC Liquidating Trust -0- No par Common stock PIC R&D Liquidating Trust -0- No par 11 PART IV ITEM 13. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Consolidated Financial Statements: Balance sheets--April 30, 1998 and April 30, 1997 Statement of operations and accumulated deficit for the years ended April 30, 1998, 1997 and 1996 Statement of shareholders' investment for the years ended April 30, 1998, 1997 and 1996 Statement of cash flows for the years ended April 30, 1998, 1997 and 1996 (b) REPORTS ON FORM 8-K The Company has filed the following Forms 8-K for the year covered by this report ended April 30, 1998: None 12 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND APRIL 30, 1997 CONTENTS PAGE ---- Independent Auditors' Report.................................. 1 FINANCIAL STATEMENTS Consolidated Balance Sheets............................... 2 Consolidated Statements of Income and Accumulated Deficit. 3 Consolidated Statements of Changes in Stockholders' Equity 4 Consolidated Statements of Cash Flows..................... 5-6 Supplemental Schedule of Non-Cash Investing and Financing Activities.................................... 7 Notes to Consolidated Financial Statements ............... 8-29 INDEPENDENT AUDITORS' REPORT June 19, 1998 Board of Directors Cox Technologies, inc. Phoenix, Arizona We have audited the accompanying consolidated balance sheets of Cox Technologies, Inc. (formerly Energy Reserve, Inc.), as of April 30, 1998 and 1997, and the related consolidated statements of income and accumulated deficit and of cash flows for the years ended April 30, 1998, 1997 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cox Technologies, Inc., at April 30, 1998 and 1997, and the results of its operations and cash flows for the years ended April 30, 1998, 1997 and 1996, in conformity with generally accepted accounting principles. Certified Public Accountants F-1 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) CONSOLIDATED BALANCE SHEETS APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- April 30 --------------------------- ASSETS 1998 1997 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 2,575,945 $ 1,118,019 Accounts receivable, less allowance for doubtful accounts of $29,527 and $30,000 at April 30, 1998 and 1997, respectively 1,627,074 1,131,873 Inventory (Note B) 1,043,531 757,492 Investment in securities (Note C) 39,500 64,500 Notes receivable - current (Note D) 33,503 39,579 Prepaid expenses 352,143 10,508 Deferred income taxes (Note F) 30,000 0 ------------ ------------ TOTAL CURRENT ASSETS 5,701,696 3,121,971 Property and equipment (Net) (Note E) 3,704,243 3,748,808 Investment in securities (Note N) 300,000 0 Deposits 5,290 3,890 Goodwill (Notes A, I and J) 48,479 78,687 Notes receivable-non-current portion (Note D) 6,828 0 ------------ ------------ TOTAL ASSETS $ 9,766,536 $ 6,953,356 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses (Note G) $ 356,811 $ 489,740 Income taxes payable (Note F) 52,270 400 Current portion of long-term debt (Note H) 510,369 585,859 ------------ ------------ TOTAL CURRENT LIABILITIES 919,450 1,075,999 Long-term debt (Note H) 280,706 358,686 Minority interest (Notes A and J) 669 2,674 ------------ ------------ 1,200,825 1,437,359 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note M) STOCKHOLDERS' EQUITY Common stock, no par value; authorized- 100,000,000 shares; issued and outstanding; 19,905,438 shares at April 30, 1998 and 19,905,188 shares at April 30, 1997 20,041,562 20,041,562 Common stock subscribed 58,100 0 Contributed capital 220,872 220,872 Treasury stock (45,920) 0 Accumulated deficit (10,598,719) (13,665,287) Unrealized loss on available-for-sale securities (Note C) (180,500) (205,500) Less - Notes receivable for common stock: Issued (Notes K and L) (875,650) (875,650) Subscribed (Notes K and L) (54,034) 0 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 8,565,711 5,515,997 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,766,536 $ 6,953,356 ============ ============ F-2 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED APRIL 30, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------- Year Ended April 30 --------------------------------------- 1998 1997 1996 ---- ---- ---- REVENUE: Sales $ 8,138,756 $ 7,453,817 $ 6,864,519 ----------- ----------- ----------- TOTAL REVENUE 8,138,756 7,453,817 6,864,519 ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales 3,704,857 3,475,905 3,531,871 General and administrative expenses 2,079,207 1,834,606 1,711,460 Sales expense 1,223,991 1,052,164 1,004,953 Depreciation and amortization 35,250 40,923 43,093 ----------- ----------- ----------- TOTAL EXPENSES 7,043,305 6,403,598 6,291,377 ----------- ----------- ----------- INCOME FROM OPERATIONS 1,095,451 1,050,219 573,142 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Other income (expense) (Note E) 2,093,805 19,214 (266,575) Minority interest in income of consolidated subsidiary (Note I) (11,192) Interest expense (72,188) (65,100) (87,737) ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSE) 2,021,617 (45,886) (365,504) ----------- ----------- ----------- Earnings before income taxes 3,117,068 1,004,333 207,638 Provisions for income taxes (Note F) 50,500 133,692 39,617 ----------- ----------- ----------- NET EARNINGS $ 3,066,568 $ 870,641 $ 168,021 =========== =========== =========== EARNINGS PER SHARE (Note A): Net Income $ .15 $ .04 $ .01 =========== =========== =========== F-3 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED APRIL 30, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------- Year Ended April 30 ----------------------------------------- 1998 1997 1996 ---- ---- ---- ACCUMULATED DEFICIT, beginning of year ($13,665,287) ($14,535,928) ($14,703,949) NET EARNINGS 3,066,568 870,641 168,021 ------------ ------------ ------------ ACCUMULATED DEFICIT, end of year ($10,598,719) ($13,665,287) ($14,535,928) ============ ============ ============ Common Stock ------------------------ Number of Contributed Shares Amount Capital ------ ------ ------- BALANCES: April 30, 1995 19,526,374 $ 20,009,855 $220,872 Shares issued: Settlement of liabilities 36,607 4,500 Shares reacquired and cancelled (7,793) (7,793) BALANCES: ----------- ------------ -------- April 30, 1996 19,555,188 20,006,562 220,872 Shares issued: Acquisition of subsidiary 350,000 35,000 BALANCES: ----------- ------------ -------- April 30, 1997 19,905,188 20,041,562 220,872 Shares issued 250 BALANCES: ----------- ------------ -------- April 30, 1998 19,905,438 $ 20,041,562 $220,872 =========== ============ ======== F-4 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 30, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------- Year Ended April 30 -------------------------------- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $3,066,568 $870,641 $ 168,021 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation and depletion 31,273 36,946 39,116 Minority interest (2,005) 2,674 11,192 Allowance for doubtful accounts (473) 5,000 25,000 Amortization of goodwill 3,977 3,977 3,977 Deferred taxes (30,000) 167,411 39,600 (Acquisition) disposition of Goodwill 26,231 (26,979) CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES: (Net of effect from purchase of Twin-Chart, Inc.: for the years ended April 30, 1997 and 1996 only) (Increase) decrease in current assets: Accounts receivable (494,728) 240,192) 49,237 Inventory (286,039) (12,768) 22,756 Prepaid expenses (341,635) (1,697) (2,436) (Increase) decrease in non-current assets: Deposits (1,400) 0 2,931 Increase (decrease) in current liabilities: Accounts payable and accrued expenses (132,929) 206,545) (50,907) Income taxes payable 51,870 0 0 ---------- -------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,890,710 598,468 308,487 ---------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of treasury stock (45,920) Issuance of securities 35,000 Disposition of securities 25,650 Investment in securities (300,000) Purchase of property and equipment (37,090) (56,816) (308,426) Disposition of equipment 50,382 38,629 Loss realized on sale of securities 50,000 287,850 Purchase of minority interest in subsidiary (167,750) Common stock subscribed 58,100 ---------- -------- --------- NET CASH (USED) BY INVESTING ACTIVITIES (224,528) (21,816) (124,047) ---------- -------- --------- F-5 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) YEARS ENDED APRIL 30, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------- Year Ended April 30 --------------------------------- 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Amounts loaned on notes receivable (9,006) (6,702) Amounts repaid on note receivable 8,254 25,595 40,612 Amounts borrowed under notes payable 78,069 640,179 Amounts repaid on notes payable (231,539) (98,584) (291,795) Repayment (additions) to subscriptions receivable (54,034) 250 Reacquisition of common stock (net) (3,293) ---------- ---------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (208,256) (72,989) 379,251 ---------- ---------- --------- NET INCREASE (DECREASE) IN CASH 1,457,926 503,663 563,691 CASH AND CASH EQUIVALENTS, beginning of year 1,118,019 614,356 50,665 ---------- ---------- --------- CASH AND CASH EQUIVALENTS, end of year $2,575,945 $1,118,019 $ 614,356 ========== ========== ========= SUPPLEMENTAL DISCLOSURE: Interest paid $ 36,345 $ 40,851 $ 58,091 Income taxes paid $ 26,326 $ 46,016 F-6 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES YEARS ENDED APRIL 30, 1998, 1997 AND 1996 - -------------------------------------------------------------------------------- OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES Year Ended April 30 ------------------------------- 1998 1997 1996 ---- ---- ---- Payment of accounts payable and accrued expenses in exchange for common stock $0 $ 0 $250 Write-down for unrealized loss on available for sale securities $0 $205,500 $ 0 F-7 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The Company was organized in July 1968 for the purpose of acquiring oil and gas leases and for the exploration and development of oil and gas properties. On October 30, 1994, the Company acquired Twin-Chart, Inc. a Nevada Corporation, and its subsidiary (collectively Twin). Twin was privately owned and operated and is a producer and distributor of transit temperature recording instruments. Twin was acquired by the issuance of 4,587,000 restricted shares of common stock and 5,000,000 warrants to purchase restricted common stock of the Company with an agreed aggregate value of approximately $1,050,000. Twin conducts its operations primarily through a 100 percent owned subsidiary Transit Services, Inc., under the trade name and style of Cox Recorders. In March, 1997 a transaction was consummated wherein the Company acquired 75% of the issued and outstanding shares of National On-Site Check Cashing, Inc. This transaction was subsequently reversed with no significant effect on income in 1998. Effective August 1, 1995, by agreement, the Company organization was restructured with Mr. James Cox becoming an officer and director of the Company. In 1997 Mr. Cox became President, Chief Executive Officer and Chief Operating Officer, Mr. Sprenger, formerly President of the Company and Chief Operating Officer became the Chairman of the Board of Directors and the Board was expanded to a total of five members. One of the new members is an officer and employee. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES A. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Energy Reserve Financial Corp., Energy Reserve F-8 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A. PRINCIPLES OF CONSOLIDATION (CONTINUED) Holdings, Inc., ERES Cogenics, Inc. and Twin-Chart, Inc. It also includes the 56% ownership of Digi-V, Inc., which is in the development stage. All significant intercompany accounts and transactions have been eliminated. B. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. C. CAPITALIZATION OF OIL AND GAS PROPERTIES The following types of costs relating to the Company's oil and gas properties are capitalized under the successful efforts method of accounting: (i) Costs of purchase to acquire properties. (ii)Costs to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing oil and gas whether or not a specific well is successful. D. DEPRECIATION, DEPLETION AND AMORTIZATION OF CAPITALIZED COST OF OIL AND GAS PROPERTIES Depreciation, depletion and amortization of the capitalized cost of oil and gas properties are provided (on each property) on the unit-of-production method, at F-9 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) D. DEPRECIATION, DEPLETION AND AMORTIZATION OF CAPITALIZED COST OF OIL AND GAS PROPERTIES (CONTINUED) rates which are based on the ratio of oil and gas produced for the year to independent estimates of the total proved developed recoverable reserves and to total proved recoverable reserves from the property. These rates are applied to the unamortized costs for each property. Adjustments to the rates applied, required as the result of revisions of independent engineers' estimates of proved reserves, affect the year of such change and future years. Depreciation of all other property and equipment is provided on the straight-line method over the respective estimated lives ranging from five to twenty years. E. OPERATING COSTS Costs of oil production (lifting costs), geological and geophysical costs and the costs of carrying and retaining undeveloped properties are charged to operations as incurred. F. RESEARCH AND DEVELOPMENT COSTS Costs of research and development activities are charged to operations as incurred. G. CASH AND CASH EQUIVALENTS Cash and cash equivalents represent highly liquid investments, generally with a remaining maturity of three months or less. F-10 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) H. INVENTORY Inventory at April 30, 1998 and 1997 consists primarily of raw material, work-in-progress and finished goods related to transit temperature recording instruments; manufactured by Transit Services. Inventories are stated at the lower of cost (first-in, first-out method) or market. I. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Income taxes are provided based on earnings reported for financial statements purposes. Deferred taxes are provided on the temporary differences between income for financial statement and tax purposes. The Company deducts certain exploration and development costs in its income tax returns, which are capitalized and amortized for financial reporting purposes. Accordingly, the tax basis of certain of the Company's oil and gas assets is less than its basis for financial reporting purposes. Deferred taxes for these differences have not been provided in the accompanying consolidated financial statements due to the existence of net operating loss carryforwards. J. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments in two money market accounts (totaling $817,368 and $898,997 at April 30, 1998 and 1997 respectively) with a high quality financial institution. At April 30, 1998 and 1997, substantially all cash and cash equivalents were on deposit with one financial institution. Concentrations of credit risk with respect to trade F-11 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) J. CONCENTRATION OF CREDIT RISK (CONTINUED) receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different geographic areas. Accounts receivable from ten customers amounted to approximately 37% of the total accounts receivable at April 30, 1998. Generally, the Company does not require collateral or other security to support customer receivables. The Company established an allowance for doubtful accounts during the year ended April 30, 1996 of $25,000. At April 30, 1998 and 1997 the allowance for doubtful accounts was $29,529 and $30,000 respectively. K. FAIR VALUE OF FINANCIAL INSTRUMENTS Based on borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of the Company's long-term debt approximates the carrying value. Furthermore, the carrying value of all other financial instruments potentially subject to valuation risk (principally consisting of cash and cash equivalents, accounts receivable, bank borrowings, and accounts payable) also approximates fair value. L. ISSUANCE OF COMMON STOCK The issuance of common stock for other than cash is recorded by the Company at management's estimate of the fair value of the assets acquired or services rendered. The shares of common stock used (investment shares) can be sold only in accordance with issued rules promulgated by the Securities and Exchange Commission (SEC). F-12 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE A - ORGANIZATION, OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED) M. GOODWILL Goodwill created in the acquisition of the consolidated subsidiaries is being amortized over 15 years. Accumulated amortization amounted to $11,931 and $7,954 at April 30, 1998 and 1997, respectively. N. BASIC EARNINGS PER SHARE Earnings per share have been calculated in conformity with Financial Accounting Standards Board Statement No. 128 "EARNINGS PER SHARE". The Company has a simple capital structure with no significant potential common shares. Basic earnings per common share is based on the weighted average number of common shares outstanding during each year (1998 - 19,905,438; 1997 - 19,584,355; 1996 - 19,540,781). Common stock equivalents were immaterial for earnings per share purposes. O. LONG-LIVED ASSETS The Company has implemented the requirements of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived assets and for Long-Lived asset for the Disposal of". In evaluating the recoverability of the Company's Long-lived assets, management evaluated the current fair market value and expected future cash flows of its assets and concluded that no impairment of value has occurred as of April 30, 1998. F-13 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE B - INVENTORY Inventory at April 30, 1998 and 1997 consists of the following: 1998 1997 ----- ---- Raw Materials $ 364,540 $279,338 Work-in-process 352,096 142,413 Finished goods 326,895 335,741 ---------- -------- $1,043,531 $757,492 ========== ======== NOTE C - INVESTMENT IN SECURITIES In March 1992, as part of a February 1992 agreement to acquire securities of Pan American Energy, Inc., (PAEC) a public corporation, the Company traded certain California real estate lots in exchange for 4,000,000 Series "A" common stock warrants and the right to purchase 2,000,000 additional such warrants at ten cents ($.10) per warrant. The Company did not recognize gain on the exchange and has recorded the cost of the warrants at the $30,000 recorded cost of the lots. INVESTMENTS IN SECURITIES O.T.S. HOLDINGS, INC. In February 1992, the Company entered into an agreement with O.T.S. Holdings, Inc. (OTS) a public company to sell certain mining equipment and 50,000 shares of Company stock in exchange for $10,000 cash and 190,000 shares of 10% Cumulative Convertible Income Preferred stock of OTS. The transaction was valued at $200,000 comprised of $50,000 for the Company stock at $1.00 per share and $150,000 for the mining equipment. In conversations with a market-maker for these securities, it was concluded that recent litigation has reduced the value of this stock to $.05 bid; $.09 asked. Accordingly, a valuation allowance was established reducing the carrying amount to $.05 per share. Because the core business of the company was still considered F-14 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE C - INVESTMENT IN SECURITIES (CONTINUED) INVESTMENTS IN SECURITIES (CONTINUED) O.T.S. HOLDINGS, INC. (CONTINUED) sound, the loss is considered unrealized and reflected in the stockholders' equity section of the financial statements. PERFECTION FOODS INTERNATIONAL In December 1992, the Company agreed in principal to use 50,000 shares of its common stock to acquire 1,500,000 common stock shares and 5,000,000 warrants of Perfection Foods, International (PFI) a company formed in 1992 to engage in the fish processing business. In March 1993, subsequent to the fiscal year ended December 31, 1992, the transaction was completed and the Company issued the agreed shares and received the PFI shares. Mr. Sprenger, the chairman of the Board of Directors of the Company, is an officer and director of PFI. At the date of the transaction, March 1993, the Company's holding represented 33% of the outstanding shares of PFI, and the Company recorded the transaction of $1.00 per share issued on 50,000 shares. Because the short-term growth of PFI has been slower than anticipated, the Company reduced the carrying amount of PFI's shares by 50% in 1997. The loss on these available for sale securities was realized in 1998. Shares held at April 30, 1998 and 1997 were comprised as follows: 1998 ------------------------------ Current Unrealized Cost Value Loss ---- ----- ---- Pan American Energy Corporation Warrants $ 30,000 $30,000 $ O.T.S. Holdings, Inc. Stock 190,000 9,500 180,500 -------- ------- -------- $220,000 $39,500 $180,500 ======== ======= ======== F-15 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE C - INVESTMENT IN SECURITIES (CONTINUED) INVESTMENTS IN SECURITIES (CONTINUED) PERFECTION FOODS INTERNATIONAL (CONTINUED) 1997 --------------------------------- Current Unrealized Cost Value Loss ---- ----- ---- Pan American Energy Corporation Warrants $30,000 $30,000 $ Perfection Food International Stock 50,000 25,000 25,000 O.T.S. Holdings, Inc. Stock 190,000 9,500 180,500 -------- ------- -------- $270,000 $64,500 $205,500 ======== ======= ======== NOTE D - NOTES RECEIVABLE Notes receivable at April 30, 1998 and 1997 consists of: 1998 1997 ---- ---- Unsecured note receivable, due October 6, 1998 plus accrued interest at 13%. $14,929 $23,183 Other 25,402 16,396 ------- ------- 40,331 39,579 Less: current portion 33,503 39,579 ------- ------- $ 6,828 $ 0 ======= ======= F-16 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE E - PROPERTY AND EQUIPMENT At April 30, 1998 and 1997, property and equipment are summarized by major classification as follows: Oil and Gas Properties and Equipment 1998 1997 - ------------------------------------ ---- ---- Intangible drilling costs $ 883,023 $ 883,023 Lease and well equipment 1,828,881 1,828,881 Leasehold improvements 715,891 715,891 Undeveloped leases 72,167 72,167 Repurchased participating interests 2,608,640 2,608,640 Other 71,036 121,418 ---------- ---------- 6,179,638 6,230,020 Less: accumulated depreciation and depletion 2,767,860 2,767,078 ---------- ---------- 3,411,778 3,462,942 ---------- ---------- Manufacturing Property and Equipment - ------------------------------------ Tooling 146,225 112,727 Machinery and equipment 34,640 34,640 Office furniture and equipment 8,106 6,129 Leasehold improvements 234,533 232,918 ---------- ---------- 423,504 386,414 Less: accumulated depreciation and depletion 131,039 100,548 ---------- ---------- 292,465 285,866 ---------- ---------- $3,704,243 $3,748,808 ========== ========== F-17 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE E - PROPERTY AND EQUIPMENT (CONTINUED) OIL AND GAS PROPERTIES MITCHEL LEASES The Mitchel leases located in Kern County, California consist of 380 acres, on which 52 oil wells have been drilled and completed. During 1998, 1997 and 1996 the Company did not drill any wells on this lease as to which all drilling requirements have been satisfied. Landowner and overriding royalty interests in the property total 21.66 percent. The Company has obtained a report from an independent petroleum engineer which combines the estimated proved reserves and revenues as of June 1996 of the Mitchel leases and the contiguous Bacon Hills leases. These combined leases comprise an entire section of the Chico-Martinez field (see below, "Bacon Hills lease"). Reference is also made to the supplemental information on Standardized measure of Discounted Future Net Cash Flows elsewhere in this Form 10-K. During 1998 and 1997, the Company produced approximately 500 gross barrels of oil, on the combined Mitchel and Bacon Hills leases. No oil was produced on these leases in 1996. During 1998, 1997 and 1996, the Company had no steaming operations. BACON HILLS LEASE This sublease, located in the Chico-Martinez field, Kern County, California, was acquired in December 1980, and consists of approximately 260 acres, in which the Company has interests to the depth of 5,000 feet. The landowners and overriding royalty interest holders are identical with the Mitchel leases, which total 21.67 percent, and the Company owns the remaining 78.33 percent working interest in this lease. The acquisition of this sublease, in conjunction with the Mitchell subleases, provided the Company with an entire leasehold interest in a full section of land. Under the terms of this sublease, the Company committed to the drilling of an initial six F-18 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE E - PROPERTY AND EQUIPMENT (CONTINUED) OIL AND GAS PROPERTIES (CONTINUED) BACON HILLS LEASE (CONTINUED) wells on or before March 31, 1982, and at least six additional wells each 12-month period thereafter, until at least 52 wells have been drilled without regard to whether they are producing or abandoned. The Company has drilled a total of 14 wells - under its Commitment. No wells have been drilled on this lease since 1984. In March 1990, the sublessor declared the sublease terminated and requested return of the undrilled portion of the sublease. The Company does not acknowledge the declaration of termination, and has not complied with the sublessor's request. To date, no litigation, action or further request has been undertaken by the sublessor in connection with this matter. The Company believes that this breach can be cured, but irrespective of the breach, the Company holds a five acre well tract and the oil and gas rights to each of the aforementioned fourteen wells on this sublease. COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION The major activity of the Company concerning the properties during the past ten years was directed toward the implementation of a proposed COGEN/TEOR Project to be located on the Mitchel leases, with the capability of serving the combined Mitchel and Bacon Hills leases with a steam flood enhanced oil recovery operation and provide for the sale of power to a California Public Utility. ERES Cogenics, Inc., a wholly owned subsidiary, was formed in August 1987 to be the builder/owner/operator of the COGEN/TEOR facilities. The Company signed a power purchase agreement with the Pacific Gas and Electric Company (PG&E) for the delivery by the Company of 20.5 megawatts of electricity no earlier than June 1, 1989 and no later than December 1991. The agreement further provided for delivery and the purchase of up to 45 megawatts of power in later years. Contracts were signed or negotiated with responsible and experienced suppliers and contractors for the Cogen construction, engineering, supervision, natural gas delivery, maintenance and operation and the TEOR installation including the laying of steam lines for the steam flood operations. The estimated cost of the F-19 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- COGEN/TEOR NOTE E - PROPERTY AND EQUIPMENT (CONTINUED) COGENERATION SYSTEM AND THERMALLY ENHANCED OIL RECOVERY OPERATION (CONTINUED) 20.5 megawatt facility was between $45,000,000 and $50,000,000 by independent engineers. The power purchase agreement with PG&E terminated on December 24, 1991 after a decision by the utility not to defer the deadline date. In 1992, the Company filed a complaint with the California Public Utility Commission (CPUC) alleging bad faith conduct by PG&E and requesting a reinstatement of a new power purchase contract. In October 1993, the CPUC hearing on the complaint was concluded. In June, 1997, the Company and PG&E reached a settlement agreement of the complaint, which was approved by the CPUC in the amount of $3,500,000 which was received by the Company in February 1998. OTHER MATTERS Geological and geophysical costs for the years ended April 30, 1998 and 1997 were not significant. To continue to operate and further develop its oil and gas properties, the Company will require significant amount of additional capital in 1998 and future years from the sale of debt and/or equity securities, or through other financial arrangements. NOTE F - INCOME TAXES The provisions for income taxes consists of: April 30 ------------------------------ 1998 1997 1996 ---- ---- ---- Current payable: Federal $10,500 $32,000 State 70,000 $ 800 1,017 ------- ------- ------- 80,500 800 33,017 ------- ------- ------- Deferred: Federal 30,000 98,933 29,304 F-20 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE F - INCOME TAXES (CONTINUED) April 30 ------------------------------ 1998 1997 1996 ---- ---- ---- State 33,959 10,296 ------- -------- ------- 30,000 132,892 39,600 ------- -------- ------- 50,500 133,692 72,617 ------- -------- ------- Less: utilization of net operating loss carryforward 0 0 (33,000) ------- -------- ------- $50,500 $133,692 $39,617 ======= ======== ======= The Company and its subsidiaries file consolidated Federal income tax returns. There is an aggregate Federal net operating loss carryover of approximately $10,100,000 available to reduce future federal taxable income of the parent company. These net operating loss carryovers will expire in various amounts between 2001 and 2010. The Company also has available unused investment tax credits of $184,000 which will expire in various amounts between 1999 and 2001. The reconciliation of income tax computed at U.S. Federal and State statutory rates to the income tax provision for the years ended April 30, 1998 and 1997 are as follows: 1998 ------------------------- Currently Payable ------------------------- Consolidated Deferred ------------ -------- Pre-tax accounting income $ 3,117,068 $ =========== ======= Tax at statutory rates: F-21 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE F - INCOME TAXES (CONTINUED) Federal 968,100 (30,000) State 185,000 Utilization of net operating loss carryforward (1,072,600) ---------- -------- $ 80,500 $(30,000) ========== ======== 1997 ------------------------- Currently Payable ------------------------- Consolidated Deferred ------------ -------- Pre-tax accounting income $1,019,333 $ Abandonment of property (594,000) 594,000 --------- -------- Taxable income $ 425,333 $594,000 ========= ======== Tax at statutory rates: Federal $ 148,800 $ 98,933 State 7,900 33,959 Utilization of net operating loss carryforward (155,900) --------- -------- $ 800 $132,892 ========= ======== The deferred tax asset at April 30, 1998 is attributable to accrued State income taxes. NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities at April 30, 1998 and 1997 consist of the following: F-22 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE G - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (CONTINUED) 1998 1997 ---- ---- Trade accounts payable $103,356 $211,961 Accrued vacation payable 73,121 67,443 Accrued salaries and wages payable 170,398 134,623 Other accounts payable and accrued liabilities 9,936 75,713 -------- -------- $356,811 $489,740 ======== ======== NOTE H - NOTES AND CONTRACTS PAYABLE The following is a summary of notes and contracts payable at April 30, 1998 and 1997: 1998 1997 ---- ---- Unsecured notes payable to individuals due in monthly installments of $2,955, including interest at 8%, through December 2001 (see Note I). $72,091 $103,875 Note payable secured by treasury stock, due in monthly installments of $2,000 plus accrued interest at 6.67% through March, 2000. 42,422 Stipulated judgement for $201,875 for settlement of litigation involving a well drilling contractor at the Company's Mitchell and Bacon Hills lease. Interest at accruing 10% per annum. 394,271 358,429 Note payable to individual at 10%, due on demand. 7,057 F-23 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE H - NOTES AND CONTRACTS PAYABLE (CONTINUED) 1998 1997 ---- ---- Unsecured notes payable to individuals, due on demand, including interest at 8%. 125,000 Unsecured note payable at 10%, due on demand. 4,500 Note payable to bank, secured under general security agreement, due in monthly installments of $7,560, including interest at 8.5%, through January 2002. 282,291 345,684 --------- --------- TOTAL 791,075 944,545 Less: current portion (510,369) (585,859) --------- --------- $ 280,706 $ 358,686 ========= ========= Aggregate maturities of long-term borrowings over the next five fiscal years are as follows: Year Ended April 30 Amount - ------------------- ------ 1999 $510,369 2000 $123,055 2001 $101,236 2002 $ 56,415 -------- $791,075 ======== NOTE I - ACQUISITION OF TWIN-CHART, INC. In April 1993, the Company exchanged 50,000 shares of its common stock for a combination of 1,000,000 shares and 5,000,000 warrants of Twin-Chart, Inc.'s F-24 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE I - ACQUISITION OF TWIN-CHART, INC. (CONTINUED) (TCI) common stock, which represented approximately 20% of the outstanding shares. In October 1994, the Company acquired the remaining issued and outstanding shares of TCI which amounted to 4,098,000 shares for 4,587,000 shares of the Company's common stock and 5,000,000 warrants for the purchase of the Company's stock at an initial price of $5.00 per share. The price per share increases at a rate of $.50 per share per year for five years following the initial year, then at a rate of $1.00 per share per year for the second five years and finally at a rate of $2.00 per share per year for the final three year period. The acquisition has been accounted for as a purchase. The results of operations of TCI have been included in the accompanying consolidated financial statements since the date of acquisition, which was October 31, 1994. The total cost of the acquisition was approximately $1,050,000, which approximated the fair value of the net assets of TCI acquired as of that date. In January, 1996, TCI acquired all of the minority interest (13.7%) in its subsidiary Transit Services, Inc. The purchase price was $110 per share on five year installment notes, due in monthly installments of $2,955, including interest at 8% (see Note H). The total cost was $167,750. NOTE J - ACQUISITION OF NATIONAL ON-SITE CHECK CASHING, INC. OF NEVADA In March, 1997, the Company issued 350,000 shares of common stock in exchange for 75% of the issued and outstanding stock of "National On-Site Check Cashing, Inc. of Nevada" (NOCC). NOCC cashes payroll checks for a fee using mobile armored trucks for facilitating the transactions. The Company recorded the transaction using the purchase method of accounting and valued the shares issued at $.10 per share. The transaction was rescinded in April, 1998. There was no significant gain or loss in the transaction. F-25 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE K - COMMON STOCK SHARES ISSUED IN EXCHANGE FOR INTEREST-BEARING NOTES The Company has issued shares of its common stock in exchange for notes receivable. The financial statements show the outstanding shares and the related notes receivable as an offset against stockholders' equity. NOTE L - RELATED-PARTY MATTERS As discussed below, certain transactions have been consummated with parties related to the Company and its management. OWNERSHIP INTERESTS Mr. Sprenger is the trustee of two liquidating trusts for two formerly affiliated corporations in which he was an officer and director. These trusts, Progressive Investment Corporation Liquidating Trust (PICLT) and PIC Research and Development Liquidating Trust (PICR&DLT) are shareholders of Company common stock. The ownership of the Company's common stock by Mr. Sprenger, Mr. Cox, PICLT, PICR&DLT, Company employees and other related parties (relatives, friends and business associates of Mr. Sprenger) is summarized as follows at April 30, 1998: Percentage ---------- Mr. Sprenger * 4.5 Mr. Cox 23.3 PICLT 1.9 PICR&DLT 1.2 Company employees 2.5 Other related parties * 24.3 * Includes stock issued under subscription rights (Refer to discussion in this Note L). Mr. Sprenger, Mr. Sherer's Estate and other related parties own the following beneficial percentages in the two liquidating trusts at April 30, 1998. F-26 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE L - RELATED-PARTY MATTERS (CONTINUED) OWNERSHIP INTEREST (CONTINUED) PICLT PICR&DLT ----- -------- Mr. Sprenger 0 0 Mr. Sherer (Estate) 7.0 1.1 PICLT -- 44.1 Other related parties 31.0 6.0 TRANSACTIONS INVOLVING MR. SPRENGER AND OTHER RELATED PARTIES A. In October 1984, the Company and the then President, Alfred P. Sprenger, and his wife Dorothy V. Sprenger (Sprengers), entered into an agreement (the agreement) for the issuance to the Sprengers of 2,000,000 investment shares of Company stock at a price of $1.00 per share. The price quoted by NASDAQ as of the date of agreement was $.875 to $1.00 per share. The agreement was mutually extended to December 31, 1991 for payment of the $2,000,000 which evidenced by a promissory note secured by the issued shares. In December 1991, the Company reviewed the status of the arrangement with issuances for employee options and settlement of liabilities. Accordingly, the stock price for this agreement was adjusted to $0.625 per share. This action resulted in a decrease of $750,000 in the amount of the original agreement. The maturity date of the promissory note has been extended to December 31, 2000. In December 1992, Mr. Sprenger assigned his interest in 1,950,000 of those investment shares to a non profit organization. From December 1991 to April 30, 1998, a total of $728,321 has been credited to the common stock promissory note by application of $598,000 in accrued salary compensation from 1988 to date and a $130,321 debt due Mr. Sprenger. At April 30, 1998 and 1997, the unpaid balance of the promissory note is $521,929, respectively, which is secured by 1) 870,800 shares of the issued common stock and 2) further collateralized by mortgages on real estate. At April F-27 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE L - RELATED-PARTY MATTERS (CONTINUED) TRANSACTIONS INVOLVING MR. SPRENGER AND OTHER RELATED PARTIES (CONTINUED) 30, 1998, a total of 1,079,200 shares of the 1,950,000 shares of Company stock assigned by Mr. Sprenger had been transferred to the non profit organization. B. In December 1985, the Company issued 1,300,000 investment shares of common stock to certain parties in exchange for promissory notes secured by the issued shares at a price of $0.625 per share. The quoted market price according to the National Market Quotation Bureau was $0.62 to $0.875 per share at the date of issuance of the shares. The aggregate dollar amount of the promissory notes was $812,500. A total of $458,779 has been paid on the promissory notes to date by the various parties. The $353,721 balance due at April 30, 1998 is reflected in the consolidated Balance Sheet as a deduction from shareholders' equity. This balance due is secured by 508,394 of the issued shares. None of the promissory notes are due from officers of the company. NOTE M - COMMITMENTS AND CONTINGENCIES GENERAL The Company's operations are subject to various governmental and regulatory controls (particularly those of the Department of Energy and the Environmental Protection Agency), the effect of which on the nature of the Company's future operations, if any, is not known. COMMITMENTS The Company leases its offices and manufacturing plant facilities under noncancellable operating leases which expire in 2005. The total minimum commitments under these leases are as follows: F-28 COX TECHNOLOGIES, INC. AND SUBSIDIARIES (FORMERLY ENERGY RESERVE, INC. AND SUBSIDIARIES) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED APRIL 30, 1998 AND 1997 - -------------------------------------------------------------------------------- NOTE M - COMMITMENTS AND CONTINGENCIES (CONTINUED COMMITMENTS (CONTINUED) Year ending April 30 -------------------- 1999 $ 67,642 2000 $ 67,642 2001 $ 67,642 Through 2005 $248,043 Rent expense for the years ended April 30, 1998, 1997 and 1996 is $103,814, $134,852, and $125,380, respectively. LITIGATION A complaint for infringement of patent was filed in October 1995 in the United States District Court for the Eastern District of California. The complaint was settled in 1997 for a nominal amount. NOTE N - SUBSEQUENT EVENT In November, 1997, the Company acquired a nominal interest in VITSAB, AG, (VITSAG) a corporation formed under the laws of the Country of Switzerland for $300,000. In June, 1998 the Company acquired all of the outstanding shares of Visual Indicators Tag Systems, AB, (VITSAB) a corporation formed under the laws of the Country of Sweden and a wholly-owned subsidiary of VITSAG. The acquisition was accomplished by the issuance of 3,375,734 shares of the Company's unregistered common stock, 950,000 shares of the common stock of VITSAB, USA, Inc., a previously wholly-owned subsidiary of the Company with 4,750,000 issued shares of common stock outstanding, and the assumption of certain debt owed by VITSAB to an unrelated company. F-29 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: ENERGY RESERVE, INC., an Arizona Corporation 7-29-98 By /s/ James L. Cox --------------------------- James L. Cox, President and Chief Executive Officer 7-29-98 By /s/ R.W. Dupree --------------------------- R.W. Dupree, Controller and Chief Financial Officer 7-29-98 By /s/ David K. Caskey --------------------------- David K. Caskey Secretary-Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dated indicated: Dated: SIGNATURES - ------ ---------- 7-29-98 James L. Cox --------------------------- James L. Cox President and Director 7-29-98 /s/ Alfred P. Sprenger --------------------------- Alfred P. Sprenger Chairman - Board of Directors 7-29-98 /s/ David K. Caskey --------------------------- David K. Caskey Secretary-Treasurer and Director 7-29-98 /s/ George M. Pigott --------------------------- George M. Pigott Director 7-29-98 /s/ Michael E. Fonzo --------------------------- Michael E. Fonzo Director EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K FINANCIAL REPORT OF COX TECHNOLOGIES, INC. AS SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS YEAR APR-30-1998 MAY-01-1997 APR-30-1998 1 2,575,945 39,500 1,627,074 0 1,043,531 5,701,696 3,704,243 0 9,766,536 919,450 0 0 0 20,041,562 (11,475,851) 9,766,536 8,138,756 8,138,756 3,704,857 7,115,493 0 0 72,188 3,117,068 50,500 1,023,263 0 2,093,805 0 3,066,568 .15 .15
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