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, 2003 April 30, 2003
------------- --------------
ASSETS (Unaudited)
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 716,147 $ 572,149
Accounts receivable, less allowance for doubtful accounts 938,119 964,078
Inventory, net 1,300,789 1,182,270
Notes receivable - current portion -- 75,000
Prepaid expenses 17,466 17,733
------------ ------------
TOTAL CURRENT ASSETS 2,972,521 2,811,230
Property and equipment, net 438,284 505,688
Due from officer, net 8,928 8,928
Other assets 71,280 71,510
Patents 105,275 114,845
------------ ------------
TOTAL ASSETS $ 3,596,288 $ 3,512,201
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 449,511 $ 291,948
Current portion of long-term debt 403,695 530,778
------------ ------------
TOTAL CURRENT LIABILITIES 853,206 822,726
OTHER LIABILITIES:
Long-term debt 510,832 862,393
Long-term debt - related parties 3,410,688 3,327,500
------------ ------------
TOTAL OTHER LIABILITIES 3,921,520 4,189,893
------------ ------------
TOTAL LIABILITIES 4,774,726 5,012,619
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized 100,000,000 shares;
issued andoutstanding; 39,339,094 shares at July 31, 2003
and 39,339,094 at April 30, 2003 23,252,804 23,252,804
Accumulated other comprehensive (loss) (36,314) (32,591)
Accumulated deficit (24,369,127) (24,696,452)
Less - Notes receivable for common stock (25,801) (24,179)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT (1,178,438) (1,500,418)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,596,288 $ 3,512,201
============ ============
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
Common Comprehensive Accumulated Less Note
Stock Income (Loss) Deficit Receivable Total
----- ------------- ------- ---------- -----
Balance, April 30, 2002 $ 22,593,724 ($ 66,168) ($24,806,900) ($ 24,179) ($ 2,305,523)
Comprehensive income-
Net income -- -- 81,680 -- 81,680
Foreign currency
translation adjustment -- 12,037 -- -- 12,037
Total comprehensive --------
income -- -- -- -- 93,717
Change in subscribed stock, net -- -- -- (23) (23)
Common stock issued 12,274 -- -- -- 12,274
------------ ------------ ------------ ------------ ------------
Balance, July 31, 2002 $ 22,605,998 ($ 56,131) ($24,725,220) ($ 24,202) ($ 2,199,555)
============ ============ ============ ============ ============
Balance, April 30, 2003 $ 23,252,804 ($ 32,591) ($24,696,452) ($ 24,179) ($ 1,500,418)
Comprehensive income -
Net income -- -- 327,325 -- 327,325
Foreign currency
translation adjustment -- (3,723) -- -- (3,723)
Total comprehensive --------
income -- -- -- -- 323,602
Change in subscribed stock, net -- -- -- (1,622) (1,622)
------------ ------------ ------------ ------------ ------------
Balance, July 31, 2003 $ 23,252,804 ($ 36,314) ($24,369,127) ($ 25,801) ($ 1,178,438)
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
5
COX TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended July 31,
---------------------------
2003 2002
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 327,325 $ 81,680
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and depletion 69,192 77,521
Amortization of patents 9,570 10,994
Increase (decrease) in allowance for doubtful accounts (750) 316
Other 231 (5,655)
Decrease in valuation adjustment -- 19,641
--------- ---------
405,568 184,497
Changes in assets and liabilities:
(Increase) decrease in current assets:
Accounts receivable 26,709 65,672
Inventory (118,519) (12,853)
Prepaid expenses 267 21,100
Increase (decrease) in current liabilities:
Accounts payable and accrued expenses 157,562 (34,950)
--------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 471,587 223,466
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,788) (38,769)
Payment received on note receivable
75,000 --
--------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 73,212 (38,769)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock, net -- 12,274
Repayment on debt (395,456) (285,841)
Subscriptions receivable (1,622) (23)
(273,590)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,723) 12,037
--------- ---------
NET INCREASE (DECREASE) IN CASH 143,998 (76,856)
CASH AND CASH EQUIVALENTS, beginning of period 572,149 216,042
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 716,147 $ 139,186
========= =========
Supplemental Cash Flow Information
Interest paid $16,660 $49,728
Income taxes paid $ -- $ --
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.
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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.
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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