10-Q 1 cox4008710q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______. Commission file number 0-8006 COX TECHNOLOGIES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NORTH CAROLINA 86-0220617 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 69 McADENVILLE ROAD BELMONT, NORTH CAROLINA 28012-2434 (Address of principal executive offices) (Zip Code) (704) 825-8146 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicated by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, no par value, outstanding at September 10, 2003..................................................38,339,094 COX TECHNOLOGIES, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS FACE SHEET 1 TABLE OF CONTENTS 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets July 31, 2003 and April 30, 2003 3 Consolidated Statements of Income Three Months Ended July 31, 2003 and 2002 4 Consolidated Statements of Changes in Stockholders' Equity Three Months Ended July 31, 2003 and 2002 5 Consolidated Statements of Cash Flows Three Months Ended July 31, 2003 and 2002 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 Item 3. Quantitative and Qualitative Disclosure About Market Risks 13 Item 4. Controls and Procedures 13 PART II. OTHER INFORMATION AND SIGNATURES Item 2. Changes in Securities and Use of Proceeds 14 Item 6. Exhibits and Reports on Form 8-K 14 1. Exhibits 31.1 - Certification by Co-Chief Executive Officer 15 31.2 - Certification by Co-Chief Executive Officer 16 31.3 - Certification by Chief Financial Officer 17 32.1 - Certificate of Co-Chief Executive Officers 18 32.2 - Certificate of Chief Financial Officer 19 2. Report on Form 8-K Signatures 14 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements COX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

July 31, ~~2002~~2003 April 30, ~~2002~~2003 ------------- -------------- ASSETS (Unaudited) ------ CURRENT ASSETS: Cash and cash equivalents $ ~~139~~716,~~186~~147 $ ~~216~~572,~~042~~149 Accounts receivable, less allowance for doubtful accounts ~~of $65~~938,~~316~~119 ~~at July 31~~964,078 ~~2002 and $65~~Inventory,~~000~~ atnet ~~April 30, 2002~~ 1,~~007~~300,~~263~~789 1,~~072~~182,~~935~~270 ~~Inventory~~Notes ~~1,432,195~~receivable 1- current portion -- 75,~~419,342~~000 Prepaid expenses 2317,~~732~~466 4417,~~832~~733 ------------ ------------ TOTAL CURRENT ASSETS 2,~~602~~972,~~376~~521 2,~~753~~811,~~151~~230 Property and equipment, net ~~725~~438,~~876~~284 ~~764~~505,~~628~~688 ~~Property held for sale, net 300,000 300,000~~ Due from officer, net 218,~~426~~928 418,~~067~~928 Other assets 6371,~~178~~280 6471,~~749~~510 Patents ~~144~~105,~~712~~275 ~~148~~114,~~796~~845 ------------ ------------ TOTAL ASSETS $ 3,~~857~~596,~~568~~288 $ 43,~~072~~512,~~391~~201 ============ ============ LIABILITIES AND STOCKHOLDERS' ~~EQUITY~~DEFICIT ------------------------------------- CURRENT LIABILITIES: Accounts payable and accrued expenses $ ~~623~~449,~~173~~511 $ ~~658~~291,~~123~~948 ~~Short-term debt 800,000 1,000,000~~ Current portion of long-term debt 1403,~~368,594~~695 1530,~~485,878~~778 ------------ ------------ TOTAL CURRENT LIABILITIES 2853,~~791~~206 822,~~767~~726 3OTHER LIABILITIES: Long-term debt 510,~~144~~832 862,~~001~~393 Long-term debt - related parties 3,~~265~~410,~~356~~688 3,~~233~~327,~~913~~500 ------------ ------------ TOTAL OTHER LIABILITIES 63,~~057~~921,~~123~~520 64,~~377~~189,~~914~~893 ------------ ------------ TOTAL LIABILITIES 4,774,726 5,012,619 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' ~~EQUITY~~DEFICIT: Common stock, no par value; authorized 100,000,000 shares; issued ~~and outstanding~~andoutstanding; 2539,~~878~~339,~~082~~094 shares at July 31, ~~2002~~2003 and 2539,~~769~~339,~~684~~094 at April 30, ~~2002~~2003 2223,~~240~~252,~~710~~804 2223,~~132~~252,~~312~~804 ~~Paid in capital 365,288 461,412~~ Accumulated other comprehensive ~~income~~ (loss) (5636,~~131~~314) (6832,~~168~~591) Accumulated deficit (24,~~725~~369,~~220~~127) (24,~~806~~696,~~900~~452) Less - Notes receivable for common stock 24(25,~~202~~801) (24,179) ------------ ------------ TOTAL STOCKHOLDERS' ~~EQUITY~~DEFICIT (21,~~199~~178,~~555~~438) (21,~~305~~500,~~523~~418) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' ~~EQUITY~~DEFICIT $ 3,~~857~~596,~~568~~288 $ 43,~~072~~512,~~391~~201 ============ ============

See Notes to Consolidated Financial Statements. 3 COX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended July 31, --------------------------- 2003 2002 ---- ---- REVENUE: Sales $ 2,440,940 $ 2,265,907 ------------ ------------ COSTS AND EXPENSES: Cost of sales 1,230,290 1,274,968 General and administrative 457,368 516,877 Selling 263,936 237,069 Depreciation 69,192 77,521 Amortization of patents 9,570 10,994 ------------ ------------ TOTAL COSTS AND EXPENSES 2,030,356 2,117,429 ------------ ------------ INCOME FROM OPERATIONS 410,584 148,478 ------------ ------------ OTHER INCOME (EXPENSE): Other income (expense) 15,880 58,555 Interest expense (99,139) (125,353) ------------ ------------ TOTAL OTHER INCOME (EXPENSE) (83,259) (66,798) ------------ ------------ INCOME BEFORE INCOME TAXES 327,325 81,680 Provisions for income taxes -- -- ------------ ------------ NET INCOME $ 327,325 $ 81,680 ============ ============ BASIC AND DILUTED: NET INCOME PER SHARE $ .01 .00 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 38,339,094 25,831,949 See Notes to Consolidated Financial Statements. 4 COX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (UNAUDITED)

Accumulated Subscribed Other Stock ~~Comprehensive Retained~~ Common ~~Paid~~Comprehensive inAccumulated Less Note ~~Total~~Stock Income (Loss) ~~Earnings~~Deficit ~~Stock Capital~~ Receivable ~~------------~~Total -----~~-------~~ ------------- -------~~-----~~ ------------ -----~~-------~~ Balance, April 30, ~~2001~~2002 $ 222,~~528~~593,~~355~~724 ($ ~~(108~~66,~~581~~168) $(19$24,~~643~~806,~~854~~900) ($ 2124,~~267,448~~179) ($ 12,~~044~~305,~~473 $ (31,131~~523) Comprehensive income ~~(loss)~~ - Net income ~~(loss) (542,644)~~ -- ~~(542,644)~~ -- --81,680 -- 81,680 Foreign currency translation adjustment ~~20,173~~-- 2012,~~173~~037 -- -- --12,037 --Total ~~------------~~comprehensive --------~~----~~ income --~~----------~~ --~~----------~~ --~~----------~~ --~~----------~~ ~~Total~~93,717 ~~comprehensive~~Change ~~income~~in ~~(loss)~~subscribed ~~(522~~stock,~~471)~~ --net -- -- -- --(23) ~~Change~~(23) inCommon ~~subscribed~~ stock, ~~net~~issued 112,~~145~~274 -- -- -- ~~-- 1~~12,~~145~~274 ------------ ------------ ------------ ------------ ------------ ~~------------~~ Balance, July 31, ~~2001~~2002 $ 222,~~007~~605,~~029~~998 ($ ~~(88~~56,~~408~~131) $(20$24,~~186~~725,~~498~~220) ($ 2124,~~267,448~~202) ($ 12,~~044~~199,~~473 $ (29,986~~555) ============ ============ ============ ============ ============ ~~============~~ Balance, April 30, ~~2002~~2003 $ (223,~~305~~252,~~523)~~804 ($ ~~(68~~32,~~168~~591) $($24,~~806~~696,~~900~~452) ($ 2224,~~132,312~~179) ($ ~~461~~1,~~412 $ (24~~500,~~179~~418) Comprehensive income - Net income ~~81,680~~ -- ~~81,680~~ -- --327,325 -- 327,325 Foreign currency translation adjustment ~~12,037 12,037~~ -- --(3,723) -- -- ~~------------~~(3,723) ~~------------~~Total ~~------------~~comprehensive --------~~----~~ ~~------------ ------------ Total comprehensive~~ income ~~93,717~~ -- -- -- -- ~~-- Common stock issued 12~~323,~~274~~602 ~~-- -- 108,398 (96,124) --~~ Change in subscribed stock, net ~~(23)~~ -- -- -- --(1,622) (231,622) ------------ ------------ ------------ ------------ ------------ ~~------------~~ Balance, July 31, ~~2002~~2003 $ (223,~~199~~252,~~555)~~804 ($ ~~(56~~36,~~131~~314) $($24,~~725~~369,~~220~~127) ($ 2225,~~240,710~~801) ($ ~~365~~1,~~288 $ (24~~178,~~202~~438) ============ ============ ============ ============ ============ ~~============~~

See Notes to Consolidated Financial Statements. 5 COX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See Notes to Consolidated Financial Statements. 6 COX TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Cox Technologies, Inc., and Cox Recorders Australia, Ltd., Pty., an Australian distribution company 95% owned by Cox Technologies, Inc. (collectively "the Company"), engage in the business of producing and distributing temperature recording instruments, both in the United States and internationally. The accompanying unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes included in the Cox Technologies, Inc. 2003 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair statement of the results of operations for the interim periods have been recorded. Certain amounts previously reported have been reclassified to conform with the current period's presentation. Stock-based Compensation The Company has 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 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. All options under the Executive Plan have been granted. 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. The Company applies APB No. 25 in accounting for both Plans. Accordingly, compensation cost is determined using the intrinsic value method under APB No. 25. For the periods ended July 31, 2003 and 2002, there was no stock-based compensation expense recorded. 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 quarters ended July 31, 2003 and 2002. 7 July 31, 2003 July 31, 2002 ------------- ------------- Net income, as reported $327,325 $ 81,680 Proforma stock-based compensation - net of tax ( 131,987) (127,310) ----------- ----------- Net income (loss), proforma $195,338 $( 45,630) Basic and diluted EPS, as reported $.01 $.00 Basic and diluted EPS, proforma $.01 $.00 Restricted stock was issued out of the 2000 Plan to consultants and employees in lieu of cash payments totaling zero and 12,274 shares, respectively for the quarters ended July 31, 2003 and 2002. At July 31, 2003, there were 2,028,972 shares reserved for issuance under the 2000 Plan. Accounts Receivable The balance in the allowance for doubtful accounts is $45,000 and $45,750 at July 31, 2003 and April 30, 2003, respectively. 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 has 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 Company believes the adoption of the provisions of SFAS No. 150 will not have a significant effect on its financial position or results of operations. 2. INVENTORY Inventory at July 31, 2003 and April 30, 2003 consists of the following: July 31, 2003 April 30, 2003 ----------------- ------------------ Raw materials $ 396,598 $ 328,744 Work-in-process 209,320 103,059 Finished goods 744,871 800,467 ------------ ------------ 1,350,789 1,232,270 Less reserve 50,000 50,000 ------------ ------------ Total $ 1,300,789 $1,182,270 ============ ============ 3. DEBT On May 19, 2003, the Company executed a note modification agreement to modify the note dated March 19, 2003. The effective date of the modification was established when the Company made a principal payment on the note for $355,000. The payment was made to Centura on May 21, 2003. The results of the modification is to reduce the monthly principal payment to $21,000 plus accrued interest beginning on June 15, 2003 and continuing until July 15, 2006 on which date the balance of the note will mature. Also, beginning on the effective date of the modification, the interest rate on the outstanding principal shall be calculated at the bank's 30-day LIBOR base rate plus 2.5% per annum. The Company has calculated the borrowing base as of July 31, 2003 and such calculation would support a loan of approximately $844,000 and the outstanding balance of the Centura loan at July 31, 2003 is $756,566. 8 4. RELATED PARTY TRANSACTIONS On January 20, 2003, the Company entered into a Stock Purchase Agreement (the "TI Stock Purchase Agreement") with Technology Investors, LLC ("TI"), an affiliate of Brian Fletcher and Kurt Reid, who are officers and directors of the Company, pursuant to which TI agreed to purchase and the Company agreed to sell 12,500,000 shares of the Company's Common Stock at a price of $0.06 per share, for a total purchase price of $750,000. This transaction was submitted to the Company's shareholders for their approval at a special meeting of the shareholders on March 12, 2003. With a quorum of shareholders present, a motion was made and seconded to approve the TI Stock Purchase Agreement, and the motion was passed by a unanimous vote of those present in person or represented by proxy. The transaction was consummated on March 19, 2003. TI, together with Mr. Fletcher and Mr. Reid and their affiliates, now collectively own and control beneficially an aggregate of 15,661,516 shares of the Company's Common Stock, or approximately 38% of the Company's issued and outstanding common stock. These figures include the 2,728,550 shares of the Company's Common Stock that TI may obtain by converting its existing promissory note, but exclude the options that Mr. Fletcher and Mr. Reid own to purchase, in the aggregate, 3,000,000 shares of the Company's Common Stock, which options are exercisable in varying increments through September 9, 2009. 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 July 31, 2003, the principal and accrued interest of $3,410,688 could be converted into 2,728,550 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. See Note 5 below for further discussion of this transaction and the consequences to the Company if it fails to meet its principal and accrued interest obligations under the TI Note when they become due on March 10, 2005. In addition, Mr. Fletcher and Mr. Reid were named directors of the Company. The Company has agreed to nominate Mr. Fletcher and Mr. Reid for three consecutive terms on the Board of Directors. Mr. Fletcher and Mr. Reid were also both retained as consultants to the Company. In connection with their services they each would receive compensation of $1 annually and a one-time grant of immediately exercisable options to purchase 300,000 shares of the Company's Common Stock at an exercise price of $1.25 per share for a period of up to ten years. In fiscal 2001, Mr. Fletcher and Mr. Reid each received stock options to purchase 2,000,000 shares of the Company's Common Stock at an exercise price of $.59 per share for a period of up to ten years. In fiscal 2002, Mr. Fletcher and Mr. Reid each received stock options to purchase 800,000 shares of the Company's Common Stock at an exercise price of $.11 per share for a period of up to seven years. Also, the Board of Directors approved an increase in compensation for Mr. Fletcher and Mr. Reid retroactive to January 1, 2001, whereby they each would receive annual compensation of $100,000, payable quarterly in unrestricted shares of the Company's Common Stock valued at the average daily closing price during the quarter. During fiscal 2002, Mr. Fletcher and Mr. Reid were paid $75,000 of salary in unrestricted shares of the Company's Common Stock at an average market price of $.35 per share under this structure. On December 7, 2001, Mr. Fletcher and Mr. Reid agreed to a decrease in their annual compensation to $1 effective October 1, 2001. On March 15, 2002, the Compensation Committee of the Board of Directors approved a compensation structure, effective March 1, 2002, whereby Mr. Fletcher and Mr. Reid would be compensated based on the actual monthly cash flow and quarterly net income generated by the Company. The maximum annual compensation would be capped at $210,000 each. During fiscal 2002, Mr. Fletcher and Mr. Reid were compensated $7,500 each under this structure. During fiscal 2003, Mr. Fletcher and Mr. Reid were each granted options to purchase 200,000 shares of the Company's Common Stock at an exercise price of $.11 per share for a period of up to seven years. Effective November 1, 2002, the Board of Directors ratified the recommendation of the Compensation Committee to change the compensation structure for both Mr. Fletcher and Mr. Reid and set the annual salary rate at $100,000 per year. 9 On April 1, 2003, the Board of Directors modified the compensation plan for Mr. Fletcher and Mr. Reid increasing their annual salary rate to $120,000 per year, effective April 15, 2003, and establishing a quarterly bonus plan beginning with the first quarter of fiscal 2004 based on the profitability of the Company. The quarterly bonus is limited to 50% of the Company's net income for the quarter and Mr. Fletcher and Mr. Reid can earn a non-cumulative bonus up to $10,000 per quarter. During fiscal 2003, Mr. Fletcher and Mr. Reid were each compensated approximately $99,000 as a payout from the fiscal 2002 compensation arrangement and approximately $50,000 from the fiscal 2003 compensation arrangement. At July 31, 2003, a bonus of $10,000 each was accrued for payment to Mr. Fletcher and Mr. Reid. 5. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations is currently not adequate to retire the TI Note, and it is unlikely that cash flow will 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. TI has indicated that, in the event the Company becomes unable to meet its obligations under the TI Note, TI may be willing to explore alternative financing arrangements, including a restructuring of the TI Note prior to its due date. Alternatively, the Company may seek a cash infusion elsewhere, through a separate debt or equity offering, a strategic partnership or some form of business combination. The Company may consider any or all of these alternatives in the event it becomes unable to meet its debt obligation to TI, but there can be no assurance that any deal will be consummated on terms acceptable to both the Company and TI or another third party. Without such an arrangement, it is highly likely that the Company would default on its obligations under the TI Note, at which time TI would be entitled to exercise any and all remedies available to it under the TI Note and applicable law, including bringing suit against the Company and its assets. Should TI seek to enforce its right to timely repayment of the TI Note, there is a risk that the Company will not be able to continue as a going concern. Item 2. Management's Discussion And Analysis of Financial Condition And Results of Operations Comparison of Operations for 2004 and 2003 The Company operates in one reporting segment that involves the production and distribution of temperature recording and monitoring devices, including the Cox1 graphic temperature recorder, DataSource(R) and Tracer(R) electronic data loggers, Vitsab(R) visual indicator labels and probes and related products. Revenues from sales increased by approximately $175,000, or 8%, for the three-month period ended July 31, 2003 as compared to the same period as last year. This increase is primarily due to an increase in the sales of DataSource(R), Tracer(R) and Vitsab(R) products, offset by a decrease in Cox1 product sales. Unit sales of Cox1 decreased by approximately 11% for the three-month period ended July 31, 2003 as compared to the same period last year and the average sales price decreased 8%. Unit sales of DataSource(R) increased approximately 76% for the three-month period ended July 31, 2003 as compared to the same period last year. Unit sales of Tracer(R) increased approximately 37% for the three-month period ended July 31, 2003 as compared to the same period last year. Unit sales of Vitsab(R) increased approximately 235% for the three-month period ended July 31, 2003 as compared to the same period last year. The revenue from the sale of graphic recorders represented approximately $1,356,300 or 56% of total revenues for the three-month period ended July 31, 2003 as compared to approximately $1,651,300 or 73% in the same period last year. The sales of electronic data loggers represented approximately $841,200 or 34% of total revenues for the three-month period ended July 31, 2003 as compared to $492,400 or 22% in the same period last year. The sale of Vitsab(R) products represented approximately $106,900 or 4% of total revenues for the three-month period ending July 31, 2003 as compared to $45,204 or 2% in the same period last year. The sale of probes and related products represented $36,800 or 2% for the three-month period ended July 31, 2003 as compared to $30,500 or 2% in the same period last year. The sale of other miscellaneous products represented the balance. Management believes that the Company will continue to experience a decrease in average sales price for some products due to competitive price pressure, but expects units sales for its primary products to remain constant, or in the case of electronic data loggers, increase in future periods. 10 Cost of sales for the three-month period ended July 31, 2003 decreased approximately $44,700 or 4% as compared to the same period last year. The decrease is due to decreasing labor and benefit costs, supplies used in the manufacturing process and a reduction in the price that the Company now pays for raw material components and labor costs, offset slightly by increased shipping expenses and retriever fees. The Company continues to contract with a third party to manufacture and assemble certain base versions of the Cox1 units at an offshore location. During fiscal 2003, this location supplied approximately 40% of the total number of units utilized by the Company. Because of this manufacturing arrangement, the Company has realized significant cost savings on units manufactured in both the offshore and Belmont, North Carolina facilities. The Company's current plans are to continue assembling special-use Cox1 units in the Belmont facility. The Belmont facility will also continue to manufacture and assemble a certain percentage of the base Cox1 units. If necessary, the production capabilities of the Belmont facility can be expanded to meet the total demand for all Cox1 units. The Company has identified certain risks and uncertainties that are associated with offshore production that include, but are not limited to, political issues, transportation risks and the availability of raw materials. The Company will not experience foreign currency exchange risks as all transactions are denominated in U.S. dollars. General and administrative expenses for the three months ended July 31, 2003 decreased approximately $59,500, or 11%, as compared to the same period last year. The net decrease is due to the elimination of Vitsab Sweden, AB expenses after the sale of that operation and decreases in legal expenses and is partially offset by increased insurance costs and salary expenses. Selling expense increased approximately $26,900, or 11% for the three months ended July 31, 2003 as compared to the same period last year. The increase in the three-month period is primarily due to increased advertising and promotions expenses and sales salaries and was partially offset by decreases in travel expenses and commission expenses. Depreciation expense decreased approximately $8,300, or 11% for the three-month period as compared to the same period last year due to the elimination of depreciation expenses associated with the Vitsab equipment. Amortization of patents and goodwill decreased approximately $1,400, or 13% for the three months ended July 31, 2003 as compared to the same period last year. The decrease is due to a nominal change in the rate of amortization of certain Vitsab patents owned by the Company. Other income decreased approximately $42,700, or 73% for the three months ended July 31, 2003 as compared to the same period last year. This decrease is primarily related to the decrease in the amount of the payments received as a result of a revision in the agreement between the Company and its Copenhagen distributor for an option to purchase all of the shares and assets of the Company's wholly owned subsidiary, Vitsab Sweden, AB. Interest expense decreased approximately $26,200, or 21% for the three-month period as compared to the same period last year. Interest expense decreased on both bank debt and capitalized leases and was partially offset by an increase in accrued interest related to the Technology Investors Note described under "Liquidity and Capital Resources" below. The decrease in net property and equipment of approximately $67,400, is primarily due to depreciation, partially offset by the purchase of tooling, machinery and equipment, and leasehold improvements. Liquidity and Capital Resources The Company derives cash from operations, equity sales, and borrowing from long- and short-term lending sources to meet its cash requirements. At present, the cash flow from operations appears adequate to meet cash requirements and commitments of the Company during the 2004 fiscal year. 11 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 July 31, 2003, the principal and accrued interest of $3,410,688 could be converted into 2,728,550 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. The Company's cash flow from operations is currently not adequate to retire the TI Note, and it is unlikely that cash flow will 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. TI has indicated that, in the event the Company becomes unable to meet its obligations under the TI Note, TI may be willing to explore alternative financing arrangements, including a restructuring of the TI Note prior to its due date. Alternatively, the Company may seek a cash infusion elsewhere, through a separate debt or equity offering, a strategic partnership or some form of business combination. The Company may consider any or all of these alternatives in the event it becomes unable to meet its debt obligation to TI, but there can be no assurance that any deal will be consummated on terms acceptable to both the Company and TI or another third party. Without such an arrangement, it is highly likely that the Company would default on its obligations under the TI Note, at which time TI would be entitled to exercise any and all remedies available to it under the TI Note and applicable law, including bringing suit against the Company and its assets. Should TI seek to enforce its right to timely repayment of the TI Note, there is a risk that the Company will not be able to continue as a going concern. On May 19, 2003, the Company executed a note modification agreement with Centura Bank to modify the note dated March 19, 2003. The effective date of the modification was established when the Company made a principal payment on the note for $355,000. The payment was made to Centura on May 21, 2003. The results of the modification is to reduce the monthly principal payment to $21,000 plus accrued interest beginning on June 15, 2003 and continuing until July 15, 2006 on which date the balance of the note will mature. Also, beginning on the effective date of the modification, the interest rate on the outstanding principal shall be calculated at the bank's 30-day LIBOR base rate plus 2.5% per annum. The Company has calculated the borrowing base as of July 31, 2003 and such calculation would support a loan of approximately $825,000 and the outstanding balance of the Centura loan on July 31, 2003 is $756,566. Forward-Looking Statements Statements contained in this document, which are not historical in nature, are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations of forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "estimate," "intend," "plan," and other words and terms of similar meaning in connection with any discussion of future operating and financial performance. Forward-looking statements are subject to risks and uncertainties that may cause future results to differ materially from those set forth in such forward-looking statements. Cox Technologies undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof. Such risks and uncertainties with respect to Cox Technologies include, but are not limited to, its ability to successfully implement internal performance goals, performance issues with suppliers, regulatory issues, competition, the effect of weather on customers, exposure to environmental issues and liabilities, variations in material costs and general and specific economic conditions. From time to time, Cox Technologies may include forward-looking statements in oral statements or other written documents. 12 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS There was no material change in the Company's market risk during the quarter ended July 31, 2003. For additional information on market risk, refer to the "Quantitative and Qualitative Disclosure About Market Risk" section of the Company's Annual Report on Form 10-K for the year ended April 30, 2003. Item 4. DISCLOSURE CONTROLS AND PROCEDURES The Co-Chief Executive Officers and the Chief Financial Officer of the Company have concluded, based on their evaluation as of a date within 90 days prior to the date of the filing of this Report, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including the Co-Chief Executive Officers and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosures. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. 13 PART II. OTHER INFORMATION AND SIGNATURE Item 2. Changes in Securities and Use of Proceeds No securities of the Registrant were issued during the three months ended July 31, 2003. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 31.1 - Certification by Co-Chief Executive Officer 31.2 - Certification by Co-Chief Executive Officer 31.3 - Certification by Chief Financial Officer 32.1 - Certificate of Co-Chief Executive Officers 32.2 - Certificate of Chief Financial Officer (b) Reports on Form 8-K: The Company filed on August 6, 2003 a Current Report on Form 8-K disclosing the fiscal 2003 financial results. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COX TECHNOLOGIES, INC. ---------------------- (Registrant) Date: 09-11-03 /s/ Brian D. Fletcher ----- -------- ----------------------- Brian D Fletcher Co-Chief Executive Officer Date: 09-11-03 /s/ Kurt C. Reid -------- ----------------------- Kurt C. Reid Co-Chief Executive Officer Date: 09-11-03 /s/ John R. Stewart -------- ----------------------- John R. Stewart Chief Financial Officer 14

Filing Compare · COX TECHNOLOGIES INC