10-K 1 cox40484-10k.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 - FOR THE FISCAL YEAR ENDED APRIL 30, 2004 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 - For the transition period from _______ to ________ Commission file number: 0-8006 COX TECHNOLOGIES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NORTH CAROLINA 86-0220617 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 77 McADENVILLE ROAD BELMONT, NORTH CAROLINA 28012-2434 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (704) 825-8146 Securities registered pursuant to Section 12 (b) of the Act: (None) Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, WITHOUT PAR VALUE -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Estimated aggregate market value of the voting stock held by non-affiliates of the registrant: $6,106,732 as of August 17, 2004 -------------------------------------------------------------------------------- Number of shares of Common Stock, no par value, as of the latest practicable date: 38,167,077 shares as of August 17, 2004 -------------------------------------------------------------------------------- Documents incorporated by reference: None COX TECHNOLOGIES, INC. FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED APRIL 30, 2004 -------------- TABLE OF CONTENTS Item Page PART I 1. Business.............................................................. 1 2. Properties............................................................ 4 3. Legal Proceedings..................................................... 4 4. Submission of Matters to a Vote of Security Holders................... 4 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............................................................. 4 6. Selected Financial Data............................................... 7 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 7 8. Financial Statements and Supplementary Data ..........................14 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................................35 9a. Internal Controls and Procedures......................................35 PART III 10. Directors and Executive Officers of the Registrant....................35 11. Executive Compensation................................................38 12. Security Ownership of Certain Beneficial Owners and Management........40 13. Certain Relationships and Related Transactions........................40 14. Principal Accountant Fees and Services ...............................42 PART IV 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......43 Signatures............................................................47 i PART I ITEM 1. BUSINESS General Cox Technologies, Inc. (the "Company"), is engaged in the process of orderly liquidation of its remaining assets, the winding up of its business operations, the dissolution of the Company and the distribution of cash to shareholders. The Company was incorporated as Mericle Oil Company in July 1968, under the laws of the State of Arizona. The name was changed to Energy Reserve, Inc. in August 1975. In November 1994, Energy Reserve acquired Twin-Chart, Inc. and altered its primary business focus from crude oil operations to temperature recording and monitoring operations. As a result of this change in focus, the Company changed its name to Cox Technologies, Inc. in April 1998. The Company reincorporated in the State of North Carolina in December 2000. Except where the context otherwise indicates, all references to the Company are to Cox Technologies, Inc., its wholly owned subsidiaries, Twin-Chart, Inc., Transit Services, Inc., Vitsab, Inc., Vitsab USA, Inc., Fresh Tag Research & Manufacturing, Inc., Qualtag Engineering, Inc. and Cox Recorders Australia, Pty. Ltd. ("Cox Recorders Australia"), a 95% owned Australian distribution company. During July 2001, all domestic subsidiaries were merged into the parent company, Cox Technologies, Inc. On March 15, 2003, the Company sold all of its shares in its Vitsab Sweden subsidiary to its Copenhagen distributor. On December 12, 2003, the Company entered into an Asset Purchase Agreement (such agreement, as amended on January 29, 2004, the "Asset Purchase Agreement") with Sensitech Inc., a Delaware corporation ("Sensitech") and Cox Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Sensitech, formed for purposes of consummating the Asset Purchase Agreement ("Buyer") to sell substantially all of the Company's assets ("the Asset Sale"). Effective April 16, 2004, the Company and Sensitech completed Sensitech's acquisition of substantially all of the assets of the Company pursuant to the terms of the Asset Purchase Agreement dated December 12, 2003, as amended January 29, 2004, among the Company, Sensitech and Cox Acquisition Corp. The aggregate consideration received by the Company at the closing was comprised of $10,595,589 in cash. In addition, Sensitech assumed $233,569 of the Company's payables and certain other liabilities. At closing, Sensitech retained a $250,000 holdback amount in the Asset Sale. Determination of the final consideration is subject to adjustment based upon finalization of the Company's balance sheet as of the closing date. Under the terms of the Asset Purchase Agreement, the Company retained certain assets and liabilities in connection with the transaction, including certain cash, production equipment, office equipment, machines, tools, fixtures, furniture and certain retained liabilities. In connection with the Asset Sale, the Company and Sensitech entered into a Manufacturing Services Agreement under which the Company continued to manufacture the Company's products on behalf of Sensitech from April 16, 2004 through July 2, 2004. The parties completed the Asset Sale following a special meeting of the Company's shareholders on April 15, 2004, whereby the holders of a majority of the Company's common stock approved the Asset Sale and the subsequent liquidation and dissolution of the Company pursuant to the Plan of Complete Liquidation and Dissolution (the "Plan"). On January 29, 2004 the Company entered into an Asset Purchase Agreement with Rask Holding ApS, to sell its Vitsab division for $175,000 plus assumed liabilities. The transaction was consummated on the same date. Rask Holding acquired all of the assets associated with the Vitsab division except cash and accounts receivable, and assumed all liabilities associated with the Vitsab division except liabilities associated with a raw material purchase from a specific vendor and for taxes resulting from operations of the Vitsab division prior to January 29, 2004. The Company sold most of its remaining assets (principally furniture and equipment) at auction on July 17, 2004. 1 Business Operations prior to the Asset Sale Prior to the Asset Sale the core business of the Company was to provide reliable temperature monitoring products and develop new and technologically advanced monitoring systems. The Company produced and distributed transit temperature recording instruments, including electronic "loggers," graphic temperature recorders and visual indicator tags, both in the United States and internationally. Temperature Recorder Operations The Company's temperature recorder activities included production and distribution of graphic temperature recording instruments, the sale and distribution of electronic temperature and humidity recorders (sold for non-transit quality monitoring purposes as well as for transit monitoring), production and distribution of visual indicator labels, the sale of fixed based temperature monitoring systems, and the sale and distribution of various temperature sensing probes and thermometers. The graphic temperature recording instruments, known as temperature recorders, are self-contained, battery-powered and designed to create a graphical "time vs. temperature" record. The electronic temperature recorders are battery-powered devices that record temperature in a computer memory chip. The data is later retrieved by transferring the information to a personal computer. The graphic recorders were marketed under the trade name Cox Recorders and produced a record which was documentary proof of temperature conditions useful for compliance with governmental regulations, the monitoring of performance of refrigerated carriers, and for claims in the transport of valuable perishables such as produce, meat, pharmaceuticals, chemicals, live plants and animal material. The electronic temperature recording products were used for the same purpose, but also were used for internal checking of temperature conditions in storage and processing. The Company sold two different types of electronic "data loggers" which were manufactured by an offshore contractor. The Tracer(R) product line, which can record data for both temperature and humidity, is a research-grade instrument used in a broad variety of laboratory, environmental, process control, and quality assurance applications. A lower cost electronic data logger, the DataSource(R), is used primarily for transit temperature monitoring and recording. Both loggers deliver their data via a cable link to a personal computer using specialized software. The Company purchased for resale the TempList(R), which is a data collection or "listing" temperature recorder that is used for point-of-measurement recording. The TempList(R) delivers the data via a cable link to a personal computer using specialized software. The Company also purchased digital thermometers with penetration probes for resale from a variety of manufacturers. The Cox1 product accounted for approximately 62% of the Company's revenues for the period beginning May 1, 2003 and ending April 15, 2004. The balance of revenues was generated through the sale of electronic data loggers, probes and other temperature monitoring products. During fiscal 2002, the Company contracted with a third party to manufacture and assemble certain base versions of the Cox1 units at an offshore location. During the period beginning May 1, 2003 and ending April 15, 2004, that offshore location supplied approximately 40% of the total number of units utilized by the Company. Because of this manufacturing arrangement, the Company realized significant cost savings on units manufactured in both the offshore and Belmont, North Carolina facilities. The Company did not experience foreign currency exchange risks as all transactions were denominated in U.S. dollars. The temperature recorder operations of the Company did not depend upon a single or a few customers. However, the Company did have significant business relationships with several large retail customers and foreign distributors. Backlog of orders was not a major factor in the temperature recorder operations of the Company. The Company was a major competitor in the temperature recording industry with regards to its production and distribution activities. The Company encountered significant competition from a variety of companies in all major areas of its business activity. The Company competed primarily on product performance and price. Reliability, technology, customer service and company reputation were also important competitive factors. The Company generally did not maintain company owned distribution entities. However, in 1999, the Company established Cox Recorders Australia to retain its market share and presence in this geographic area. Except for this subsidiary, all distributors were contracted. All other distribution and sales operations were through individual sales persons operating on salary, sales commission basis or salary plus incentive basis. The shares of Cox Recorders Australia stock owned by the Company were sold to Sensitech in the Asset Sale. 2 Vitsab(R) Product Vitsab(R) is a technology that employs enzymatic color indicators inside a transparent label to show the amount of temperature exposure of a stored or shipped temperature-sensitive commodity. These labels are programmable devices that run as a "biological clock" parallel to the biological clock of the product it is set to monitor. They integrate both time and temperature and give a visual indication that parallels the monitored food or drug product as it reaches a certain definable state. During the period from May 1, 2003 through January 29, 2004, the Vitsab(R) line of products generated sales equaling approximately 3% of the Company's total revenues. Oilfield Operations Until September 30, 2002, the Company owned working interests through subleases in developed oil and gas properties located in California. These developed properties contained drilled wells that were capable of producing crude oil or natural gas. The Company attempted to manage and improve production in the fields by employing an independent oilfield operator through several contractual agreements dating back to 1999. The Company sold its interest in these properties on September 30, 2002. Intellectual Property The Company owned a number of patents, trademarks, trade secrets and other intellectual property directly related to, and important to, the Company's business. All of these assets were sold to either Sensitech or Rask Holding. Research and Development No research and development expenses were incurred during fiscal 2004, 2003 or 2002. Government Regulation The Company is not currently subject to direct regulation by any governmental agency other than rules and regulations that apply to businesses generally. Employees On June 1, 2004, the Company had 35 full-time employees compared to 64 on June 1, 2003. On August 17, 2004, the Company had four employees. None of the Company's employees are covered by collective bargaining agreements. EXECUTIVE OFFICERS OF THE REGISTRANT Date Elected Name and Age (1) Title (1) An Officer ---------------- --------- ---------- Dr. James L. Cox Chairman, President and 08/01/95 Age - 59 Chief Technology Officer Brian D. Fletcher Co-Chief Executive Officer and 03/10/00 Age - 42 Director of Marketing Kurt C. Reid Co-Chief Executive Officer and 03/10/00 Age - 44 Director of Operations John R. Stewart Chief Financial Officer 06/11/03 Age - 56 and Secretary (1) As of August 17, 2004 The officers of the Company will serve in their respective capacities until the liquidation of the Company is completed. Dr. James L. Cox has been employed by the Company as President for more than five years and as Chief Technology Officer since April 1, 2003. Prior thereto and for more than five years, he was employed by the Company as Chief Executive Officer. He has served continuously as Chairman for the past five years. 3 Brian D. Fletcher has been employed by the Company as Co-Chief Executive Officer and Director of Marketing since April 1, 2003. Prior thereto and since March 10, 2000, he was employed as Chief Operating Officer. Prior to joining the Company, he was a private investor for more than the previous two years. Kurt C. Reid has been employed by the Company as Co-Chief Executive Officer since April 1, 2003 and Director of Operations since March 10, 2000. Prior to joining the Company, he was a private investor for more than the previous two years. John R. Stewart has been employed by the Company as Chief Financial Officer and Secretary since June 11, 2003. Prior to joining the Company, he was self-employed as an independent accounting and financial consultant for more than the previous five years. Available Information As of August 1, 2004, we began maintaining a temporary office at 77 McAdenville Road, Belmont NC 28012. Our phone number is (704) 825-8146 and our mailing address is 137 Cross Center Dr - #329, Denver, NC 28037. The books and records of the Company are in the possession of Kurt C. Reid, Co-Chief Executive Officer and John R. Stewart, Chief Financial Officer. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available. The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The content of the website is not incorporated in the filing. Further, the Company's references to the URL for this website is intended to be an inactive textual reference only. ITEM 2. PROPERTIES The Company had leased manufacturing facilities located in Belmont, North Carolina through July 31, 2004. The facility in Belmont served as the Corporate Office and as a manufacturing facility during the Contract Manufacturing period for Sensitech. As of August 1, 2004, the Company began maintaining a space at 77 McAdenville Road, Belmont NC, 28012 and maintaining certain computer operations and books and records in that space to facilitate customer, vendor and shareholder communications. The space is being occupied without cost to the Company. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 15, 2004, the Company held a Special Meeting of shareholders (the "Special Meeting"). At the Special Meeting, the shareholders of the Company voted to approve the Asset Sale and the Plan of Dissolution (the "Plan"). The vote to approve the Asset Sale was 20,946,072 shares in favor and 904,671 shares opposed. The vote to approve the Plan was 20,912,318 shares in favor and 926,399 shares opposed. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS We intend to close our stock transfer books and discontinue recording transfers of our common stock at the close of business on the date we file the Articles of Dissolution with the North Carolina Secretary of State, referred to as the "final record date". The articles of dissolution will be filed at such time as the Board of Directors, in its absolute discretion deems necessary, appropriate or desirable. It is anticipated that this action will be taken in the second half of 2004. The Company's Common Stock is traded on the nationwide over-the-counter market and is listed under the symbol "coxt.ob" on the electronic bulletin board provided by the National Quotation Bureau, Inc. 4 The table below presents the reported high and low common stock sale prices for each quarter of fiscal 2004 and 2003. The Company has not declared any dividends during the last two fiscal years. 2004 2003 ---------------------------------------------- High Low High Low ---- --- ---- --- First Quarter $0.09 $0.05 $0.30 $0.07 Second Quarter $0.30 $0.05 $0.15 $0.06 Third Quarter $0.25 $0.13 $0.08 $0.02 Fourth Quarter $0.18 $0.14 $0.07 $0.04 At August 12, 2004, the Company had approximately 2,062 holders of record of the Company's Common Stock. The table below presents the information related to the equity compensation plans that have been previously approved by shareholders and equity compensation plans not approved by shareholders, as of April 15, 2004.

Number of securities Weighted-average Number of securities to be issued upon exercise price of ~~Number~~remaining ofavailable ~~securities~~for exercise of outstanding ~~remaining~~future ~~available~~issuance ~~for~~under outstanding options, options, warrants ~~future~~equity ~~issuance~~compensation ~~under~~plans warrants and rights and rights ~~equity compensation plans~~ -------------------- ----------------- ----------------------------------- Equity compensation plans approved by security holders (2000 Stock Incentive 5Plan) 4,~~218~~289,000 $ .~~1885~~1737 2,~~028~~957,972 ~~Plan)~~ Equity compensation plans not approved by security holders (Non-Qualified Stock Option Agreements) 6,~~652~~600,~~500~~000 $ .~~6568~~6534 -- ~~Option Agreements)~~ -------------------- ----------------- ----------------------------------- Total 1110,~~870~~899,~~500~~000 $ .4510 2,~~028~~957,972 ==================== ================= ===================================

The table below presents the information related to the equity compensation plans on a liquidation basis and presents only the "in-the-money" options, as of April 15, 2004. In-the-money options are those granted to individuals with an exercise price below the expected liquidation distribution amount per common share.

~~Fiscal~~Number ~~Years~~of ~~Ended~~securities ~~April~~with ~~30,~~an ~~2003~~Weighted-average ~~2002~~exercise ~~2001~~exercise ~~2000(2)~~price ~~1999~~below the price of outstanding estimated distribution amount options, warrants and rights ---------------------------- ---- ---- ---- ------- --------------------- ~~Sales~~Equity $compensation ~~8,773,852~~plans $approved ~~8,627,103~~by $security ~~9,709,561~~holders ~~$ 9,710,976 $ 8,954,544 Income~~ (~~loss)~~2000 ~~from~~Stock ~~operations~~Incentive ~~$ 413,556 ($ 4,826,969~~Plan) ~~($ 6~~690,~~149,417)~~000 ($ ~~1,955,191)~~.1057 $Equity ~~163,292~~compensation ~~Basic~~plans ~~and~~not ~~diluted~~approved ~~net~~by ~~income~~security ~~(loss)~~holders ~~per average common share $ .00~~ ($Non-Qualified ~~.20)~~Stock ($Option ~~.27~~Agreements) ($ .09) $ .01 Weighted average number of Common shares outstanding 27,907,224 25,360,071 24,661,104 24,222,547 21,368,188 Total assets $ 3,512,201 $ 4,072,391 $ 8,654,189 $14,369,529 $12,877,192 Stockholders' equity (deficit) ($ 1,~~500~~800,~~418)~~000 ($ ~~2,305,523)~~.1100 ~~$ 2,528,355 $ 9,041,805 $10,025,938 Long~~-~~term~~------------------------------------------------------------------- ~~debt~~Total ~~(1) $ 4,189,893 $ 3,233,913 $ 3,090,044 $~~ 2,~~908~~490,~~359~~000 $ ~~581,374~~.1088 ====================================================================

5 Since its inception, the Company has not paid any cash dividends on its common stock and does not anticipate paying such dividends in the foreseeable future. In calendar 2004, we expect to make cash distributions to shareholders of record at the final record date. Since the Asset Sale to Sensitech, we have been taking the necessary steps to liquidate and convert the remaining non-cash assets of the Company to cash and to pay the liabilities and obligations of the Company. In lieu of satisfying all of our liabilities and obligations prior to making distributions to our shareholders, we will create a contingency reserve to provide for such liabilities and obligations. The actual amount of the contingency reserve will be based upon estimates and opinions of management and the Board of Directors and review of our estimated operating expenses and future estimated liabilities, including, without limitation, anticipated compensation payments, estimated legal and accounting fees, operating lease expenses, payroll and other taxes payable, miscellaneous office expenses, and expenses accrued in our financial statements. There can be no assurance that the contingency reserve in fact will be sufficient. After the liabilities, expenses and obligations for which the contingency reserve is established have been satisfied in full, we will distribute to our shareholders any remaining portion of the contingency reserve. Under the North Carolina Business Corporation Act, in the event we fail to create an adequate contingency reserve for payment of our expenses and liabilities, or should such contingency reserve be exceeded by the amount ultimately found payable in respect of expenses and liabilities, each shareholder could be held liable for the repayment to creditors out of the amounts theretofore received by such shareholder from us. Management's current estimate is that the accumulative distribution will be in a range from $0.16 to $0.18 per common share. The following is a list of all unregistered stock issued during the last three fiscal years. Fiscal 2004 Pursuant to an Amended Employment Agreement between Mr. Peter Ronnow and the Company dated August 17, 2000, the Company issued 148,148 shares of restricted stock to satisfy compensation due Mr. Ronnow. The shares were issued under the exemption set forth in Rule 701 under the Securities Act of 1933. Fiscal 2003 Pursuant to an April 10, 2001 amendment to an agreement between the Company and BEN Acquisition, LLC, dated June 23, 2000, the Company issued 10,000 shares of restricted stock to each of the three members of BEN Acquisition, LLC on July 18, 2002. The shares were issued under the exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933. Pursuant to the TI Stock Purchase Agreement, the Company issued 12,500,000 shares of restricted stock to TI. The shares were issued under the exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933. Fiscal 2002 Pursuant to an April 10, 2001 amendment to an agreement between the Company and BEN Acquisition, LLC, dated June 23, 2000, the Company issued 9,500 shares of restricted stock to each of the three members of BEN Acquisition, LLC on November 20, 2001. The shares were issued under the exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933. Pursuant to an April 30, 2001 agreement between the Company and McManus Financial Consultants, Inc., under which they provided consulting services related to investor relations, the Company issued 41,667 and 41,666 shares of restricted stock, respectively, to the two partners. The shares were issued under the exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933. Pursuant to a February 15, 2002 agreement between the Company and Stock Enterprises, Inc., under which Mr. James R. Stock, president, agreed to cancel for consideration an investor relations services agreement dated November 1, 2002, the Company issued to Mr. Stock 30,000 shares of restricted stock. The shares were issued under the exemption set forth in Rule 506 of Regulation D of the Securities Act of 1933. 6 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical consolidated financial information as of and for each of the fiscal years, which have been derived from, and should be read together with, the audited consolidated financial statements and the related notes, which are included elsewhere in this report. The information presented below should also be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations. Upon the sale of substantially all of the assets of the Company on April 16, 2004, we ceased normal operations and began contract manufacturing for Sensitech. Accordingly, a comparison of the selected financial data for the period from May 1, 2003 through April 15, 2004 should take into account the fact that the Company ceased it operations 15 days before completing a full year of operations.

~~Payments~~May ~~due~~1, by2003 ~~period~~Fiscal ~~----------------------~~Years ~~Less~~Ended ~~than~~April ~~More~~30, ~~than~~thru ~~Contractual~~April ~~obligations~~15, ~~Total~~2004 12003 ~~year~~2002 ~~1-3~~2001 ~~years~~2000 3-~~5 years 5 years~~ ---~~--------------------~~ ----- ------ ----~~-----~~ ----~~-----~~ ~~-------~~Sales ~~10%~~$ ~~Senior~~9,770,512 ~~Subordinated~~$ ~~Convertible~~8,492,522 ~~Note~~$ ~~due~~8,475,146 ~~March~~$ ~~2005~~9,678,339 $3 9,~~327~~710,~~500~~976 $Income --(loss) from continuing operations $3 1,~~327~~476,~~500~~873 $ --705,773 ($ --4,322,370) ~~Note~~($ ~~payable~~5,403,922) to($ ~~bank~~ 1,~~184~~955,~~999~~191) ~~360~~Loss from discontinued operations ($ 613,~~000~~391) ~~720~~($ 595,~~000~~325) ~~104~~($ 840,~~999~~674) ($ 1,370,087) -- ~~Unsecured~~Basic ~~note~~and ~~payable~~diluted ~~12,000~~income ~~12,000~~(loss) --from --continuing --operations ~~Capital~~per ~~leases~~average ~~196,172~~common ~~158,780~~share ~~37,392~~$ --.04 --$ ~~Operating~~.02 ~~leases~~($ ~~137~~.17) ($ .22) ($ .08) Weighted average number of Common shares outstanding 38,~~419~~293,667 ~~119~~27,~~254~~907,224 1825,~~165~~360,071 --24,661,104 --24,222,547 ~~Purchase~~Total ~~obligations~~assets --$ --3,512,201 --$ --4,072,391 --$ ~~---------------------------------------~~8,654,189 ~~----------~~$ ~~----------~~14,369,529 Long-~~---------~~term ~~----------~~debt ~~----------~~(1) ~~Total~~ $ 4,~~858~~189,893 $ 3,233,913 $ 3,090,044 $ ~~650~~2,~~034~~908,359 Stockholders' equity (deficit) ($4 1,~~103~~500,~~057~~418) ($ ~~104~~2,~~999~~305,523) $ --2,528,355 ~~=======================================~~$ ~~==========~~9,041,805 ~~==========~~(1) ~~==========~~Excludes ~~==========~~current ~~==========~~maturities

Net assets in liquidation: April 30, 2004 -------------- Cash and cash equivalents $7,597,606 Accounts receivable 319,613 Other assets 36,711 Total assets 7,953,930 Total liabilities 1,337,575 ----------- Net assets in liquidation $6,616,355 ========== ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Upon the sale of substantially all of the assets of the Company on April 16, 2004, we ceased normal operations and began contract manufacturing for Sensitech. Accordingly, a comparison of the selected financial data for the period from May 1, 2003 through April 15, 2004 should take into account the fact that the Company ceased it operations 15 days before completing a full year of operations. We cannot list here all of the risks and uncertainties that could cause our actual future financial results to differ materially from our present expectations or projections regarding estimated distribution to shareholders but we can identify many of them. For example, our future results could be affected by the cost of satisfying known liabilities for which we have estimated the value, the need to satisfy unanticipated liabilities arising in the future and the expenses of dissolving and winding up the Company. 7 The following discussion and analysis should be read in conjunction with the selected financial data in Item 6 and our financial statements and notes thereto in Item 8. The Company operated in one reporting segment, Temperature Recorder Operations. The "Temperature Recorder Operations" segment involves the production and distribution of temperature recording and monitoring devices, including electronic "loggers," graphic temperature recorders and visual indicator tags. Critical Accounting Policies The Company's accounting and reporting policies are in accordance with accounting principles general accepted in the United States of America. The application of certain of these principles involves a significant amount of judgment and the use of estimates based on assumptions that involve significant uncertainty at the time of estimation. We have identified the following policies as being particularly sensitive to estimate or otherwise critical based on the potential impact on the financial statements: accrued cost of liquidation, revenue recognition, asset impairment, stock options, and income taxes. We periodically review these policies, the estimation processes involved, and the related disclosures. Accrued cost of liquidation and effects of change to liquidation basis - Pursuant to the Plan of dissolution approved by shareholders on April 15, 2004, we plan to file articles of dissolution with the North Carolina Secretary of State in the second half of calendar 2004. Since April 15, 2004 , the Company has been engaged in contract manufacturing for Sensitech (which services ended on July 2, 2004), selling and converting its non-cash assets, discharging its liabilities and otherwise winding-up the business and affairs in preparation for liquidation. We expect to distribute the remaining assets to our shareholders, all in accordance with the Plan of dissolution. As a result, we changed our basis of accounting to the liquidation basis as of April 16, 2004. The accompanying statements of operations, shareholders' equity and cash flows for the period from May 1, 2003 to April 15, 2004 and for each of the years in the two-year period ended April 30, 2003 have been presented on a going concern basis comparable to prior periods, which assumes the realization of assets and the liquidation of liabilities in the normal course of business. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their anticipated settlement amounts. As a result of the Asset Sale and change to liquidation basis of accounting, we recorded a $7.27 million increase in net assets. Included in the adjustment to net assets recorded in connection with the change from the going-concern to the liquidation basis of accounting, we recorded $0.63 million of accrued costs of liquidation representing the estimate of the costs to be incurred during dissolution; however, actual costs could vary from those estimates. Distributions ultimately made to shareholders upon liquidation will differ from the "net assets in liquidation" recorded in the accompanying Statement of Net Assets in Liquidation as a result of future changes in estimated investment income, settlement of liabilities and obligations and final costs of liquidation. At April 30, 2004, the following represent the estimated costs of liquidation: Officer compensation and benefits $131,000 Legal, audit and tax services 124,500 Insurance 212,000 Other costs, including utilities, rent, supplies and miscellaneous expenses 162,631 -------- Total $630,131 ======== Revenue recognition - Revenue was recognized as products are shipped, net of an allowance for estimated returns. Asset impairment - Goodwill was evaluated for impairment annually, or more frequently when there were indications of impairment. Based on an analysis of acquired goodwill as of April 30, 2002, the goodwill previously recorded was deemed impaired and was written off as of that date. Specifically identified intangible assets subject to amortization, such as patents, and long-lived assets were evaluated for recoverability whenever events or changes in circumstances indicated that the carrying amount of an asset or asset group may not be recoverable. During fiscal year 2002, it was determined that the carrying amount of certain equipment under development was not recoverable, and an impairment loss was recognized in the period ended April 30, 2002. 8 Stock options - The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which disclosures are presented in Note 1, "Significant Accounting Policies - Stock-based Compensation." In accordance with this policy, the Company continues to account for its employee stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25 and related interpretations. No stock-based compensation cost is reflected in net income for options granted under those plans having an exercise price equal to the market value of the underlying common stock on the date of grant. Income taxes - Until adopting the liquidation basis of accounting, the Company accounted for income taxes using the asset and liability method. The Company has deferred tax assets related principally to net operating loss carry forwards and impairment losses recognized for financial reporting purposes. Valuation allowances have been recorded to offset these deferred tax assets. Certain net operating loss carry forwards have been utilized to offset income from the asset sale to Sensitech and were considered in the determination of net assets in liquidation. Quantitative and Qualitative Analysis The Company has identified certain areas that potentially subject it to significant concentrations of credit risk. These areas for potential risk include cash and cash equivalents and trade accounts receivable. At times, cash balances at financial institutions are in excess of FDIC insurance coverage. The cash balances are maintained at financial institutions with high credit - quality ratings and the Company believes no significant risk of loss exists with respect to those balances. The Company believes that amounts reported for cash and cash equivalents and accounts receivable are considered to be reasonable approximations of their fair values due to their short term nature. Results of operations for the period May 1, 2003 to April 15, 2004 and fiscal years ended April 30, 2003 and 2002 Fiscal period ended April 15, 2004 The discussion of the results of operations does not include the Vitsab division, which has been presented as discontinued operations. Revenues from sales increased $1,277,990, or approximately 15%, as compared to fiscal 2003. For fiscal 2004, revenues from data logger sales increased by approximately $1,259,000, or approximately 59%, over revenues from sales of the same product in fiscal 2003, while revenues from sales of graphic recorders decreased by approximately $48,000, or approximately less than 1% over revenues from sales of the same product in fiscal 2003. Unit sales of Cox 1 improved by less than 1% and unit sales of DataSource improved by 68% over fiscal 2003. The unit selling price for both Cox 1 and DataSource eroded by approximately 4% as compare to unit selling prices of the same products in fiscal 2003. During fiscal 2004, revenues from the sale of graphic recorders represented approximately $6,149,000, or approximately 62%, of total revenues, revenues from the sale of electronic data loggers represented approximately $3,387,000, or approximately 34% of total revenues, revenues from the sale of probes and related products represented approximately $234,000, or approximately 2%, of total revenues. Revenues from the sale of other miscellaneous products represented approximately 1% of total revenues. Cost of sales increased by $58,841, or less than 1%, as compared to fiscal 2003. The Company continues to benefit from the lower cost of units purchased from an offshore contract manufacturer; however, those decreases in cost were more than offset by increases in rebate fees, shipping costs and increases in both medical and workman's compensation insurance expenses. The Company continued to contract with a third party to manufacture and assemble certain base versions of the Cox1 units at an offshore location. During fiscal 2004, this location supplied approximately 40% of the total number of units utilized by the Company. Because of this manufacturing arrangement, the Company realized cost savings on units manufactured in both the offshore and Belmont, North Carolina facilities. General and administrative expenses for fiscal 2004 increased $255,278, or approximately 15%, as compared to fiscal 2003. This increase was due to higher costs associated with bad debt, labor, legal fees and outside services, partially offset by decreases in telephone costs and other general expenses. Selling expenses for fiscal 2004 increased $180,281, or approximately 21%, as compared to fiscal 2003. The principal increase is due to higher sales salaries, partially offset by decreases in travel expenses, commissions, trade show costs and outside sales services expenses. No research and development costs were incurred during fiscal 2004. 9 Other income (expense) decreased $60,709, or approximately 41%, in fiscal 2004 as compared to fiscal 2003. The decrease was primarily attributable to the cessation of option payments for the purchase of the Company's wholly owned subsidiary, Vitsab Sweden, upon the consummation of the sale of the subsidiary in fiscal 2003. Other expenses decreased because the Company did not realize negative valuation adjustments against a long term receivable in fiscal 2004 as compared to fiscal 2003. Interest expense decreased $39,215 or approximately 9%, in fiscal 2004 as compared to fiscal 2003. Interest payments to Centura decreased due to the continued retirement of the debt balance payable to Centura combined with a lower interest rate for the full fiscal year of 2004. These decreases were substantially offset by the interest that accrued on the $2,500,000 note payable to TI, dated March 10, 2000, that was due in March 2005. Liquidity and Capital Resources Effective April 16, 2004, the Company and Sensitech completed Sensitech's acquisition of substantially all of the assets of the Company pursuant to the terms of the Asset Purchase Agreement. The aggregate consideration received by the Company at the closing was comprised of $10,595,589 in cash. In addition, Sensitech assumed $233,569 of the Company's payables and certain other liabilities. At closing, Sensitech retained a $250,000 holdback amount in the Asset Sale. After the closing and for the period from April 16 through April 30, 2004 the Company used a portion of the proceeds to retire remaining outstanding indebtedness and to pay normal costs of operations and expenses associated with the liquidation process. As of April 30, 2004, our principal assets consisted of $7,597,606 of cash and cash equivalents. We are now engaged in the process of orderly liquidation of the remaining assets, the winding up of its business operations, the dissolution of the Company and the distribution of cash to shareholders. Off-Balance Sheet Arrangements The Company is not a party to or bound by any long-term guarantee agreements. Contractual Obligations The amounts set forth below represent the Company's material contractual obligations to be paid in future periods: Payments due by period ---------------------- Less than More than Contractual obligations Total 1 year 1-3 years 3-5 years 5 years -------------------------------------------------------------------------------- Operating leases $ 22,432 $ 22,432 $ - $ - $ - -------------------------------------------------------------------------------- Total $ 22,432 $ 22,432 $ - $ - $ - ================================================================================ Fiscal 2003 The discussion of the results of operations does not include Vitsab division, which has been presented as discontinued operations. Revenues from sales increased $17,376, or less than 1% in fiscal 2003 as compared to fiscal 2002. As a whole both unit sales and average selling price remained relatively flat in fiscal 2003. For fiscal 2003, revenues from data logger sales increased by approximately $630,000, or approximately 42%, over revenues from sales of the same product in fiscal 2002, while revenues from sales of graphic recorders decreased by approximately $604,000, or approximately 9%, over revenues from sales of the same product in fiscal 2002. During fiscal 2003, revenues from the sale of graphic recorders represented approximately $6,197,000, or approximately 73%, of total revenues, revenues from the sale of electronic data loggers represented approximately $2,128,000, or approximately 25% of total revenues, revenues from the sale of probes and related products represented approximately $154,202, or approximately 2%, of total revenues. Revenues from the sale of other miscellaneous products represented less than 1% of total revenues. Cost of sales decreased by $373,614, or approximately 7%, as compared to fiscal 2002. The decrease was realized principally because of a reduction in labor costs and related fringe benefits, lower raw material costs, and the lower cost of units purchased from an offshore contract manufacturer. The Company also experienced lower cost in the areas of freight and postage and shop supplies used in manufacturing. These decreases in cost were partially offset by increased cost of retriever fees. 10 General and administrative expenses for fiscal 2003 decreased $457,935 or approximately 21%, as compared to fiscal 2002. This decrease is due to lower costs associated with bad debt, labor, legal fees and outside services, partially offset by increases in insurance premium costs and other general expenses. Selling expenses for fiscal 2003 decreased $161,581, or approximately 16%, as compared to fiscal 2002. The decrease is due to lower sales salaries, commissions, trade show expenses, travel expenses and freight out expense, partially offset by increases in advertising, temporary labor and outside sales services expenses. No research and development costs were incurred during fiscal 2003. Depreciation expense in fiscal 2003 decreased $215,237, or approximately 67%, as compared to fiscal 2002. The decrease occurred principally because older assets of the Company are becoming fully depreciated. Amortization of intangible assets decreased $231,988, or 100%, in fiscal 2003 as compared to fiscal 2002. The decrease is primarily related to the impairment of goodwill during fiscal 2002. Other income (expense) decreased $37,998, or approximately 20%, in fiscal 2003 as compared to fiscal 2002. The decrease was primarily attributable to the cessation of option payments for the purchase of the Company's wholly owned subsidiary, Vitsab Sweden, upon the consummation of the sale of the subsidiary. Other expenses decreased because the Company is no longer paying patent licensing fees. Interest expense decreased $70,565, or approximately 13%, in fiscal 2003 as compared to fiscal 2002. The decrease was primarily attributable to interest expense in fiscal 2002 related to the construction of manufacturing equipment that will not be completed, and that did not reoccur in fiscal 2003. Interest payments to Centura decreased due to the retirement of a portion of the debt balance payable to Centura. These decreases were substantially offset by the interest that accrued on the $2,500,000 note payable to TI, dated March 10, 2000, that was due in March 2005. The decrease in inventory of $237,072 is related to the decrease in the number of units in finished goods inventory and a decrease in work-in-progress inventory. The Company has also lowered its costs of purchasing raw materials through negotiations with vendors. Decreased direct labor and benefits costs and overheads incurred in the production of the Cox1 units resulted in a decrease in the valuation of finished goods. The Company also established a $50,000 reserve for slow moving or obsolete inventory in fiscal 2003. The net decrease in property and equipment of $258,939 is primarily due to depreciation and the transfer of assets owned by the Company related to Vitsab Sweden. This decrease was partially offset by the acquisition of approximately $84,000 of new assets. Fiscal 2002 Prior to fiscal 2002, the Company had two operating segments: (1) Temperature Recorder Operations and (2) oilfield operations and other, which included all economic activity related to the oil production and the holding of the oil subleases and the operation of its Phoenix, Arizona office. The Company closed its Phoenix office effective October 31, 2000. The activities performed in its Phoenix office were transferred to the Corporate Office in Belmont, North Carolina. The Company entered into an agreement with a group in Dallas, Texas, to sell the subleases on behalf of the Company. The group contacted and solicited potential buyers to make purchase offers to the Company for the subleases. The Company terminated the agreement in April 2001 after receiving no purchase offers from potential buyers. As a result of the inability of the Company to attract a potential buyer, the high cost and difficulty in producing crude oil of the type found in the field and losses incurred in the oilfield operations, the Company evaluated the recoverability of the carrying amount of the oilfield net assets. In analyzing expected future cash flows from potential offers, the Company determined that $300,000 of net assets should be accounted for as property held for sale. As a result, the Company recognized a loss on impairment of $3,062,196 in the fourth quarter of fiscal 2001. The Company determined that no change in the valuation of this asset was necessary for fiscal 2002. The Company sold the oilfield leases on September 30, 2002 and now operates in one reporting segment, Temperature Recorder Operations. Temperature Recorder Operations Revenues from sales decreased $1,082,458, or approximately 11% in fiscal 2002 as compared to fiscal 2001, due to a 13% decrease in the number of Cox1 units sold as a result of decreased demand and a 4% decrease in average sales price. Sales of DataSource(R) units increased approximately 129%, slightly offset by a 4% 11 decrease in average sales price during fiscal 2002. During fiscal 2002, a large grocery store chain started requiring its shippers to use the DataSource(R) units exclusively. Fiscal 2002 reflects a 22% decrease in the number of Tracer(R) products sold and a 4% decrease in average sales price. During fiscal 2002, revenues from the sale of graphic recorders represented $6,751,000 or approximately 78% of total revenues, revenues from the sale of electronic data loggers represented $1,472,000 or approximately 17%, revenues from the sale of probes and related products represented $129,000 or approximately 2%, and revenues from the sale of Vitsab(R) products represented $112,000 or approximately 1%. Revenues from the sale of oil and other miscellaneous products represented the balance. Cost of sales for fiscal 2002 increased $85,162, or approximately 2% as compared to fiscal 2001. The increase was due to a reduction in the price the Company now pays for raw material components and labor costs, increased retriever fees, shipping costs and supplies used in the manufacturing process, partially offset by decreased purchases of raw materials, decreasing labor and benefits costs and postage expenses. During fiscal 2002, the Company contracted with a third party to manufacture and assemble certain base versions of the Cox1 units at an offshore location. During fiscal 2002, this location supplied approximately 6% of the total number of units utilized by the Company. Because of this manufacturing arrangement, the Company realized significant cost savings on units manufactured in both the offshore and Belmont, North Carolina facilities. General and administrative expenses for fiscal 2002 decreased $2,014,515, or approximately 44% as compared to fiscal 2001. This decrease was due to lower costs associated with legal fees, professional services, salaries, payroll taxes and employee benefits, partially offset by increases in outside services and other general expenses. Selling expenses for fiscal 2002 decreased $551,400, or approximately 30% as compared to fiscal 2001. The decrease was due to lower sales salaries, commissions, trade shows and travel expenses. No research and development costs were incurred during fiscal 2002 as the Company reached the final development stages of the Vitsab(R) product and halted the development of the EDS(TM) product in fiscal 2001. Depreciation and depletion expense in fiscal 2002 decreased $90,422, or approximately 18% as compared to fiscal 2001. There was no depletion expense associated with the oilfield operations recorded in fiscal 2002 as a result of the impairment of the oilfield operations. Amortization of patents and goodwill increased $36,261, or approximately 17% in fiscal 2002 as compared to fiscal 2001. This increase was related to the additional goodwill recognized from the acquisition of Vitsab Sweden. In fiscal 2002, the Company evaluated the fair value of goodwill from the acquisition of Vitsab Sweden and determined the goodwill to be impaired and recognized an impairment loss of $2,695,689 in the fourth quarter of fiscal 2002, as discussed in Note 8 to the consolidated financial statements. Other income increased $317,335, or approximately 248% in fiscal 2002 as compared to fiscal 2001. This increase was related primarily to the payments received as a result of the agreement between the Company and its Copenhagen distributor for an option to purchase all of the shares and assets of the Company's wholly owned subsidiary, Vitsab Sweden, as discussed in Note 1 to the consolidated financial statements. Interest expense increased $28,820, or approximately 6% in fiscal 2002 as compared to fiscal 2001. Reasons for this increase included the increase in interest accrued on the note payable to TI, dated March 10, 2000, in the amount of $2,500,000, interest on the Revolving Loan with RBC Centura Bank ("Centura") and the reclassification of interest paid on progress payments made by Centura, on behalf of the Company, from deposits to interest expense. The fiscal 2002 decrease in inventory of $509,824 was related to the decrease in the number of units in finished goods inventory and a decrease in work-in-progress inventory. The Company also lowered its costs of purchasing raw materials through negotiations with vendors. Decreased direct labor and benefits costs and overheads incurred in the production of the Cox1 units resulted in a decrease in the valuation of finished goods and an increase in cost of goods sold by an equal amount. The fiscal 2002 decrease in property and equipment, net of $397,836, was primarily due to depreciation. There were no significant additions or deletions to property and equipment in fiscal 2002. Forward-Looking Statements Statements contained in this document that are not historical in nature are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give our current expectations of 12 forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "estimate," "intend," "plan," and other words and terms of similar meaning in connection with any discussion of future operating and financial performance. Forward-looking statements are subject to risks and uncertainties that may cause future results to differ materially from those set forth in such forward-looking statements. The Company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof. Such risks and uncertainties with respect to the Company include, but are not limited to, its ability to successfully implement internal performance goals, performance issues with suppliers, regulatory issues, competition, the effect of weather on customers, exposure to environmental issues and liabilities, variations in material costs and general and specific economic conditions. From time to time, the Company may include forward-looking statements in oral statements or other written documents. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA COX TECHNOLOGIES, INC. AND SUBSIDIARIES STATEMENT OF NET ASSETS IN LIQUIDATION April 30, 2004 -------------- ASSETS Cash and cash equivalents $7,597,606 Accounts receivable 319,613 Other assets 36,711 ---------- TOTAL ASSETS $7,953,930 ========== LIABILITIES Accounts payable and accrued liabilities $ 707,444 Accrued costs of liquidation 630,131 ---------- Commitments and contingencies TOTAL LIABILITIES 1,337,575 ---------- NET ASSETS IN LIQUIDATION $6,616,355 ========== See Notes to Consolidated Financial Statements. 14 COX TECHNOLOGIES, INC. AND SUBSIDIARIES STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION Period from April 16, 2004 thru April 30, 2004 ---------------------- NET INCREASE IN NET ASSETS IN LIQUIDATION: ----------------------------------------- Interest Income $ 1,982 ----------- NET INCREASE IN ASSETS IN LIQUIDATION 1,982 NET ASSETS IN LIQUIDATION AT APRIL 16, 2004 $ 6,614,373 ----------- NET ASSETS IN LIQUIDATION AT APRIL 30, 2004 $ 6,616,355 =========== See Notes to Consolidated Financial Statements. 15 COX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS April 30, 2003 ----------------- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $572,149 Accounts receivable, net 874,668 Inventory, net 1,078,966 Notes receivable - current portion 75,000 Prepaid expenses 17,733 ---------- TOTAL CURRENT ASSETS 2,618,516 Property and equipment, net 223,579 Due from officer, net 8,928 Other assets 71,510 Assets of discontinued operations 589,668 ---------- TOTAL ASSETS $3,512,201 ========== LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES: Accounts payable and accrued expenses $282,517 Current portion of long-term debt 387,927 Liabilities of discontinued operations 152,282 ---------- TOTAL CURRENT LIABILITIES 822,726 ---------- OTHER LIABILITIES: Long-term debt 862,393 Long-term debt - related party 3,327,500 ---------- TOTAL OTHER LIABILITIES 4,189,893 ---------- TOTAL LIABILITIES 5,012,619 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock, no par value; authorized 100,000,000 shares; issued and outstanding; 38,339,094 shares 23,252,804 Accumulated other comprehensive loss (32,591) Accumulated deficit (24,696,452) Less - Notes receivable for common stock (24,179) ---------- TOTAL STOCKHOLDERS' DEFICIT (1,500,418) ---------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $3,512,201 ========== See Notes to Consolidated Financial Statements. 16 COX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME

~~April~~May 301, 2003 thru April 15, Fiscal Years Ended April 30, 2004 2003 2002 ----~~----------~~ ----~~----------~~ ~~ASSETS~~ ------ ~~CURRENT ASSETS~~REVENUE: ~~Cash~~Sales ~~and~~$ ~~cash~~9,770,512 ~~equivalents~~ $ ~~572~~8,~~149~~492,522 $ ~~216~~8,~~042~~475,146 ~~Accounts~~COSTS ~~receivable,~~AND ~~net~~EXPENSES: ~~964~~Cost of sales 4,~~078~~854,624 14,~~072~~795,~~935~~783 ~~Inventory~~5,169,397 ~~net~~General and administrative 1,~~182~~955,~~270~~487 1,~~419~~700,~~342~~210 ~~Notes receivable - current portion 75~~2,~~000~~158,146 --Selling ~~Prepaid expenses 17~~1,~~733 44~~059,~~832~~073 ~~------------ ------------ TOTAL CURRENT ASSETS 2~~878,~~811,230~~791 21,~~753~~040,~~151~~372 ~~Property~~Depreciation ~~and equipment~~98,550 ~~net 505~~107,~~688~~554 ~~764~~322,~~628~~791 ~~Property~~Loss ~~held~~on ~~for~~impairment ~~sale,~~-- ~~net~~ -- ~~300~~3,~~000 Due from officer~~537,597 ~~net~~Amortization ~~8,928~~of ~~41,067~~intangibles ~~Other~~-- ~~assets~~-- 71231,~~510~~988 ~~64,749~~------------ ~~Patents 114,845 148,796~~ ------------ ------------ TOTAL ~~ASSETS~~COSTS $AND 3EXPENSES 7,~~512~~967,~~201~~734 $7,482,338 412,~~072~~460,~~391~~291 ~~============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT~~ ------------ ------------ ------------- ~~CURRENT~~OPERATING ~~LIABILITIES:~~INCOME ~~Accounts~~(LOSS) ~~payable~~1,802,778 ~~and~~1,010,184 ~~accrued expenses $ 291~~(3,~~948~~985,145) $OTHER ~~658,123~~INCOME ~~Short-term~~(EXPENSE): ~~debt~~Other --income 188,~~000~~891 149,~~000~~600 ~~Current~~187,598 ~~portion~~Interest ofexpense ~~long-term~~(414,796) ~~debt 530~~(454,~~778~~011) 1(524,~~485,878~~823) ------------ ------------ ~~TOTAL CURRENT LIABILITIES 822,726 3,144,001 OTHER LIABILITIES: Long~~-~~term debt 862,393 208,913 Long~~-~~term debt~~ - ~~related party 3,327,500 3,025,000~~ ---------~~---~~ TOTAL OTHER EXPENSE (325,905) (304,411) (337,225) ------------ ~~TOTAL OTHER LIABLITIES 4,189,893 3,233,913~~ ------------ ------------ ~~TOTAL~~CONTINUING ~~LIABILITIES~~INCOME $(LOSS) 5BEFORE INCOME TAXES 1,~~012~~476,~~619~~873 $705,773 6(4,~~377~~322,~~914~~370) PROVISION FOR INCOME TAX -- -- --~~------~~ ------------ ~~COMMITMENTS AND CONTINGENCIES~~ ------------ ------------~~-----~~ ~~STOCKHOLDERS'~~INCOME ~~DEFICIT:~~(LOSS) ~~Common~~FROM ~~stock,~~CONTINUING noOPERATIONS ~~par value; authorized 100~~1,~~000~~476,~~000~~873 ~~shares;issued~~705,773 ~~and outstanding; 38~~(4,~~339~~322,~~094~~370) ~~shares~~OPERATING atLOSS ~~April~~FROM ~~30,~~DISCONTINUED ~~2003~~OPERATIONS ~~and~~364,703 25595,~~769~~325 840,~~684~~674 ~~shares~~LOSS atON ~~April~~SALE ~~30,~~OF ~~2002~~ASSETS $OF ~~23,252,804~~DISCONTINUED $OPERATIONS 22248,~~593,724~~688 ~~Accumulated~~-- ~~other~~-- ~~comprehensive~~PROVISION ~~loss~~FOR ~~(32,591)~~INCOME ~~(68,168)~~TAXES ~~Accumulated~~ON ~~deficit~~DISCONTINUED ~~(24,696,452)~~OPERATIONS ~~(24,806,900)~~-- ~~Less~~-- -- ~~Notes~~------------ ~~receivable for common stock (24,179) (24,179)~~ ------------ ------------ ~~TOTAL~~LOSS ~~STOCKHOLDERS'~~ON ~~DEFICIT~~DISCONTINUED ($OPERATIONS 1613,~~500~~391 595,~~418)~~325 ~~($ 2~~840,~~305,523)~~674 ------------ ------------ ~~TOTAL~~------------ ~~LIABILITIES~~NET ~~AND~~INCOME ~~STOCKHOLDERS'~~(LOSS) ~~DEFICIT~~$ 863,482 $ 3110,~~512,201~~448 ($ 45,~~072~~163,~~391~~046) ============ ============ ============ EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED: CONTINUING OPERATIONS $ .04 $ .02 ($ .17) DISCONTINUED OPERATIONS ($ .02) ($ .02) ($ .03) NET INCOME (LOSS) $ .02 $ .00 ($ .20) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 38,293,667 27,907,224 25,360,071

See Notes to Consolidated Financial Statements. 17 COX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME Period from April 16, 2004 to April 30, 2004 (Liquidation Basis), and Fiscal Period from May 1, 2003 to April 15, 2004 and Fiscal Years Ended April 30, 2003 and 2002

~~Fiscal~~Accumulated ~~Years~~Subscribed ~~Ended~~Other ~~April~~Stock ~~30,~~Common Comprehensive Accumulated Less Note Stock Income (Loss) Deficit Receivable Total ----- ------------- ------- ---------- ----- Balance, April 30, 2001 $ 22,311,921 ($ 108,581) ($19,643,854) ($ 31,131) $ 2,528,355 Comprehensive income (loss) - Net income (loss) -- -- ~~2003~~(5,163,046) ~~2002~~-- ~~2001~~(5,163,046) Foreign currency translation adjustment -- 40,413 -- -- 40,413 -- ---------- ~~REVENUE:~~Total ~~Sales~~comprehensive $income 8(loss) -- -- -- -- (5,~~773~~122,~~852~~633) $Payment 8on subscribed stock -- -- -- 6,~~627~~952 6,~~103~~952 $Common 9stock issued 281,~~709~~803 -- -- -- 281,~~561~~803 ------------ ------------ ------------ ~~COSTS~~------------ ~~AND~~------------ ~~EXPENSES:~~Balance, ~~Cost~~April of30, ~~sales~~2002 422,~~917~~593,~~048~~724 5(68,~~436,181~~168) 5(24,~~351~~806,~~019~~900) ~~General and administrative 2~~(24,~~045,839~~179) (2,~~540~~305,~~680~~523) ~~4,555,195~~Comprehensive ~~Selling~~income ~~1,057,109~~(loss) ~~1,260,652~~- ~~1,812,052~~Net ~~Research~~income ~~and~~-- ~~development~~ -- 110,448 -- ~~345~~110,~~393~~448 ~~Depreciation~~Foreign ~~and~~currency ~~depletion~~translation ~~306,349~~adjustment ~~423,398~~-- ~~513~~35,~~820~~577 ~~Loss~~-- on-- ~~impairment~~35,577 ------------ ~~3,537,597~~Total ~~3,062,196~~comprehensive ~~Amortization~~income of-- ~~patents~~-- ~~and~~-- ~~goodwill~~-- 33146,~~951~~025 ~~255,564~~Common ~~219~~stock issued 659,~~303~~080 -- -- --~~------~~ 659,080 ------------ ------------ ~~TOTAL COSTS AND EXPENSES 8,360,296 13,454,072 15,858,978~~ ------------ ------------ ------------ ~~INCOME~~Balance, ~~(LOSS)~~April ~~FROM~~30, ~~OPERATIONS~~2003 ~~413~~23,~~556~~252,804 (432,~~826~~591) (24,~~969~~696,452) (624,~~149~~179) (1,~~417~~500,418) Comprehensive income (loss) - Net income -- -- 863,482 -- 863,482 Foreign currency translation adjustment -- (10,438) -- -- (10,438) ------------ Total comprehensive income -- -- -- --~~----~~ ~~OTHER~~853,044 ~~INCOME~~Adjust ~~(EXPENSE):~~stock ~~Other~~subscription ~~income~~-- ~~(expense)~~-- ~~151~~24,~~150~~179 ~~189~~24,~~185~~179 ~~(128,150)~~Common ~~Interest~~stock ~~expense~~redeemed (~~454~~30,~~258~~233) ~~(525,262) (496,442)~~ -- -- --~~------~~ (30,233) ------------ ------------ ~~TOTAL OTHER INCOME (EXPENSE) (303,108) (336,077) (624,592)~~ ------------ ------------ ------------ ~~INCOME~~Balance, ~~(LOSS)~~April ~~BEFORE~~15, ~~INCOME~~2004 ~~TAXES~~23,222,571 ~~110~~(43,~~448~~029) (523,~~163~~832,~~046~~970) -- (6653,~~774,009~~428) ~~Provision~~Effect ~~for~~of ~~income~~change ~~taxes~~to liquidation basis 43,029 7,224,772 7,267, 801 Change in net assets in liquidation April 16, 2004 to April 30, 2004 -- -- 1,982 -- 1,982 ------------ ------------ ------------ ~~NET~~------------ ~~INCOME~~------------ ~~(LOSS)~~Balance, April 30, 2004 $ ~~110~~23,~~448~~222,571 -- ($ 516,~~163~~606,~~046~~216) (-- $ 6,~~774~~616,~~009)~~355 ============ ============ ============ ~~BASIC~~============ ~~AND DILUTED: NET INCOME (LOSS) PER SHARE $ .00 ($ .20) ($ .27) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 27,907,224 25,360,071 24,661,104~~============

See Notes to Consolidated Financial Statements. 18 COX TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

~~Accumulated~~May ~~Subscribed~~1, ~~Other~~2003 ~~Stock~~thru ~~Common~~April ~~Comprehensive~~15 ~~Accumulated~~Fiscal ~~Less~~Years ~~Note~~Ended ~~Stock~~April ~~Income~~30, ~~(Loss)~~2004 ~~Deficit~~2003 ~~Receivable~~2002 ~~Total~~ ----- ----~~---------~~ ----~~---~~ ~~----------~~CASH ~~-----~~FLOW ~~Balance,~~FROM ~~April~~OPERATING ~~30,~~ACTIVITIES: ~~2000~~Net income (loss) $ 21863,~~889,449~~482 $ --110,448 ($125,~~869~~163,~~845~~046) $Adjustments ~~22,201~~to $reconcile ~~9,041,805~~net ~~Comprehensive~~ income (loss) ~~Net~~to ~~income~~net ~~(loss)~~cash --from --operating (6activities: Depreciation and depletion 206,~~774~~705 306,~~009)~~349 --423,398 (6Amortization of patents 28,~~774~~711 33,~~009)~~951 ~~Foreign~~255,564 ~~currency~~Loss ~~translation~~on ~~adjustment~~sale --of ~~(108~~assets of discontinued operations 248,~~581)~~688 -- -- ~~(108,581)~~Loss on impairment -- --~~--------~~ ~~Total~~3,537,597 ~~comprehensive~~Loss ~~income~~on ~~(loss)~~disposal --of property and equipment -- -- 2,242 Gain on sale of property held for sale -- (619,~~882,590~~503) ~~Change~~-- inLoss ~~subscribed~~on ~~stock,~~sale ~~net~~of --subsidiary -- 17,013 -- ~~(53~~Allowance for doubtful accounts 49,~~332)~~921 ~~(53~~19,~~332)~~250 ~~Common~~3,190 ~~stock~~Other ~~issued~~3,953 ~~422~~13,~~472~~129 --(63,209) --Increase in valuation allowance -- ~~422~~32,~~472~~139 ~~------------~~12,499 ------------ ------------ ------------ ~~------------~~1,401,460 ~~Balance~~512,776 ~~April 30~~(991,765) ~~2001~~Changes ~~22,311,921~~in assets and liabilities: (~~108,581~~Increase) decrease in current assets: Accounts receivable (19282,~~643,854~~055) 89,607 65,183 Inventory (31382,~~131~~402) 2237,~~528~~072 509,~~355~~824 ~~Comprehensive~~Prepaid ~~income~~expenses (~~loss~~100,397) ~~Net~~27,099 ~~income~~ (~~loss~~14,339) Other receivable and investments -- -- (519,~~163,046)~~230 --Increase (~~5,163,046~~decrease) ~~Foreign~~in ~~currency~~current ~~translation~~liabilities: ~~adjustment~~Accounts --payable 40and accrued expenses 338,~~413~~575 (276,175) 55,345 -- --------- ~~40,413~~ ----------- ----------- ~~Total~~CASH ~~comprehensive~~PROVIDED ~~income~~BY (~~loss~~USED IN) OPERATING ACTIVITIES 975,181 590,380 (356,522) -- --------- ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment (543,~~122~~675) (84,~~633~~315) ~~Payment~~(25,562) onProceeds ~~subscribed~~from ~~stock~~sale --of Vitsab 175,000 -- -- ~~6,952~~Proceeds ~~6,952~~from ~~Common~~sale ~~stock~~of ~~issued~~property ~~281~~held for sale -- 54,~~803~~504 -- Equipment under development -- -- ~~281~~28,~~803~~603 Collection of note receivable from property held for sale 75,000 100,000 -- ----------- ------------ ------------ CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 206,325 70,189 3,041 ------------ ----------- ----------- ~~Balance~~CASH FLOW FROM FINANCING ACTIVITIES: Retirement of common stock, ~~April~~net (30,233) ~~2002~~Issuance 22of common stock,~~593~~ net -- 659,~~724~~080 ~~(68~~281,~~168)~~803 Repayment on debt (241,~~806~~020,~~900~~309) (241,~~179~~301,620) (2370,~~305,523~~813) ~~Comprehensive~~Decrease ~~income~~in ~~(loss)~~subscriptions ~~Net~~receivable ~~income~~24,179 -- 6,952 Amounts borrowed under short--term ~~110,448~~debt -- ~~110~~-- 252,~~448~~548 ~~Foreign~~Amounts ~~currency~~borrowed ~~translation~~under ~~adjustment~~long-term debt -- 35302,~~577~~500 315,000 -- --------- ~~35,577~~ ----------- ----------- ~~Total~~CASH ~~comprehensive~~PROVIDED ~~income~~BY (USED IN) FINANCING ACTIVITIES (1,026,363) (340,040) 485,490 -- --------- ----------- ----------- ~~146,025~~EFFECT ~~Common~~OF ~~stock~~EXCHANGE ~~issued~~RATE ~~659~~CHANGES ON CASH (16,~~080~~207) 35,577 40,413 -- -- -- ~~659,080~~ ----- ------- ---- -------- --- NET INCREASE IN CASH 140,904 356,107 172,422 CASH AND CASH EQUIVALENTS, beginning of period 572,149 216,042 43,620 --------- -- ----------- ------------ ~~Balance,~~CASH ~~April~~AND 30CASH EQUIVALENTS, ~~2003~~end $of ~~23,252,804~~period ($ 32713,~~591)~~053 ($~~24,696,452)~~ ~~($ 24~~572,~~179)~~149 ($ 1216,~~500,418)~~042 ============ ============ ============ ~~============~~Supplemental ~~============~~Cash Flow Information Interest paid $ 414,796 $ 154,787 $ 250,262 Income taxes paid $ -- $ -- $ -- Note Receivable resulting from sale of property held for sale $ -- $ 175,000 $ --

See Notes to Consolidated Financial Statements. 19 COX TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS, SALE OF SUBSTANTIALLY ALL ASSETS AND SIGNIFICANT ACCOUNTING POLICIES Business Prior to the Asset Sale (see below), Cox Technologies, Inc. (the "Company") was engaged in the business of producing and distributing transit temperature recording instruments, including electronic "loggers," graphic temperature recorders and visual indicator labels, both in the United States and internationally. Temperature recorders and loggers work by creating a strip chart record of temperature changes over time, or record temperatures electronically according to a preset interval ("logging"). Visual indicator labels are a relatively new technology that employs enzymatic color indicators inside a transparent label to show the amount of temperature exposure of a stored or shipped temperature-sensitive commodity. The visual indicator products are marketed under the trade name Vitsab(R). The Company was involved in the sale and manufacture of both types of transit monitoring products, and has established an international market presence and reputation for reliable temperature recording products. In April 2001, the Company executed an agreement with its Copenhagen distributor ("Purchaser") for an option to purchase all of the shares and assets of the Company's wholly owned subsidiary, Vitsab Sweden, AB ("Vitsab Sweden"). The option agreement gave the Purchaser until November 30, 2001 to exercise the option. On October 18, 2001 the Company entered into a verbal agreement with Purchaser to extend the agreement through February 2002, and thereafter on a month-to-month basis. On April 15, 2002, the Purchaser notified the Company that he was terminating the agreement effective June 15, 2002. During May 2002, the Purchaser rescinded the termination notice and both parties agreed verbally to extend the agreement until September 15, 2002, and then on a month-to-month basis. On December 10, 2002, the Company executed an additional amendment with the Purchaser that extended the option period until March 31, 2003. On March 15, 2003, the Company, under a Share Purchase Agreement, sold all of its shares in Vitsab Sweden to its Copenhagen distributor. The purchase price for all of the Company's shares in Vitsab Sweden was $1.00. The Company recognized a loss of approximately $17,000 that is included in other income (expense). On January 29, 2004 the Company entered into an Asset Purchase Agreement with Rask Holding ApS, to sell its Vitsab division for $175,000 plus assumed liabilities. The transaction was consummated on the same date. Rask Holding acquired all of the assets associated with the Vitsab division except cash and accounts receivable, and assumed all liabilities associated with the Vitsab division except liabilities associated with a raw material purchase from a specific vendor and for taxes resulting from operations of the Vitsab division prior to January 29, 2004. As the Vitsab division was sold prior to the shareholder approval and closing of the Asset Sale to Sensitech, the operations of the Vitsab division have been reflected as discontinued operations for periods prior to the adoption of the liquidation basis of accounting effective April 16, 2004. Revenues and pre-tax losses, respectively, generated by the Vitsab division were $288,385 and ($364,703) for the fiscal period ended April 15, 2004, $281,330 and ($595,325) for fiscal 2003, and $151,957 and ($840,674) for fiscal 2002. Sale of Substantially All of the Assets of the Company On December 12, 2003, the Company entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with Sensitech Inc., a Delaware corporation ("Sensitech") and Cox Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Sensitech, formed for purposes of consummating the Asset Purchase Agreement ("Buyer") to sell substantially all of its assets ("the Asset Sale"). Effective April 16, 2004, the Company and Sensitech completed the Asset Sale. The aggregate consideration received by the Company at the closing was comprised of $10,595,589 in cash. In addition, Sensitech assumed $233,569 of the Company's payables and assumed other liabilities. At closing, Sensitech retained a $250,000 holdback amount in the Asset Sale. The final consideration is subject to adjustment based upon finalization of the Company's balance sheet as of the closing date. Under the terms of the Asset Purchase Agreement, the Company retained certain assets and liabilities in connection with the transaction, including certain cash, receivables, production equipment, office equipment, machines, tools, fixtures, furniture and certain retained liabilities. In connection with the Asset Sale, the Company and Sensitech entered into a Manufacturing Services Agreement under which the Company continued to manufacture the Company's products on behalf of Sensitech for a period from April 16, 2004 through July 2, 2004. 20 The parties completed the Asset Sale following a special meeting of the Company's shareholders on April 15, 2004, whereby the holders of a majority of the Company's common stock approved the Asset Sale and the subsequent liquidation and dissolution of the Company pursuant to the Plan of Complete Liquidation and Dissolution (the "Plan"). Significant Accounting Policies Accrued Cost of Liquidation and Effects of Change to Liquidation Basis Pursuant to the Plan of dissolution approved by shareholders on April 15, 2004, we plan to file articles of dissolution with the North Carolina Secretary of State in the second half of calendar 2004. Since April 15, 2004, the Company has been engaged in contract manufacturing for Sensitech (which services ended on July 2, 2004), selling and converting its non-cash assets, discharging its liabilities and otherwise winding-up the business and affairs in preparation for liquidation. We expect to distribute the remaining assets to our shareholders, all in accordance with the Plan of dissolution. As a result, we changed our basis of accounting to the liquidation basis as of April 16, 2004. The accompanying statements of operations, shareholders' equity and cash flows for the period from May 1, 2003 to April 15, 2004 and for each of the years in the two-year period ended April 30, 2003 have been presented on a going concern basis comparable to prior periods, which assumes the realization of assets and the liquidation of liabilities in the normal course of business. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their anticipated settlement amounts. As a result of the Asset Sale and change to the liquidation basis of accounting, we recorded a $7.27 million increase in net assets. Included in the adjustment to net assets recorded in connection with the change from the going-concern to the liquidation basis of accounting, we recorded $0.63 million of accrued costs of liquidation representing the estimate of the costs to be incurred during dissolution; however, actual costs could vary from those estimates. Distributions ultimately made to shareholders upon liquidation will differ from the "net assets in liquidation" recorded in the accompanying Statement of Net Assets in Liquidation as a result of future changes in estimated investment income, settlement of liabilities and obligations and final costs of liquidation. The components of the effect of the change to the liquidation basis of accounting are summarized below. Gain on Asset Sale $8,374,000 Costs of liquidation and dissolution, including losses to be incurred winding down operations, impairment of remaining assets, and accrued liquidation costs (814,199) Provision for federal and state income taxes (292,000) ---------- Net effect of change to liquidation basis of accounting $7,267,801 ========== At April 30, 2004, the following represent the estimated costs of liquidation: Officer compensation and benefits $ 131,000 Legal, audit and tax services 124,500 Insurance 212,000 Other costs, including utilities, rent, supplies and miscellaneous expenses 162,631 ------- Total $ 630,131 ========= Stock-based Compensation The Company elected to follow Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations in accounting for its employee stock options. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." This statement defines a fair value method of 21 accounting for stock options or similar equity instruments. SFAS No. 123 permits companies to continue to account for stock-based compensation awards under APB No. 25, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share as if the Company had adopted the new method of accounting. SFAS No. 123 has been amended by Financial Accounting Standards Board pronouncement number 148 ("FASB No. 148), "Accounting for Stock-based Compensation - Transition and Disclosure". FASB No. 148 requires prominent disclosure in the annual and quarterly statements of the Company on stock-based compensation. The Company has two stock option plans, the Stock Option Agreements By and Between Cox Technologies, Inc. and Certain Executives ("Executive Plan") and the 2000 Stock Incentive Plan ("2000 Plan"). In accordance with the Executive Plan, options to purchase an aggregate of up to 6,652,500 shares of the Company's Common Stock were granted to certain executives of the Company. Options generally were granted at the fair market value of the Company's Common Stock determined on the date of the grant. Certain options were granted at an exercise price below fair market value and $600,000 of compensation expense was charged to operations in fiscal 2000. Options from the Executive Plan are exercisable on various dates and expire on various dates. In accordance with the 2000 Plan, up to 8,000,000 shares of the Company's Common Stock can be issued through the use of stock-based incentives to employees, consultants and non-employee members of the Board of Directors. The exercise price of options granted through the 2000 Plan cannot be less than 85% of the fair market value of the Company's Common Stock on the date of the grant. All outstanding options have been granted at the fair market value; therefore, no compensation expense has been recorded. Options from the 2000 Plan are exercisable on various dates from the date of the grant and expire on various dates. Exceptions to the exercise date for both plans are allowed upon the retirement, disability or death of a participant. An exception is also allowed upon a change in control as defined in both plans. Options granted, exercised and canceled under both plans for the three years ended April 30, 2004 were as follows: Options Weighted-Average Outstanding Exercise Price ----------- -------------- April 30, 2001 7,910,000 $ .63 Granted 3,742,500 $ .12 Exercised -- -- Canceled (120,000) $ .38 ---------- April 30, 2002 11,532,500 $ .45 Granted 777,500 $ .11 Exercised -- -- Canceled (439,500) $ .19 ---------- April 30, 2003 11,870,500 $ .45 Granted -- -- Exercised -- -- Canceled (981,500) $ .29 ---------- April 30, 2004 10,889,000 $ .45 ========== The Company applied APB No. 25 in accounting for both Plans. Accordingly, compensation cost is determined using the intrinsic value method under APB No. 25. Had compensation cost for both Plans been determined consistent with the fair value method for compensation expense encouraged under SFAS No. 123, the Company's net income and earnings per share (EPS) would have been the pro forma amounts shown below for the fiscal period ended April 15th, 2004 and the fiscal years ended April 30, 2003 and 2002. For purposes of pro forma disclosures, the estimated fair value of options is recorded in its entirety in the year granted. May 1, 2003 April 30, thru April 15, -------------------------- 2004 2003 2002 ---- ---- ---- Net income (loss) As reported $863,482 $110,448 ($5,163,046) Net income (loss) Pro forma $842,378 $ 95,587 ($5,191,687) Basic and diluted EPS As reported $.02 $.00 ($.20) Basic and diluted EPS Pro forma $.02 $.00 ($.20) 22 For purposes of pro forma disclosure, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for nonqualified stock option grants in the fiscal period from May 1, 2003 through April 15, 2004 and fiscal 2003 and 2002, respectively (there were no options granted in the fiscal period May 1, 2003 to April 15, 2004): 2003 2002 ---- ---- Risk free interest rate(s) 4.9% to 5.3% 4.8% to 6.0% Volatility factor(s) 285% to 304% 224% to 249% Expected life 7 to 10 years 7 to 10 years The weighted average fair value of nonqualified stock options granted during fiscal years 2003 and 2002 was $.11, and $.12, respectively. No options were granted during fiscal year 2004. Options outstanding at April 15, 2004 had exercise prices ranging from $.08 to $1.25, and a weighted average remaining contractual life of 8.2 years. The number of shares and weighted average exercise price of those shares exercisable at the end of each fiscal year was 5,007,500 shares at $.61 for 2003, and 3,733,500 shares at $.70 for 2002. The total number of shares exercisable and the weighted average exercise price at April 15, 2004 was 5,502,000 shares at $.54. As a result of the Asset Sale and the subsequent acceleration of vesting of in-the-money options (options with an exercise price of less than $.16 per share) there were 2,490,000 options exercisable at April 30, 2004 with an average exercise price of $.11 per share. The Asset Sale constitutes a change in control as defined in the two stock option plans. As provided by the plans, the Board of Directors elected to accelerate the vesting of certain options. Options to purchase 1,002,000 shares at a weighted average exercise price of $0.11 per share were accelerated. The estimated expense associated with the accelerated options of $152,400 is included in the effect of the change to the liquidation basis of accounting. Restricted stock was issued out of the 2000 Plan to consultants and employees in lieu of cash payments totaling 30,000 and 723,028 shares, respectively for fiscal 2003 and 2002. At April 30, 2003, there were 2,957,972 shares reserved for issuance under the 2000 Plan. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Cox Technologies, Inc. (the Company) and its wholly owned subsidiary, Vitsab Sweden, through March 15, 2003, the date it was sold, and Cox Recorders Australia, Pty. Ltd., a 95% owned Australian distribution company through April 16, 2004, the date it was sold as part of the Asset Sale. Vitsab Sweden carried out development, production and marketing activities that were a part of the Vitsab(R) operation. Such activities were not considered a component of an entity as defined in SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". In July 2001 all domestic subsidiaries were merged into the parent company, Cox Technologies, Inc. All material intercompany transactions and balances among the Company and its subsidiary companies have been eliminated in the accompanying consolidated financial statements. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand and investments with a maturity of three months or less. Accounts Receivable Until the Asset Sale, accounts receivable consisted of trade accounts receivable and were stated at cost less an allowance for doubtful accounts. Credit was extended to customers after an evaluation of the customer's financial condition and generally collateral was not required. Management's determination of the allowance for doubtful accounts was based on an evaluation of the accounts receivable, past experience, current economic conditions and other risks inherent in the accounts receivable portfolio. The balance in the allowance for doubtful accounts was $45,750 at April 30, 2003. Depreciation and Amortization Depreciation for property and equipment was provided on a combination of straight-line and accelerated cost recovery methods over the respective estimated lives over a range of five to twenty years. 23 Inventory Prior to the Asset Sale, inventories were stated at the lower of cost determined by the FIFO (first-in, first-out) method or market. Inventory consists primarily of raw material, work-in-process and finished goods related to the transit temperature recording segment. The Company established a $50,000 reserve for slow moving or obsolete inventory in fiscal 2003. Goodwill Goodwill represented the excess of the cost of companies acquired over the fair value of their net assets at dates of acquisition and was being amortized on the straight-line method over a range of six to seventeen years. Goodwill was written off as of April 30, 2002, therefore no amortization expense was recognized for 2003 (see Note 8 to the consolidated financial statements). Amortization expense for goodwill charged to operations totaled $220,094 and $200,910 for fiscal 2002 and 2001, respectively. As goodwill was written off as of April 30, 2002, the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" had no effect on goodwill. Patents The Company owned a number of patents directly related to and important to the Company's business. The Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", effective May 1, 2002. Under SFAS No. 142, intangible assets that have finite useful lives are amortized over their estimated useful lives, but without the constraint of the 40-year maximum life required by APB Opinion No. 17. Intangible assets with finite useful lives were reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires the Company to evaluate the recoverability of long-lived assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The adoption of the provisions of SFAS 142 did not have a significant impact on the Company's financial position or results of operations. Amortization expense for patents charged to operations totaled $28,711, $33,951and $35,470 for the fiscal period from May 1, 2003 through April 15, 2004 and fiscal 2003 and 2002, respectively. Long-lived Assets Long-lived assets held and used by the Company were reviewed for impairment whenever changes in circumstances indicate that the carrying value of the asset may not be recoverable. Income Taxes Prior to the Asset Sale, the Company accounts for income taxes pursuant to the Statement of Financial Accounting Standards (SFAS) No. 109, which requires a liability method of accounting for income taxes. Under this method, the deferred tax liability represents the tax effect of temporary differences between the financial statement and tax bases of assets and liabilities and is measured using current tax rates. Valuation allowances were established when management believed it was more likely than not that deferred tax assets would not be realized. Revenue Recognition The Company recognized revenue when products were shipped, net of estimated allowance for product returns. Fair Value of Financial Instruments Financial instruments include cash and cash equivalents, accounts receivable, notes receivable, accounts payable, accrued expenses, short-term debt and long-term debt. The amounts reported for financial instruments other than long-term debt are considered to be reasonable approximations of their fair values due to their short-term nature. Based on borrowing rates currently available to the Company for loans with similar terms and maturities, the fair value of the Company's long-term debt approximates the carrying value. Comprehensive Income (Loss) The effects of exchange rate changes on the translation of the financial statements of Cox Recorders Australia from Australian dollars to U.S. dollars are included in Other Comprehensive Income.The Company recorded foreign currency translation adjustments in the period from May 1, 2003 to April 15, 2004 and fiscal years 2003 and 2002 of ($10,438), $35,577 and $40,413, respectively. 24 Research and Development Costs The costs of research and development activities are charged to operations as incurred. Basic and Diluted Earnings Per Share Earnings per share have been calculated in conformity with SFAS No. 128, "Earnings Per Share." The Company has a complex capital structure with significant potential common shares. However, basic earnings per common share are based on the weighted average number of common shares outstanding during each year. Potential common shares from the Senior Subordinated Convertible Promissory Note with Technology Investors, LLC ("TI") are anti-dilutive for fiscal 2004, 2003 and 2002, and potential common shares from stock options are anti-dilutive for 2003 and 2002, and as such have been excluded for the earnings per share calculations. For the period from May 1, 2003 to April 15, 2004, the dilutive effect of stock options with an exercise price less than the average market price of the Company's stock have been reflected in the computation of diluted earnings per share. The earnings per share calculation is summarized below.

~~Fiscal~~Period ~~Years~~from ~~Ended~~May ~~April 30~~1, ~~2003~~Fiscal ~~2002~~Year ~~2001~~ended ~~----~~April ~~---- ---- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ 110~~30,~~448~~ ~~($5,163,046)~~2003 ~~($6,774,009) Adjustments~~ to ~~reconcile~~April ~~net income (loss) to net cash from operating activities: Depreciation and depletion 306~~15,~~349~~ ~~423,398 513,820 Amortization of patents 33,951 255,564 219,303 Loss on impairment~~ -- ~~3,537,597 3,062,196 Loss on disposal of property and equipment~~ -- ~~2,242 22,628 Gain on sale of property held for sale (19,503)~~ -- -- ~~Loss on sale of subsidiary 17,013~~ -- -- ~~Allowance for doubtful accounts 19,250 3,190 33,286 Other 13,131 (63,209) 21,783 Increase in valuation allowance 32,139 12,499 211,787~~ ----------- ----~~-------~~ ~~-----------~~2004 ~~512,778~~2003 ~~(991,765)~~2002 (2,689,206) Changes in assets and liabilities: (Increase) decrease in current assets: Accounts receivable 89,607 65,183 483,425 Inventory 237,072 509,824 (303,551) Prepaid expenses 27,099 (14,339) (27,380) Other receivable and investments -- ~~19,230 8,586 Increase (decrease) in current liabilities: Accounts payable and accrued expenses (276,175) 55,345 (329,673)~~ --~~---------~~ ----~~-------~~ ----~~-------~~ ~~CASH~~Basic ~~PROVIDED~~Income BYfrom ~~(USED~~continuing ~~IN)~~operations ~~OPERATING ACTIVITIES 590~~$1,~~381~~476,873 ~~(356~~$705,~~522)~~773 $(24,~~857~~322,~~799~~370) ~~-----------~~Weighted ~~-----------~~average ~~-----------~~shares ~~CASH~~outstanding ~~FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment (84~~38,~~315) (25~~293,~~562)~~667 ~~(81~~27,~~039) Proceeds from sale of property held for sale 54~~907,~~504~~224 ~~-- -- Equipment under development -- 28~~25,~~603 (689~~360,~~176)~~071 ~~Collection~~Basic ofearnings ~~note~~per ~~receivable~~share ~~from~~$0.04 ~~property~~$0.02 ~~held for sale 100,000 -- -- ----------- ----------- ----------- CASH PROVIDED BY~~ $(~~USED IN~~0.17) ~~INVESTING~~Diluted ~~ACTIVITIES~~Income ~~70,189~~from ~~3,041~~continuing ~~(770,215)~~operations ~~----------- ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock, net 659,080 281,803 422,472 Repayment on debt (~~$1,~~301~~476,~~620)~~873 ~~(370~~$705,~~813)~~773 $(~~1,273,669) Subscriptions receivable -- 6,952~~ 4,~~768 Amounts borrowed under short-term debt -- 252~~322,~~548 1,211,452 Amounts borrowed under long-term debt 302,500 315,000 1,190,000 ----------- ----------- ----------- CASH PROVIDED BY (USED IN~~370) ~~FINANCING~~Weighted ~~ACTIVITIES~~average ~~(340,040)~~shares ~~485,490~~outstanding 138,~~555~~293,~~023~~667 ~~----------- ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 35~~27,~~577 40~~907,~~413~~224 ~~(108~~25,~~581) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH 356~~360,~~107~~071 ~~172,422~~Dilutive ~~(2,181,572)~~effect ~~CASH AND CASH EQUIVALENTS, beginning~~ of ~~period~~stock ~~216,042~~options 43393,~~620~~281 ~~2,225,192~~Average ~~-----------~~diluted ~~-----------~~shares ~~-----------~~outstanding ~~CASH AND CASH EQUIVALENTS~~38, ~~end of period $ 572~~686,~~149~~948 ~~$ 216~~27,~~042 $ 43~~907,~~620~~224 ~~=========== =========== =========== Supplemental Cash Flow Information Interest paid $ 154~~25,~~787 $ 250~~360,~~262~~071 $Diluted ~~246,442~~earnings ~~Income~~per ~~taxes~~share ~~paid~~ $0.04 -- $0.02 -- $ ~~-- Note Receivable resulting from sale of property held for sale $ 175,000 $ -- $ --~~(0.17)

Reclassifications Certain amounts previously reported on the consolidated financial statements have been reclassified to conform to the current period's presentation. Common stock and paid in capital have been combined in their presentation on the consolidated balance sheet and on the consolidated statements of changes in stockholder's equity (deficit). Concentrations of Credit Risk Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents and, until the Asset Sale, accounts receivable. Credit risk of accounts receivable was generally diversified due to the large number of entities comprising the customer base. At times, cash balances at financial institutions are in excess of FDIC insurance coverage. The cash balances are maintained at financial institutions with high credit - quality ratings and the Company believes no significant risk of loss exists with respect to those balances. 25 Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions. These affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 are required to be applied starting with fiscal years beginning after June 15, 2002. The Company adopted the provisions of SFAS No. 143 effective May 1, 2003, and the adoption of the provisions of SFAS No. 143 did not have a significant effect on its financial position or results of operations. SFAS No. 150 addresses the accounting for certain financial instruments with characteristics of both liabilities and equity, and is effective for interim periods beginning after June 15, 2003. The adoption of the provisions of SFAS No. 150 did not have a significant effect on its financial position or results of operations. 2. INVENTORIES Inventory at April 30, 2003 consists of the following: 2003 ---- Raw materials $ 328,744 Work-in-process 103,059 Finished goods 800,467 ------------ 1,232,270 Less reserve 50,000 ------------ 1,182,270 Less inventory of discontinued operations 103,304 ------------ Total $ 1,078,966 ============ 3. PROPERTY AND EQUIPMENT The following is a summary of property and equipment at cost, by major classification, less accumulated depreciation at April 30, 2004 and April 30, 2003: 2004 2003 ---- ---- Manufacturing Property and Equipment ------------------------------------ Tooling $ 394,339 $ 518,840 Machinery and equipment 399,900 1,567,752 Office furniture and equipment 71,913 175,780 Leasehold improvements 276,958 300,665 ----------- ----------- 1,143,110 2,563,037 Less: Accumulated depreciation 979,854 2,057,349 ----------- ----------- Total manufacturing property and equipment 163,256 505,688 Equipment, net of accumulated depreciation of discontinued operations (282,109) Impairment for liquidation (126,545) -- ----------- ----------- Total property and equipment $ 36,711 $ 223,579 =========== =========== Property and equipment is included in other assets in the statement of net assets in liquidation. 4. PATENTS Patents were being amortized over their estimated useful lives in accordance with SFAS No. 142. The carrying value and amortization of patents are as follows: As of April 30, 2003 -------------------- Gross Carrying Accumulated Value Amortization ----- ------------ Amortized intangible asset Patents $ 206,597 $ 91,752 Aggregate amortization expense Period from May 1, 2003 to April 15, 2004 $28,711 2003 $33,951 26 5. DEBT Prior to April 30, 2004, the Company repaid all long-term debt. The following is a summary of long-term debt obligations and lease contracts payable at April 30, 2003: 2003 10% Senior Subordinated Convertible Promissory Note due March 2005 (from related party, see Note 6) (principal amount of the note and accrued interest are convertible into the Company's no par common stock at a conversion price of $1.25 per share) $3,327,500 Note payable to bank, secured by accounts receivable and inventory. See details set forth in the narrative below. 1,184,999 Unsecured note payable to a vendor in 24 monthly installments of $2,000. 12,000 Capital leases secured by equipment, expiring in various years, with terms ranging from 36 months to 60 months, due in monthly installments ranging from $496 to $5,467 196,172 ------- 4,720,671 Less: Current maturities (including $142,851 related to discontinued operations) 530,778 ------- Total long-term debt $ 4,189,893 =========== In March 2000, the Company entered into an agreement with TI whereby the Company issued to TI a 10% subordinated convertible promissory note in the amount of $2,500,000 (the "TI Note"), the entire principal and interest of which are due on March 10, 2005. Alternatively, the principal amount of the TI Note and interest accrued thereon may be converted, at the option of holder, into shares of the Company's Common Stock at a conversion price of $1.25 per share. As of April 30, 2003, the principal and accrued interest of $3,327,500 would be converted into 2,662,000 shares of the Company's Common Stock. Mr. Fletcher and Mr. Reid serve as the sole managers of TI and share voting and dispositions power with respect to the Common Stock issuable upon conversion of the TI Note. Prior to the Asset Sale, the Company's cash flow from operations was not adequate to retire the TI Note, and it was unlikely that cash flow would increase in an amount sufficient for the Company to meet its obligations under the TI Note when the principal and accrued interest become due on March 10, 2005. Upon completion of the Asset Sale, the Company paid TI $3,700,362 and retired the TI Note. On July 13, 2000 the Company entered into a five-year term loan ("Term Loan") with its primary lender, Centura in the amount of $1,190,000. Initial principal payments of $9,920, in addition to accrued interest, were due monthly from August 2, 2000 to July 2, 2001. The rate of interest on the Term Loan was Centura's prime rate plus .625% per annum. Thereafter, principal payments of $22,313, in addition to accrued interest, were due monthly until July 13, 2005. On July 13, 2000 the Company also established a revolving line of credit with Centura for working capital in the amount of up to $1,000,000 ("Revolving Loan"), subject to a maximum percentage of eligible trade accounts receivable and inventories. The rate of interest on the Revolving Loan was Centura's prime rate plus .25% per annum and was due monthly beginning in August 2000. The principal of the Revolving Loan was due on September 2, 2001. 27 On November 29, 2001, the Company executed (a) an amendment to the original Revolving Loan agreement, (b) a new security agreement and (c) a note modification agreement for the Term Note and for the Revolving Loan that were effective October 30, 2001 (collectively "Modified Agreements"). These Modified Agreements extended the maturity date of the Revolving Loan to January 31, 2002 and changed the rate that interest will accrue on the Term Note and the Revolving Loan from prime rate plus .625% per annum and prime rate plus .25% per annum, respectively, to 30-day LIBOR plus 500 basis points per annum. These Modified Agreements also stated that Centura would forbear exercise of its rights and remedies under the Modified Agreements until January 31, 2002, so long as the Company continued to pay the principal and interest on the Term Note and pay interest on the Revolving Loan. On February 21, 2002 the Company executed documents with Centura, effective January 31, 2002, that amended the Modified Agreements to extend the maturity dates of the Revolving Loan and the Term Loan to July 31, 2002. As a result, the full balance of theses loans was classified as current portion of long-term debt at April 30, 2002. The Company borrowed $1,000,000 related to this line of credit at April 30, 2002. On June 7, 2002, the Company paid $200,000 down on the amount outstanding on this line of credit, leaving a balance of $800,000. Centura also agreed to finance the lease of two major pieces of production equipment related to the manufacturing of the Vitsab(R) product. The Company had advanced approximately $842,000 in progress payments on the cost of both pieces of equipment, of which $464,000 had been advanced directly by Centura. Through January 31, 2002, the Company had accrued and paid approximately $57,000 of interest related to the progress payments made by Centura on behalf of the Company. In November 2001, the Company met with representatives of the engineering firm that designed, and was in the later stages of constructing, the new production equipment for manufacturing the Vitsab(R) product. In that meeting, the engineering firm stated it was still having technical problems with the production equipment. These problems were preventing the engineering firm from delivering a machine that would meet the Company's production requirements at the agreed upon fees. It was agreed by both parties that the design and construction of the new production equipment would be put on hold indefinitely. It was also agreed that the Company could have possession and/or title to the equipment at its current state of development. As a result of the indefinite delay in the design and construction of the equipment, the Company and Centura agreed to execute documents on February 21, 2002 that converted the $464,000 advanced under the lease by Centura to a five-year note payable ("Lease Loan"), effective January 31, 2002. The executed documents also incorporated the note into the Modified Agreements. The interest rate on the note was the 30-day LIBOR plus 500 basis points per annum, with monthly payments of $7,700 plus accrued interest. The maturity date of the note was July 31, 2002. On July 31, 2002, the Company executed documents with Centura that extended the maturity date of the Term Loan, the Revolving Loan and the Lease Loan ("Loans") to October 31, 2002 and decreased the amount available on the Revolving Loan from $1,000,000 to the then outstanding balance of $800,000. On December 1, 2002, the Company executed documents with Centura that extended the maturity date of the Loans to March 15, 2003. Under this new arrangement, the Company continued paying the current monthly principal payments plus accrued interest on the Loans during this forbearance period. This extension gave the Company additional time to procure additional debt or equity funding to allow the Company to decrease the amount owed to Centura by an additional $450,000 (the "Loan Reduction"). The Company was required to reduce the amount of principal outstanding under the Loans to $1,215,000, including the Loan Reduction, by March 15, 2003. The Loan Reduction was in addition to the Company's normal monthly principal payments due on the Loans and the $91,000 payment that the Company received on January 30, 2003 from the purchaser of the oilfield subleases. On March 19, 2003, the Company executed with Centura: (a) an amendment to the loan agreement, (b) a promissory note and (c) a security agreement. The amendment to the loan agreement required among other considerations that the outstanding Term Loan, Revolving Loan and Lease Loan should not exceed a combined balance of $1,214,999. Also, under this agreement the aforementioned notes would be amended and restated to one promissory note. Principal payments 28 on the note were $30,000 plus accrued interest beginning April 15, 2003 and continuing each month thereafter through August 19, 2006. The interest rate on the outstanding principal is calculated at the bank's 30-day LIBOR base rate plus 4% per annum (5.32% on April 30, 2003). On the first day of the month after the principal balance was paid equal to or less than $800,000, the interest rate will decrease to the bank's 30-day LIBOR base rate plus 3% per annum provided there is no event of default. Effective October 1, 2003, the Company was required to submit a monthly borrowing base calculation in support of the loan balance and would have been required to pay a sufficient principal payment to reduce the loan balance to the amount supported by such borrowing base. The borrowing base was defined as the sum of 80% of the eligible accounts receivable and 35% of the eligible inventory of the Company. 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 were 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 would have matured. Also, beginning on the effective date of the modification, the interest rate on the outstanding principal was calculated at the bank's 30-day LIBOR base rate plus 2.5% per annum. On March 31, 2004, the Company paid Centura $538,566 and retired the remaining balance of the debt. Capital leases consisted primarily of manufacturing property and equipment with a capitalized cost of approximately $672,000 and accumulated depreciation of approximately $537,000 as of April 30, 2003. In anticipation of the Asset Sale, the Company in January and February 2004 paid a total of $88,071 to retire all indebtedness associated with capitalized leases. 6. 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 certain executive officer 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 15,594,966 shares of the Company's Common Stock, or approximately 38% of the Company's issued and outstanding common stock. These figures include the 2,662,000 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. A more detailed description of this transaction can be read in the Proxy Statement, dated February 6, 2003, which was mailed to shareholders of record on January 17, 2003. In March 2000, the Company issued the TI Note to TI. The balance of the note and accumulated interest amounting to $3,700,362 were repaid in April 2004 with a portion of the proceeds from the Asset Sale. 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. 29 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, in which 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. 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. During fiscal 2004, Mr. Fletcher and Mr. Reid each received $30,000 in payments from the bonus plan and an accrual of $10,000 each has been recorded for future payment as of April 15, 2004. For the period starting May 1, 2003 through April 15, 2004, Mr. Fletcher and Mr. Reid were each paid at an annual rate of $120,000 and effective April 16, 2004, their individual rate of pay was changed to an annual rate of $90,000. Mr. Fletcher and Mr. Reid each received $118,846 of salary compensation during fiscal 2004. As a result of the Asset Sale, options granted to Mr. Fletcher and Mr. Reid equaling 200,000 common shares each that would vest and be exercisable between March 08, 2005 and September 9, 2007 were accelerated and became exercisable at the date of the Asset Sale closing. The total exercisable options held by Mr. Fletcher and Mr. Reid at April 15, 2004 equal 600,000 common shares each. The exercise price of the options is $.11 per share; therefore, both Mr. Fletcher and Mr. Reid will be entitled to receive the difference between the exercise price and the amount of the liquidation proceeds paid per common share. Based on a distribution rate of $.16 per share both Mr. Fletcher and Mr. Reid would receive an in-the-money option payment of $30,000. 7. RETIREMENT PLAN The Company maintained a 401(k) plan that covered substantially all employees, including subsidiary companies. Effective January 1, 2002, the Company elected to discontinue matching contributions. Prior to that date, the Company matched 50% of employee contributions up to 4% of gross earnings. The Company's matching contributions amounted to approximately $15,400 for fiscal 2002. The Company is in the process of terminating the plan and distributing the assets to the participants. 30 8. IMPAIRMENT OF ASSETS During fiscal 2002 goodwill and non-depreciable assets were determined to be impaired and these amounts were recognized as a loss on impairment of $3,537,597 in the fourth quarter of fiscal 2002. Goodwill originated primarily from the acquisition of Vitsab, AB ("Vitsab") (see Note 13 to the consolidated financial statements) during fiscal 1999. At April 30, 2002 the Company evaluated the fair value of goodwill, which was determined by reference to the present value of estimated future cash inflows and a significant change in technology to get the product to market. Due to the significant change in technology and projected future cash flows for this product, management determined goodwill from the Vitsab(R) product was impaired and recognized an impairment loss of $2,695,689 in the fourth quarter of fiscal 2002. The Company invested funds to construct machinery for the high-speed production of the Vitsab(R) product. The machinery was not completed and was not expected to produce any positive future cash flows and had a minimal scrap value, management determined the equipment was impaired and recognized a loss on impairment of $841,908 in the fourth quarter of fiscal 2002. 9. INCOME TAXES The reconciliation of income tax computed at federal and state statutory rates to the income tax provision is as follows for the fiscal periods ended April 15, 2004, April 30, 2003 and April 30, 2002. 2004 2003 2002 ---- ---- ---- Income (loss) before income taxes $ 863,482 $ 110,448 ($5,163,046) Statutory federal income tax rate: 34% 34% 34% Expected federal income tax expense at statutory rate 293,584 37,552 -- Utilization of deferred tax asset (293,584) (37,552) -- ----------- ----------- ----------- Provision for income taxes $ -- $ -- $ -- =========== =========== =========== The following is a summary of the significant components of the Company's deferred tax assets for the fiscal periods ended April 15, 2004, April 30, 2003 and April 30, 2002 2004 2003 2002 ---- ---- ---- Deferred tax assets: Net operating loss carryforwards $ 3,460,000 $ 3,754,000 $ 2,978,000 Impairment on long-lived assets 345,000 345,000 1,600,000 Other 168,000 168,000 322,000 ----------- ----------- ----------- 3,973,000 4,267,000 4,900,000 Less: Valuation allowance (3,973,000) 4,267,000 4,900,000 ----------- ----------- ----------- Net deferred tax asset $ -- $ -- $ -- =========== =========== =========== The valuation allowance primarily represents the tax benefits of certain operating loss carry forwards and other deferred tax assets that may expire without being utilized. During fiscal 2004, 2003 and 2002, the valuation allowance decreased $3,269,000, $633,000 and $494,000, respectively. During the liquidation period of April 16, 2004 through April 30, 2004, the Company recognized approximately $292,000 of federal and state income taxes primarily due to the gain on the sale of its assets to Sensitech, Inc., which amounts are included in the effect of the adoption of the liquidation basis of accounting. 31 10. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table presents certain financial information for each quarter during the fiscal periods ended April 15, 2004, and April 30, 2003. 2004 ------------------------------------------------------- Fourth Third Second (a) First (a) ------------------------------------------------------- Sales $ 2,324,141 $ 2,481,510 $ 2,631,310 $ 2,333,551 Income from operations 23,661 589,555 671,142 518,418 Net income 22,131 145,308 368,672 327,325 Basic and diluted net income (loss) per average common share $ .00 $ .00 $ .01 $ .01 2003(a) ------------------------------------------------------- Fourth Third Second First ------------------------------------------------------- Sales $ 2,104,784 $ 2,212,601 $ 1,964,391 $ 2,210,747 Income (loss) from operations 99,437 493,274 39,687 377,786 Net income (loss) 80,025 158,585 (209,842) 81,680 Basic and diluted net income (loss) per average common share .00 $ .01 ($ .01) $ .00 (a) Restated to reflect the sale of the Vitsab division as discontinued operations. 11. SEGMENT INFORMATION Information on the enterprise-wide operations (including the discontinued Vitsab operations) by domestic and international is presented in the following table. Domestic International Total -------- ------------- ----- Fiscal Period Ended April 15, 2004 Revenues $6,787,285 $3,271,612 $10,058,897 Net income $805,608 $87,874 $863,482 Identifiable assets $163,255 $10,541 $173,796 Fiscal Years Ended April 30, ---------------------------- Revenues: 2003 $6,897,095 $1,876,757 $8,773,852 2002 $5,719,605 $2,907,498 $8,627,103 Net income (loss): 2003 $522,755 ($362,307) $160,448 2002 ($3,456,703) ($1,706,343) ($5,163,046) Identifiable assets: 2003 $ 468,314 $37,375 $ 505,689 2002 $ 993,738 $70,890 $ 1,064,628 32 12. LEASES The Company leased its corporate office, sales office and manufacturing facilities under non-cancelable operating leases. Rental expense for fiscal 2004, 2003 and 2002 was $116,944, $113,291,and $110,578 respectively. At April 30, 2004, future minimum rental payments for non-cancelable operating leases are approximately $22,432 for fiscal 2005. 13. BUSINESS COMBINATION 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 from Vitsag all of the outstanding shares of Vitsab, a corporation formed under the laws of the Country of Sweden, and a wholly owned subsidiary of Vitsag. The acquisition was accomplished by (i) the issuance to Vitsag of 3,375,734 shares of the Company's unregistered common stock and 950,000 shares of the common stock of Vitsab USA, Inc. ("Vitsab USA"), a wholly owned subsidiary of the Company in the formation stage with 4,750,000 issued shares of common stock outstanding, and (ii) the assumption by the Company of certain debt owed by Vitsab to an unrelated company. In an agreement dated July 18, 1999, the Company purchased its minority interest in Vitsab USA through the issuance of 527,458 shares of the Company's unregistered common stock. The transaction has been accounted for as a purchase and the results of Vitsab's operations have been included in the accompanying consolidated financial statements since the date of the acquisition, which was June 30, 1998. The cost of the acquired enterprise was approximately $2,600,000, including debt assumed of approximately $1,750,000. At acquisition, the fair value of liabilities assumed exceeded the fair value of assets acquired, and the excess plus the cost of acquisition were recorded as goodwill. During fiscal 2000, the Company adjusted the initial purchase price allocation that resulted in additional goodwill of approximately $469,000. Goodwill was being amortized over the average estimated useful life of 16 years. The Company determined goodwill to be impaired and recognized an impairment loss of $2,695,689 in the fourth quarter of fiscal 2002. As of March 15, 2003 , the Company sold all of its shares in Vitsab Sweden, the successor to Vitsab, to its Copenpenhagen distributor. See Note 1 for further detail. 14. CONTINGENCIES From time to time, we have been subject to pending or threatened litigation. We have been advised that certain parties may exert claims related to our previous business activities and current dissolution efforts. We believe these claims are without merit and intend to defend these claims vigorously. We currently believe that these matters will not have a material adverse effect on our financial position. However, the results of legal proceedings cannot be predicted with certainty. Pending or future litigation could be costly, could cause the diversion of management's attention and could upon resolution, have a material adverse affect on the net assets available for distribution. 33 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Cox Technologies, Inc. Belmont, North Carolina We have audited the accompanying consolidated statement of net assets in liquidation of Cox Technologies, Inc. and subsidiaries as of April 30, 2004, and the related statements of changes in net assets in liquidation and stockholders' equity for the period from April 16, 2004 to April 30, 2004. We have also audited the consolidated balance sheet as of April 30, 2003 and the related consolidated statements of income, changes in stockholders' equity (deficit) and comprehensive income, and cash flows for the period from May 1, 2003 to April 15, 2004 and for each of the years in the two-year period ended April 30, 2003. 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 standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit 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. As described in Note 1 to the consolidated financial statements, the stockholders of Cox Technologies, Inc. approved an asset sale and a plan of complete liquidation and dissolution on April 15, 2004, and the Company completed the asset sale and commenced liquidation shortly thereafter. As a result, the Company has changed its basis of accounting for periods subsequent to April 15, 2004, from the going concern basis to the liquidation basis. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation of Cox Technologies, Inc. and subsidiaries as of April 30, 2004, the changes in net assets in liquidation for the period from April 16, 2004 to April 30, 2004, their financial position as of April 30, 2003, and the results of their operations and cash flows for the period from May 1, 2003 to April 15, 2004 and for each of the years in the two-year period ended April 30, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Cherry, Bekaert & Holland, L.L.P. Cherry, Bekaert & Holland, L.L.P. Gastonia, North Carolina July 30, 2004 34 Supplementary Data The information for this item is contained in Note 10 entitled "SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) on page 32 of this annual report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. INTERNAL CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, an evaluation of the effectiveness of the Company's disclosure controls and procedures was carried out under the supervision and with the participation of Brian D. Fletcher and Kurt C. Reid, the Company's Co-Chief Executive Officers, and John R. Stewart, the Company's Chief Financial Officer. Based upon that evaluation, the Chief Executive Officers and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. (b) Changes to Internal Controls. There has been no change in our internal controls over financial reporting that occurred during our fiscal fourth quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. Since the Asset Sale on April 16, 2004, we have been in the process of winding down our operations and liquidating the Company, including significantly reducing our workforce. As of August 13, 2004, the Company has four employees. As a result of the decrease in workforce, the Company has limitations on its ability to provide adequate segregation of duties and employ other common internal control practices. While the activities of the Company are being closely monitored by the Board of Directors, our inability to provide adequate segregation of duties and other mitigating controls may be considered a material weakness in internal controls over financial reporting. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors Set forth below is a table showing the names, ages, terms and positions of the three remaining directors: Director Term Name Age Since Expires Position ------------------ --- -------- ------- -------------------------------------- DR. JAMES L. COX 59 1995 2004 Chairman, President and Chief Technology Officer of the Company BRIAN D. FLETCHER 42 2000 2004 Director, Co-Chief Executive Officer and Director of Marketing of the Company KURT C. REID 44 2000 2004 Director, Co-Chief Executive Officer and Chief Operating Officer of the Company Biography of Directors DR. JAMES L. COX has been President and Chief Technology Officer of the Company since April 1, 2003. Prior to holding these offices, Dr. Cox served as the President and Chief Executive Officer of the Company since November 1997. Dr. Cox served as President and Chief Operating Officer from August 1995 to November 1997. Dr. Cox has been a director of the Company since 1995 and since November 1998, he has served as Chairman of the Board of Directors. Dr. Cox 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. BRIAN D. FLETCHER has been Co-Chief Executive Officer and Director of Marketing of the Company since April 1, 2003. Prior to holding these offices, Mr. Fletcher served as Co-Chief Executive Officer of the Company since March 2000. Mr. Fletcher has also been a director of the Company since March 2000. Since 1995, Mr. Fletcher has been a private investor. Mr. Fletcher is a Managing Director of Technology Investors, LLC ("TI"), a group that has provided financing for the Company and currently directly owns 12,500,000 shares of Company common stock. Mr. Fletcher earned his B.S. degree in Economics and Finance from Rockhurst College. 35 KURT C. REID has been Co-Chief Executive Officer and Chief Operating Officer of the Company since April 1, 2003. Prior to holding these offices, Mr. Reid served as Co-Chief Executive Officer of the Company since March 2000. Mr. Reid has also been a director of the Company since March 2000. Since 1995, Mr. Reid has been a private investor. Mr. Reid is a Managing Director of TI, a group that has provided financing for the Company and currently directly owns 12,500,000 shares of Company common stock. Mr. Reid earned his B.S. degree from Southern Illinois University at Carbondale. COMMON STOCK OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Set forth below is the number of shares of Common Stock of the Company owned by certain beneficial owners, the directors, the executive officers named in the Summary Compensation Table, and the directors and executive officers as a group, as of August 12, 2004. Dr. James L. Cox..........................................8,228,108(2) 19.5% Brian D. Fletcher........................................14,417,983(3) 36.2% Kurt C. Reid.............................................14,414,983(4) 36.2% Technology Investors, LLC................................12,500,000(5) 32.8% Directors and executive officers as a group (3 persons)..24,561,074(6) 54.0% (1) Includes shares, if any, held by each person's spouse. (2) Dr. Cox owns 3,280,279 shares directly. 1,005,829 shares are owned by a trust over which Dr. Cox has investment and voting power and 12,000 shares are owned by the estate of his deceased father. Includes a warrant to purchase 2,500,000 shares. Includes options to purchase 1,430,000 shares exercisable within 60 days of August 12, 2004. (3) Mr. Fletcher owns 217,983 shares directly. Includes options to purchase 1,700,000 shares exercisable within 60 days of August 12, 2004. Includes 12,500,000 shares beneficially owned through TI that were issued to TI on March 19, 2003. (4) Mr. Reid owns 214,983 shares directly. Includes options to purchase 1,700,000 shares exercisable within 60 days of August 12, 2004. Includes 12,500,000 shares beneficially owned through TI that were issued to TI on March 19, 2003 (5) The address for TI is 191 Bridgeport Drive, Mooresville, North Carolina. (6) Includes options and warrants to purchase, in the aggregate, 7,700,000 common shares within 60 days of August 12, 2004. THE BOARD OF DIRECTORS The business of the Company is managed under the direction of the Board of Directors. The Board meets regularly during the year to review the Company's operations, strategic and business plans, major capital appropriations and other significant developments affecting the Company and to act on matters requiring Board approval. It also holds special meetings when important matters require Board action. Members of senior management attend Board meetings on an as needed basis to discuss the progress and plans relating to their areas of responsibility. During the fiscal year ended April 30, 2004, there were three meetings of the Board. Each director attended all of the board meetings and meetings of any board committee on which he served. The Company has no nominating committee. Because of the number of matters requiring Board consideration and to make the most effective use of individual directors' capabilities, the Board created a Compensation Committee and an Audit Committee. The Compensation Committee recommends to the Board the compensation of the executive and senior management of the Company that, in the judgment of such committee's members, should from time to time be fixed by the Board. The Compensation Committee also performs other such duties as are assigned to it by 36 the Board. The Board has assigned to such committee the responsibility of administering the Company's 2000 Stock Incentive Plan (the "Incentive Plan"). With only three employees as Directors, the Board suspended any prohibition on employees serving on the Compensation Committee. The Board has appointed Dr. Cox, Mr. Fletcher and Mr. Reid to serve as the members of the Compensation Committee, each of whom is an employee of the Company. Since the Incentive Plan requires that the Compensation Committee contain at least two members who are both disinterested directors and non-employees, and since only the Compensation Committee can issue equity-based incentives, the Company has been unable to issue any equity-based incentives until such time as it can meet the requirements set forth in the Plan or amends the Plan. The Audit Committee has responsibility for considering the appointment of the independent auditors for the Company, reviewing with the auditors the plan and scope of the audit and audit fees and monitoring the adequacy of reporting and internal controls. With only three employees as Directors, the Board suspended any prohibition on employees serving on the Audit Committee until such time as the Board contains at least two members who are not employed by the Company. In the meantime, the Board has appointed Mr. Fletcher and Mr. Reid to serve as the members of the Audit Committee. Both Mr. Fletcher and Mr. Reid are employees of the Company, and neither of them is "independent," as such term is defined in Rule 4200(a)(14) of the NASD's listing standards. The Company's Board of Directors has not adopted a written charter for the Audit Committee. The Audit Committee has not identified a member as being a financial expert, as defined in the rules of the Securities and Exchange Commission. As the Company is in the process of liquidation and dissolution, it is unlikely to seek new Audit Committee members that could be identified as a financial expert. Audit Committee Report The Audit Committee has reviewed and discussed the audited financial statements with the Company's management. The Audit Committee has discussed with the independent auditors the matters required to be discussed by Statement of Auditing Standards No. 61, as may be modified or supplemented. The Audit Committee has received the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1, as may be modified or supplemented, and has discussed with the independent auditors their independence. Based on the review and discussions referred to above, the Audit Committee has recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K for Fiscal 2004 for filing with the Securities and Exchange Commission. Audit Committee: --------------- Mr. Brian D. Fletcher Mr. Kurt C. Reid Compensation of Directors Directors who are not employees of the Company receive annually options to purchase 7,500 shares of the Company's common stock, priced at market value. All directors are reimbursed in cash for their reasonable out-of-pocket expenses incurred in connection with their attendance at Board meetings. Directors who are employees of the Company do not receive compensation for service on the Board other than their compensation as employees. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of the Company's Common Stock, to file with the Securities and Exchange Commission reports of ownership and changes in ownership of Common Stock. Officers, directors and greater than 10% beneficial owners are required by Securities and Exchange Commission regulation to furnish the Company with copies of all Section 16(a) forms they file. 37 Based solely on review of the copies of such reports furnished to the Company, the Company is not aware of any failure to file on a timely basis any Form 3, 4 or 5 during the fiscal year ended April 30, 2004. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION With only three employees as Directors, the Board suspended any prohibition on employees serving on the Compensation Committee until such time as the Board contains at least two members who are not employed by the Company. Dr. Cox, Mr. Fletcher and Mr. Reid, as the remaining members of the Board, serve as the current members of the Compensation Committee. Accordingly, Dr. Cox, Mr. Fletcher and Mr. Reid establish the compensation of the executive and senior management of the Company. Dr. Cox serves as the Company's President, Chief Technology Officer and Chairman of the Board of Directors. Mr. Fletcher currently serves as Co-Chief Executive Officer and Director of Marketing of the Company, and also serves on the Company's Board of Directors. Mr. Reid currently serves as Co-Chief Executive Officer and Chief Operating Officer of the Company, and also serves on the Company's Board of Directors. Executive Officers The information for this item is set forth on page 3 of this annual report. Code of Ethics The executive offcers of the Company strongly support the concept of ethical behavior including the publication of a code of ethics to illustrate our beliefs in the conduct of business and we have strived to perform our duties in a fashion that would indicate strong ethical standards. In light of the Asset Sale and the upcoming Plan of dissolutions we have not expended the resources necessary to prepare and adopt a written code of ethics. ITEM 11. EXECUTIVE COMPENSATION The Summary Compensation Table below includes compensation paid by the Company for services rendered by all executive officers who received compensation for the fiscal year ended April 30, 2004.

~~2003~~Summary ~~2002~~Compensation ~~2001~~Table ---- ---- ------------------ ~~Deferred~~Long ~~tax~~Term ~~assets:~~Compensation ~~Net~~Annual ~~operating~~Compensation ~~loss~~Awards ~~carryforwards~~------------------------------- ~~$3,754,000~~----------- ~~$2,978,000~~All ~~$3,960,000~~Other ~~Impairment~~Name onand ~~long-lived~~Principal ~~assets~~Position ~~345,000~~Fiscal ~~1,600,000~~Year Salary(1~~,285,000~~) ~~Other~~Bonus ~~168,000~~Options ~~322,000~~(#) ~~149,000~~Compensation (2) --------- ------------------ ----------- ~~4,267,000 4,900,000 5,394,000 Less: Valuation allowance 4,267,000 4,900,000 5,394,000~~ --------- ----- ----------- ---------------- ~~Net~~Dr. ~~deferred~~James ~~tax~~L. ~~asset~~Cox 2004 $101,552 $30,000 - - Chairman, President and 2003 94,610 - 230,000 - Chief Technology Officer 2002 95,765 - 800,000 846 Brian D. Fletcher (3) 2004 $118,846 $30,000 - Co-Chief Executive Officer 2003 147,834 - 200,000 - and Director of Marketing 2002 82,500 - 800,000 - Kurt C. Reid (3) 2004 $118,846 $30,000 - Co-Chief ~~=========~~Executive ~~=========~~Officer ~~=========~~2003 147,834 - 200,000 - and Chief Operating Officer 2002 82,500 - 800,000 - John R. Stewart 2004 $80,300 - - -

------------ (1) For the years indicated, includes amounts contributed on a pre-tax basis to the Special Savings and Retirement Plan (the Company's 401(k) plan) by each of the named executive officers. (2) For the years indicated, consists of contributions by the Company to the executive's account under the Company's tax-qualified Section 401-K retirement plan. (3) See "Compensation for Mr. Fletcher and Mr. Reid" under the caption "Certain Relationships and Related Transactions" for a discussion of the compensation plans established by the Board for Mr. Fletcher and Mr. Reid. Option Grants in Last Fiscal Year No options were granted in the fiscal year ended April 30, 2004. The following table illustrates, for each officer, the aggregate in-the-money options and the aggregate value of the options determined by the difference between the exercise price and a liquidation distribution of $0.16 per share:

~~Additions~~Shares ~~-----------------------------~~Number ~~Charged~~of tosecurities ~~Other~~acquired ~~Balance~~on atValue ~~Charged~~realized tounderlying ~~Other~~Value ~~Changes~~of -unexercised ~~Add~~Name ~~Balance~~of ~~Fiscal~~officer ~~Beginning~~exercise ofon ~~Costs~~exercise ~~and~~unexercised ~~Accounts~~options in- ~~(Deduct)~~ the-money atoptions ~~End of Year Description Fiscal Year Expenses Describe (1) Describe (2) Fiscal Year~~ ---------------~~----------------------------------------------------------------------------------------~~ ~~2001 Allowance for doubtful accounts $ 28,524 $ 33,286 $~~ -- $ -- ~~$ 61,810 Impairment loss~~ -- ~~3,062,196~~ -- -- ~~3,062,196 Deferred tax assets 2,890,000~~ -- ~~2,504,000 5,394,000~~ -------~~----~~ ----------- --------~~---~~ ----------- ----------- $James ~~2,918,524~~L. $Cox ~~3,095,482 $ 2,504,000 $~~ -- $ ~~8,518,006 =========== =========== =========== =========== =========== 2002 Allowance for doubtful accounts $ 61,810 $ 23,898 $~~ -- ~~($ 20~~600,~~708)~~000 $ 6530,000 ~~Impairment~~Brian ~~loss~~D. ~~3,062,196~~Fletcher ~~3,537,597~~ -- --$ ~~6,599,793 Deferred tax assets 5,394,000~~ -- ~~(494~~600,000) ~~-- 4,900,000 ----------- ----------- ----------- ----------- -----------~~ $ 830,~~518,006 $ 3,561,495 ($ 494,~~000) ($Kurt ~~20,708)~~C. ~~$11,564,793~~Reid ~~=========== =========== =========== =========== =========== 2003 Allowance for doubtful accounts $ 65,000 $ 9,154 $~~ -- ($ ~~28,404) $ 45,750 Inventory reserve~~ -- 50600,000 ~~-- -- 50,000 Impairment loss 6,599,793 -- -- (3,062,196) 3,537,597 Deferred tax assets 4,900,000 -- (633,000) -- 4,267,000 ----------- ----------- ----------- ----------- -----------~~ $1130,~~564,793 $ 59,154 ($ 633,~~000~~) ($3,090,600) $ 7,900,347 =========== =========== =========== =========== ===========~~

38 Compensation Committee Report on Executive Compensation The Company's Board of Directors approves all compensation decisions with regard to executive officers, including the Co-Chief Executive Officers, based on recommendations by the Compensation Committee. As a result of the recent Board resignations, each of the remaining Board members now serves on the Compensation Committee, effectively eliminating the need for a recommendation to the full Board. However, in order to maximize continuity of the proceedings of the Compensation Committee, separate Committee minutes are maintained. The Compensation Committee is responsible for the establishment and overall monitoring of all compensation programs for executives and senior management, as well as the stock option plans. The Company's compensation philosophy and executive compensation programs are discussed in this report. Executive Compensation Philosophy. In general, executive officers who are in a position to make a substantial contribution to the success and growth of the Company should have interests similar to those of the shareholders. Executive officers should be motivated by and benefit from increased shareholder value. Therefore, the Company believes that executive officers should hold a meaningful equity position in the Company through the purchase of Common Stock or the award of options to purchase Common Stock. The Company's Board of Directors believes that the executive compensation program must be competitive with those of other companies of comparable size and complexity in order to attract, retain and motivate talented individuals. Executive Compensation Program. The Company's compensation program has consisted of base salary and grants of options to purchase Common Stock. Base Salary. The Board of Directors generally reviews and approves the relative levels of base salary for all executive officers, including the Co-Chief Executive Officers, on an annual basis based on recommendations by the Compensation Committee. In determining the levels of base salary for an executive officer, the Compensation Committee considers relative levels of responsibility and individual and Company performance. In addition, the Compensation Committee uses executive compensation indexes and studies or reports to gather compensation data relative to the duties, responsibilities and compensation levels of the Company's executives. This comparative market data is carefully weighed in recommending compensation levels for the Company's executives. Chief Executive Officer Compensation. On April 1, 2003, the Board of Directors appointed Mr. Fletcher and Mr. Reid as Co-Chief Executive Officers. The Compensation Committee determined the base salaries for Mr. Fletcher and Mr. Reid, after evaluating a number of factors, including salaries of chief executive officers of companies of comparable size in the industry, each individual's past performance and the Company's performance in general. The base annual salary for both Mr. Fletcher and Mr. Reid for the period from May 1, 2003 through April 19, 2004 was $120,000 and effective April 19, 2004 was reduced to an annual salary rate of $90,000 each. The base salary and incentive awards for the Chief Executive Officer(s) for future periods will be determined by the Compensation Committee based upon such factors as the Compensation Committee deems to be appropriate. Compensation Committee: ---------------------- Dr. James L. Cox Mr. Brian D. Fletcher Mr. Kurt C. Reid 39 PERFORMANCE GRAPH The line graph set forth below charts performance (on an annual basis) of an investment in the Company's Common Stock against each of the NASDAQ Composite Index and an SIC Code Index, in each case assuming an investment of $100 on April 30, 1999 through April 30, 2004. The following graph is presented pursuant to rules of the Securities and Exchange Commission. The stock price performance comparisons below shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933, as amended, or under the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates this graph by reference, and shall not otherwise be deemed filed under such acts. While total stockholder return is an important criterion of corporate performance, it is subject to the vagaries of the equity market, which affect common stock price performance. There can be no assurance that the Company's Common Stock price performance will continue into the future with the same or similar trends depicted in the graph below. As of April 30, 2004, the closing price of the Company's Common Stock was $0.17. As of August 12, 2004, the closing price of the Company's Common Stock was $0.17. [OBJECT OMITTED] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information for this item is set forth in the section entitled "Common Stock Ownership by Certain Beneficial Owners and Management" presented above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40 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 were due on March 10, 2005. Alternatively, the TI Note provided that 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. Prior to the Asset Sale, the Company's cash flow from operations was not adequate to retire the TI Note, and it was unlikely that cash flow would increase in an amount sufficient for the Company to meet its obligations under the TI Note when the principal and accrued interest became due on March 10, 2005. In April 2004, the principal and accrued interest of the TI Note amounting to $3,700,362 were repaid with a portion of the proceeds from the Asset Sale. On January 20, 2003, the Company entered into a Stock Purchase Agreement (the "TI Stock Purchase Agreement") with TI 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 passed by 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 12,932,966 shares of the Company's Common Stock, or approximately 34% of the Company's issued and outstanding common stock. These figures exclude the options that Mr. Fletcher and Mr. Reid own to purchase, in the aggregate, 3,400,000 shares of the Company's Common Stock, which options become exercisable on September 9, 2004. The Company's primary purpose in issuing the shares of Common Stock to TI was to secure funding in order to reduce the principal outstanding on its loans with RBC Centura Bank, the Company's primary lender. The Company used all $750,000 of the net proceeds from the offering to pay down the amount of principal outstanding under the Centura loans to below the target balance of $1,215,000. Upon obtaining this target balance, Centura consolidated the Company's three existing loans into one loan and amortized the remaining balance over a 41-month period. Centura also agreed to immediately lower the rate that interest will accrue on the loan to 30-day LIBOR plus 4% per annum and, once the balance is paid down below $800,000, to lower the interest rate to 30-day LIBOR plus 3% per annum. The Centura loan was repaid prior to the Asset Sale. Compensation for Mr. Fletcher and Mr. Reid 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, in which 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, each of Mr. Fletcher and Mr. Reid agreed to a decrease in his 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 Compensation Committee's recommendation to change the compensation structure for both Mr. Fletcher and Mr. Reid and set the 41 annual salary rate at $100,000 per year. On April 1, 2003, the Board of Directors modified the compensation plan for Mr. Fletcher and Mr. Reid increasing each individual's 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 each earn a non-cumulative bonus up to $10,000 per quarter. During fiscal 2003, Mr. Fletcher and Mr. Reid were each compensated $97,834 as a payout from the fiscal 2002 compensation arrangement and $50,000 from the fiscal 2003 compensation arrangement. During fiscal 2004, Mr. Fletcher and Mr. Reid each received $30,000 in payments from the bonus plan and an accrual of $10,000 each has been recorded for future payment as of April 15, 2004. For the period starting May 1, 2003 through April 15, 2004, Mr. Fletcher and Mr. Reid were each paid at an annual rate of $120,000 and effective April 16, 2004; their individual rate of pay was changed to an annual rate of $90,000. Mr. Fletcher and Mr. Reid each received $118,846 of salary compensation during fiscal 2004. As a result of the Asset Sale, options granted to Mr. Fletcher and Mr. Reid equaling 200,000 common shares each that would vest and be exercisable between March 08, 2005 and September 9, 2007 were accelerated and became exercisable at the date of the Asset Sale closing. The total exercisable options held by Mr. Fletcher and Mr. Reid at April 15, 2004 equal 600,000 common shares each. The exercise price of the options is $.11 per share; therefore, both Mr. Fletcher and Mr. Reid will be entitled to receive the difference between the exercise price and the amount of the liquidation proceeds paid per common share. Based on a distribution rate of $.16 per share both Mr. Fletcher and Mr. Reid would receive an in-the-money option payment of $30,000. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table set forth the fees paid to the Company's independent auditor, Cherry, Bekaert & Holland, L.L.P. for fiscal years 2004 and 2003. 2004 2003 Audit and Non-Audit Fees ---- ---- Audit fees (1) $58,300 $41,786 Audit related fees -- -- Tax fees (2) 9,700 11,250 All other fees (3) 3,500 -- ------- ------- Total $71,500 $53,036 ======= ======= (1) Audit fees relate to professional services rendered in connection with the audit of the Company's annual financial statements, quarterly review of financial statements included in the Company's Forms 10-Q, services in connection with registration statements filed with the U.S. Securities and Exchange Commission and audit services provided in connection with other statutory and regulatory filings. (2) Tax fees include professional services rendered in connection with tax compliance and peparation and for tax consulting and planning services. (3) Other fees relate to due diligence in connection with the sale of assets to Sensitech, Inc. Audit Committee Pre-Approval Policies and Procedures The Audit Committee, on at least an annual basis, reviews audit and non-audit services performed by Cherry, Bekaert & Holland, LLP as well as the fees charged by Cherry, Bekaert & Holland, LLP for such services. All audit and non-audit services are pre-approved by the Audit Committee, which considers, among other things, the possible effect of the performance of such services on the auditors' independence. The Audit Committee has considered the role of Cherry, Bekaert & Holland, LLP in providing its audit, audit-related and non-audit services to the Company, and has concluded that such services are compatible with Cherry, Bekaert & Holland, LLP's independence as the Company's auditors. 42 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K Page 1. Financial statements - Statement of Net Assets in Liquidation at April 30, 2004 14 Statement of Changes in Net Assets in Liquidation for the Period April 16 - 30, 2004 15 Consolidated Balance Sheets at April 30, 2003 16 Consolidated Statements of Income for the Fiscal Years Ended April 16, 2004 and April 30, 2003 and 2002 17 Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended April 30, 2004, 2003 and 2002 18 Consolidated Statements of Cash Flows for the Fiscal Years Ended April 30, 2004, 2003 and 2002 19 Notes to Consolidated Financial Statements for the Fiscal Years Ended April 30, 2004, 2003 and 2002 20-33 Report of Independent Registered Public Accounting Firm 34 2. Financial statement schedules - The following financial statement schedules are included herein: Supplemental Schedules: Consent of Independent Registered Public Accounting Firm 44 Report of Independent Registered Public Accounting Firm on Financial Statement Schedules 45 Schedule II - Valuation and Qualifying Accounts for the Fiscal Years Ended April 16, 2004 and April 30, 2003 and 2002 46 All other financial statement schedules are omitted as not applicable, not required, or the required information is included in the consolidated financial statements and notes thereto. 3. Exhibits - 31.1 Certification of Co-Chief Executive Officer A-1 31.2 Certification of Co-Chief Executive Officer A-2 31.3 Certification of Chief Financial Officer and Secretary A-3 32.1 Certification of Co-Chief Executive Officers A-4 32.2 Certification of Chief Financial Officer A-5 4. Reports on Form 8-K - The registrant filed a current report on Form 8-K on April 16, 2004 reporting the completion of the transaction to sell substantially all of the assets of the Company to Sensitech, Inc. The aggregate consideration received by the Company at the closing was comprised of $10,595,589 in cash. In addition, Sensitech assumed $233,569 of the Company's payables and assumed other liabilities. At closing, Sensitech retained a $250,000 holdback amount in the Asset Sale. The final consideration is subject to adjustment based upon finalization of the Company's balance sheet as of the closing date. Under the terms of the Asset Purchase Agreement, the Company retained certain assets and liabilities in connection with the transaction, including cash, certain production equipment, office equipment, machines, tools, fixtures, furniture and certain retained liabilities. The registrant filed a current report on Form 8-K on February 2, 2004 reporting the completion of the transaction to sell its Vitsab division to Rask Holding, ApS. 43 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Cox Technologies, Inc. Belmont, North Carolina We consent to incorporation by reference in the registration statement (No. 333-52738) on Form S-8 of Cox Technologies, Inc. of our report dated July 30, 2004, relating to the statement of net assets in liquidation of Cox Technologies, Inc. and subsidiaries as of April 30, 2004, the related statements of changes in net assets in liquidation and stockholders' equity for the period from April 16, 2004 to April 30, 2004, the consolidated balance sheet of Cox Technologies, Inc. and subsidiaries as of April 30, 2003, and the related consolidated statements of income, changes in stockholders' equity (deficit) and comprehensive income, and cash flows for the period from May 1, 2003 to April 15, 2004 and each of the years in the two-year period ended April 30, 2003, and all related schedules, which report appears in the April 30, 2004 annual report on Form 10-K of Cox Technologies, Inc. /s/ Cherry, Bekaert & Holland, L.L.P. Cherry, Bekaert & Holland, L.L.P. Gastonia, North Carolina August 17, 2004 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULES The Board of Directors and Stockholders Cox Technologies, Inc. Belmont, North Carolina Under date of July 30, 2004, we reported on the statement of net assets in liquidation of Cox Technologies, Inc. and subsidiaries as of April 30, 2004, the related statements of changes in net assets in liquidation and stockholders' equity for the period from April 16, 2004 to April 30, 2004, the consolidated balance sheet as of April 30, 2003, and the related consolidated statements of income, stockholders' equity (deficit) and comprehensive income, and cash flows for the period from May 1, 2003 to April 15, 2004 and for each of the years in the two-year period ended April 30, 2003, which are included in this annual report on Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related accompanying consolidated financial statement schedules. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audit. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ Cherry, Bekaert & Holland, L.L.P. Cherry, Bekaert & Holland, L.L.P. Gastonia, North Carolina July 30, 2004 45 COX TECHNOLOGIES, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

(1) Deferred tax valuation allowance offsets gross deferred tax assets. (2) Write-off of accounts considered to be uncollectible and realization of impairment loss. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) August 17, 2004 /s/ Brian D. Fletcher /s/ Kurt C. Reid -------------------------- -------------------------- Brian D. Fletcher Kurt C. Reid Co-Chief Executive Officer Co-Chief Executive Officer 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 registrant and in the capacities indicated on August 17, 2004. /s/ Brian D. Fletcher /s/ Kurt C. Reid -------------------------- -------------------------- Brian D. Fletcher Kurt C. Reid Co-Chief Executive Officer Co-Chief Executive Officer /s/ John R. Stewart ---------------------------- John R. Stewart Chief Financial Officer and Secretary (Principal financial and accounting officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on August 17, 2004. /s/ James L. Cox --------------------------------------- James L. Cox Chairman and President and Director /s/ Brian D. Fletcher --------------------------------------- Brian D. Fletcher Co-Chief Executive Officer and Director /s/ Kurt C. Reid --------------------------------------- Kurt C. Reid Co-Chief Executive Officer and Director 47

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