SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................to.................
Commission file number 001-1296
ZEVEX INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
DELAWARE 87-0462807
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4314 ZEVEX Park Lane, Salt Lake City, Utah 84123
(Address of principal executive offices and zip code)
(801) 264-1001
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year, if changed since last
report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of October 31, 2002, the
Company had outstanding 3,415,197 shares of common stock, par value $0.001 per
share.
PART I
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q
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ZEVEX International, Inc. ("ZEVEX" or the "Company") files herewith balance
sheets of the Company as of September 30, 2002, and December 31, 2001, and the
related statements of operations and cash flows for the respective three month
and nine month periods ended September 30, 2002 and 2001. In the opinion of the
Company's management, the financial statements reflect all adjustments, all of
which are normal recurring adjustments, necessary to fairly present the
financial condition of the Company for the interim periods presented. The
financial statements included in this report on Form 10-Q should be read in
conjunction with the audited financial statements of the Company and the notes
thereto included in the Annual Report of the Company on Form 10-K for the year
ended December 31, 2001.
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
(unaudited)
---------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 1,198,971 $ 1,028,086
Restricted cash for sinking fund payment on IDB 68,785 93,076
Accounts receivable, net 4,378,743 5,748,578
Inventories 6,298,649 7,272,842
Marketable securities - 219,899
Deferred income taxes 311,249 568,387
Income taxes receivable 354,461 418,506
Prepaid expenses and other current assets 58,020 62,662
Total current assets 12,668,878 15,412,036
Property and equipment, net 6,764,396 7,688,088
Patents, trademarks and acquisition costs, net 322,607 342,746
Goodwill, net 10,154,757 10,154,757
Other assets 30,123 41,519
Total assets $ 29,940,761 $ 33,639,146
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,066,546 $ 1,711,429
Other accrued expenses 611,839 563,067
Bank line of credit - 1,713,610
Current portion of industrial development bond 100,000 100,000
Payable related to business acquisition and
convertible debt, short-term 3,219,172 1,143,390
Current portion of other long-term debt 1,467,217 524,381
Current portion of capital leases 174,142 162,783
Total current liabilities 6,638,916 5,918,660
Deferred income taxes 262,667 276,734
Industrial development bond 1,400,000 1,500,000
Convertible debt, long-term - 3,001,970
Other long-term debt 274,550 1,608,330
Capital lease obligation 168,988 301,051
STOCKHOLDERS' EQUITY
Common stock; $.001 par value, authorized
10,000,000 shares, 3,440,197 issued and 3,415,197
outstanding at September 30, 2002 and December 31, 2001 3,440 3,440
Additional paid in capital 16,290,452 16,290,452
Unrealized gain on marketable securities, net - 20,177
Treasury stock, 25,000 shares at cost (60,956) (60,956)
Retained earnings 4,962,704 4,779,288
Total stockholders' equity 21,195,640 21,032,401
Total liabilities and stockholders' equity $ 29,940,761 $ 33,639,146
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
(unaudited) (unaudited) (unaudited) (unaudited)
----------------- ----------------- ----------------------------------
----------------- ----------------- ----------------------------------
Revenue:
Product sales $ 5,930,711 $ 6,621,4641 $ 17,359,263 $ 20,912,434
Engineering services 594,559 277,833 1,066,102 949,914
Total revenue 6,525,270 6,899,297 18,425,365 21,862,348
Cost of sales 4,111,232 4,558,593 11,310,488 13,890,896
Gross profit 2,414,038 2,340,704 7,114,877 7,971,452
Operating expenses:
General and administrative 1,434,841 1,438,634 4,399,679 4,487,086
Selling and marketing 710,533 707,415 1,985,459 2,032,956
Research and development 50,287 173,688 178,703 379,862
Goodwill amortization - 133,439 - 400,073
Total operating expenses 2,195,661 2,453,176 6,563,841 7,299,977
Operating income (loss) 218,377 (112,472) 551,036 671,475
Other income (expense):
Interest and other income 1,200 19,686 14,389 23,278
Interest expense (137,471) (227,348) (444,079) (813,619)
Gain on sale of marketable securities - - 38,079 40,978
Other than temporary impairment loss
on available for sale marketable securities - (917,628) - (917,628)
Income (loss) before income taxes 82,106 (1,237,762) 159,425 (995,516)
Benefit (provision for) income taxes (25,850) 428,133 23,991 262,900
Net income (loss) $ 56,256 $ (809,629) $ 183,416 $ (732,616)
Basis net income (loss) per share $ 0.02 $ (0.24) $ 0.05 $ (0.21)
Weighted average shares outstanding 3,415,197 3,431,372 3,415,197 3,437,180
Diluted net income (loss) per share $ 0.02 $ (0.24) $ 0.05 $ (0.21)
Diluted weighted average shares outstanding 3,415,287 3,431,372 3,417,314 3,437,180
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
2002 2001
---------------- ----------------
----------------- ---------------
Cash flows from operating activities
Net income (loss) $ 183,416 $ (732,616)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Depreciation and amortization 1,201,193 1,539,369
Deferred income taxes 255,075 (268,878)
Realized gain on marketable securities (38,079) (40,978)
Other than temporary loss on available for sale
marketable securities - 917,628
Changes in operating assets and liabilities:
Restricted cash for sinking fund payment
on industrial development bond 24,291 30,814
Accounts receivable 1,369,835 1,340,191
Inventories 974,193 1,817,826
Prepaid expenses (6,500) (59,862)
Other assets 22,538 (14,230)
Accounts payable (644,883) (1,037,240)
Accrued and other liabilities 48,772 1,385
Income taxes receivable/payable 64,045 (161,758)
Net cash provided by operating activities 3,453,896 3,331,651
Cash flows from investing activities
Purchase of property and equipment (257,362) (1,010,020)
Additions of patents and trademarks - (14,907)
Redemption of available-for-sale marketable securities 225,797 127,221
Net cash used in investing activities (31,565) (897,706)
Cash flows from financing activities
Proceeds from capital lease and long-term debt - 2,500,000
Payments on capital lease and long-term debt (511,648) (351,929)
Payments on business acquisition debt (926,188) (777,798)
Repayment on industrial development bond (100,000) (100,000)
Repayment of bank line of credit (1,713,610) (3,076,006)
Purchase of treasury stock - (60,956)
Proceeds from exercise of stock options - 665
Net cash used in financing activities (3,251,446) (1,866,024)
Net increase in cash and cash equivalents 170,885 567,921
Cash and cash equivalents at beginning of period 1,028,086 327,157
Cash and cash equivalents at end of period $ 1,198,971 $ 895,078
ZEVEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
1. Summary of Significant Accounting Policies
Description of Organization and Business
The Company was incorporated under the laws of the State of Nevada on December
30, 1987. The Company was originally incorporated as Downey Industries, Inc. and
changed its name to ZEVEX International, Inc. on August 15, 1988. In November
1997, the Company reincorporated in Delaware. In December 1998, the Company
acquired an additional product line and completed the acquisition of two
additional subsidiaries. Additionally, the Company acquired a product line from
Nestle USA, Inc. in April of 2000. The Company, through its divisions and
subsidiaries, engages in the business of designing, manufacturing and
distributing medical devices. Recently, ZEVEX renamed its three primary business
divisions. Its Applied Technology business division designs and manufactures
advanced medical components and systems for other medical technology companies
through its ZEVEX, Inc. subsidiary. Its Physical Evaluation business division
designs, manufactures and markets industry leading physical evaluation testing
systems though its JTech Medical Industries, Inc. subsidiary. Its Therapeutics
business division designs, manufactures and markets enteral nutrition delivery
devices through its ZEVEX, Inc. subsidiary.
Principles of Consolidation
The consolidated financial statements at September 30, 2002 include the accounts
of the Company and its wholly owned operating subsidiaries: ZEVEX, Inc. and
JTech Medical Industries, Inc. (JTech). The consolidated statements of
operations for the three months and nine months ended September 30, 2001 also
includes the results of operations of its former subsidiary, Aborn Electronics,
Inc. (Aborn). During December 2001, the corporate shell of Aborn was sold to a
related party. The Company retained certain manufacturing rights, cash, accounts
receivable, equipment, and inventory, which now are included within the
subsidiary, ZEVEX, Inc. For additional information regarding this transaction
refer to the Company's 2001 Annual Report on SEC Form 10-K. All significant
intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information along
with the instructions to Form 10-Q of Regulation S-X. Accordingly, certain
information and footnote disclosures normally included in complete financial
statements have been condensed or omitted. These financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in the Company's 2001 Annual Report on SEC Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for interim periods may not be indicative of
the results of operations to be expected for a full year.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions) for impairment in accordance with this
Statement. This impairment test uses a fair value approach, rather than the
undiscounted cash flows approach previously required by SFAS No. 121. Intangible
assets that do not have indefinite lives will continue to be amortized over
their useful lives and reviewed for impairment in accordance with SFAS No. 121
or SFAS No. 144 (see below). The Company has adopted SFAS No. 142 effective
January 1, 2002. SFAS No. 142 provides a six-month period from the effective
date of adoption for the Company to complete Step 1 (determining and comparing
the fair value of the Company's reporting units to their carrying values) of the
transitional impairment test. Step 2 involves the calculation of the implied
fair value of goodwill and must be completed by December 31, 2002. The Company
has completed Step 1 of the impairment assessment. Based upon the Company's
valuation procedures, the Company has determined that the fair value of the
reporting units exceeds the carrying value including goodwill. As such the
Company is not required to complete Step 2 of the impairment assessment and no
impairment loss has been recognized.
As of September 30, 2002, the Company's gross goodwill balance is $11,603,600
with accumulated amortization of $1,448,843. The adoption of SFAS No. 142 will
reduce the Company's amortization expense by approximately $533,000 annually
beginning in 2002, due to the nonamortization of goodwill. Amortization expense
for goodwill for the three months ended September 30, 2001 was $133,439, and
$400,073 for the nine months ended September 30, 2001. Adjusted net income and
net income per common share for the three and nine months ended September 30,
2001 compared to the actual results for the three and nine months ended
September 30, 2002 are as follows:
For Three Months Ended For Nine Months Ended
September 30 September 30
2002 2001 2002 2001
------------------ ------------------- ------------------ ------------------
------------------ ------------------- ------------------ ------------------
Reported net income (loss) $ 56,256 $ (809,629) $ 183,416 $ (732,616)
Goodwill amortization 133,439 -- 400,073
---------------- ----- ------- ----------------- ----- -------
--
Adjusted net income $ 56,256 $ (676,190) $ 183,416 $ (332,543)
========= =========== ========= ===========
Basic net income per share reported $ .02 $ (.24) $ .05 $ (.21)
Goodwill amortization -- .04 -- .12
----------------- ------------- --- ----------------- ------------- ---
Adjusted $ .02 $ (.20) $ .05 $ (.09)
======= ========= ======= =========
Diluted net income per share reported $ .02 $ (.24) $ .05 $ (.21)
Goodwill amortization -- .04 -- .12
----------------- ------------- --- ----------------- ------------- ---
Adjusted $ .02 $ (.20) $ .05 $ (.09)
======= ========= ======= =========
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes SFAS No. 121, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations and Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
business (as previously defined in that Opinion). The Company adopted SFAS No.
144 effective January 1, 2002. As expected, the adoption of SFAS No. 144 did not
have a material impact on the consolidated financial position, consolidated
results of operations or liquidity of the Company.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This
statement provides guidance on the classification of gains and losses from the
extinguishment of debt and on the accounting for certain specified lease
transactions. It is not anticipated that the adoption of this statement will
have a material impact on the consolidated financial position, consolidated
results of operations or liquidity of the Company.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for the Company on January 1, 2003. It is not anticipated that
the adoption of this statement will have a material impact on the consolidated
financial position, consolidated results of operations or liquidity of the
Company.
2. Bank Line of Credit
In 2002, the Company renewed its line of credit arrangement with a financial
institution with availability of $6 million. The line matures on May 28, 2003.
The line of credit is collateralized by accounts receivable and inventory and
bears interest at the prime rate, which was 4.75% at September 30, 2002 and
December 31, 2001. The Company's balance on its line of credit was $0 at
September 30, 2002 and $1,713,610 at December 31, 2001. Under the line of credit
agreement, the Company is restricted from declaring cash dividends. In addition,
the Company's line of credit contains certain financial covenants.
3. Related Party Transactions
On December 31, 1998, the Company acquired JTech pursuant to a Stock Purchase
Agreement among the Company and the four shareholders of JTech (the "JTech Stock
Purchase"). Leonard C. Smith, one of the selling JTech shareholders, received
$1,311,188 in cash and a convertible debenture in connection with the JTech
Stock Purchase. The Company paid $290,000 of the convertible debenture in
December 2001, and the remaining principal amount of $1,073,594 (inclusive of
the 1999 earn-out provision of $73,594 which was paid on April 2, 2002) is due
January 6, 2003 (as modified in December 2001) and is convertible to common
stock at Mr. Smith's option during the period from January 6, 2000 to January 6,
2003 at $11 per share.
4. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. Other comprehensive
income may include foreign currency translation adjustments, and unrealized
gains and losses on marketable securities classified as available-for-sale. For
the three months and nine months ending September 30, 2002, the Company did not
have any other elements of comprehensive income. Therefore, comprehensive income
equaled net income. For the three months ending September 30, 2001, the
Company's comprehensive income was $18,810 (net of tax effect) higher than the
net loss reported on the Company's financial statements. For the nine months
ending September 30, 2001, the Company's comprehensive loss was $34,326 (net of
tax effect) less than net income reported on the Company's financial statements.
5. Inventories
Inventories consist of the following:
September 30, 2002 December 31, 2001
-------------------------------------------------
Materials $ 2,981,718 $ 3,355,793
Work in progress 970,184 1,241,034
Finished goods, including completed subassemblies 2,346,747 2,676,015
-------------------------------------------------
$ 6,298,649 $ 7,272,842
=================================================
6. Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income
(loss) for the period by the weighted-average number of the Company's common
shares outstanding.
Diluted net income (loss) per common share includes the dilutive effect of
options in the weighted-average number of the Company's common shares
outstanding as calculated using the treasury stock method.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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General
ZEVEX, through its divisions and subsidiaries, engages in the business of
designing, manufacturing and distributing medical devices. Recently, ZEVEX
renamed its three primary business divisions. Its Applied Technology business
division designs and manufactures advanced medical components and systems for
other medical technology companies. Its Physical Evaluation business division
designs, manufactures and markets industry leading physical evaluation testing
systems. Its Therapeutics business division designs, manufactures and markets
award-winning enteral nutrition delivery devices. See Note 1 of the Financial
Statements, Description of Organization and Business for more information.
Results of Operations
ZEVEX' revenues for the third quarter of 2002 decreased to $6,525,270 from
$6,899,297 for the third quarter of 2001, a decrease of approximately 5%. For
the first nine months of 2002, revenue decreased 16% to $18,425,365 from
$21,862,348 for the nine months ended September 30, 2001. In the third quarter
of 2002, 62% of ZEVEX' revenue was derived from proprietary products sold by
ZEVEX, in comparison to 55% in 2001, and 62% for the first nine months of 2002,
compared to 56% for the nine months ended September 30, 2001. Sales of ZEVEX'
Therapeutic products accounted for approximately 49% of total revenues for the
three months ended September 30, 2002, compared to 44% for the three months
ended September 30, 2001, and 48% for the first nine months of 2002, compared to
45% for the nine months ended September 30, 2001. Sales of ZEVEX' Physical
Evaluation products accounted for approximately 13% of total revenues for the
three months ended September 30, 2002, compared to 11% for the three months
ended September 30, 2001, and 14% for the first nine months of 2002, compared to
11% for the nine months ended September 30, 2001. Thirty-eight percent of ZEVEX'
revenues during the third quarter 2002 were derived from its Applied Technology
business, compared to 45% in 2001, and 38% for the first nine months of 2002,
compared to 44% for the nine months ended September 30, 2001.
The decrease in revenues for the third quarter of 2002 compared to the third
quarter of 2001 is largely due to (1) the delay of several orders for
contract-manufactured products, including those related to a customer which has
reorganized it corporate structure through a spin-out from its parent, a
customer which has been reducing inventory levels and safety stock, and a
customer which has delayed orders due to an issue not involving ZEVEX, and (2)
the decline in orders for stationary enteral nutrition delivery pump disposable
sets. The decrease in revenues for the first nine months of 2002 compared to the
first nine months of 2001 is largely due to (1) the delay of several orders for
contract-manufactured products, including those related to a customer which has
reorganized it corporate structure through a spin-out from its parent, a
customer which has been reducing inventory levels and safety stock, and a
customer which has delayed orders due to an issue not involving ZEVEX, (2) the
scheduling of private-label enteral feeding pump orders for a European customer,
and (3) the decline in orders for stationary enteral nutrition delivery pump
disposable sets. During the third quarter, however, scheduled shipments of
surgical handpieces have increased compared to the first six months of 2002, and
the Company has experienced an increase in orders for private label enteral
feeding pumps from the European customer mentioned above. The Company recently
began a new time and materials development program for a mobile organ perfusion
system. Additionally, the Company is also in the process of completing the
development of three new surgical handpieces, which it expects will be followed
by production orders. The Company is also currently developing several new
ultrasonic and optoelectronic sensor products for certain customers. While these
developments are encouraging, there is no assurance that the products and
applications under development will result in manufacturing sales for the
Company. Additionally, because scheduled shipments may be cancelled or postponed
without penalty in certain cases, improvements in scheduled shipments may prove
to be temporary and not continue for the remainder of the Company's fiscal year.
ZEVEX' gross profit as a percentage of revenues was approximately 37% for the
third quarter of 2002, compared to 34% for the third quarter of 2001. Gross
profit for the nine months ended September 30, 2002 was approximately 39%
compared to 36% for the same nine month period of 2001. Management attributes
the slight increase in gross profit percentage from 2001 to 2002 to improvement
in manufacturing and distribution efficiencies and the particular product mix
delivered during the quarter and nine month periods.
Selling, general and administrative expenses decreased slightly during the third
quarter of 2002 to $2,145,374, as compared to $2,146,049, for the third quarter
of 2001. For the nine months ended September 30, 2002 selling, general and
administrative expenses decreased to $6,385,138, as compared to $6,520,042 for
the same nine month period of 2001. Although the Company has decreased certain
general and administrative cost the Company is continuing its investment in
building its domestic sales force for the Physical Evaluation and Therapeutics
divisions, and its efforts to grow international sales of all product lines.
As of September 30, 2002, ZEVEX had two full-time engineers engaged in research
and development, and had several other designers and engineers, including
independent contractors, contributing to research and development projects.
During the third quarter of 2002, ZEVEX invested $50,287 in research and
development, compared to $173,688 in the third quarter 2001. For the nine months
ended September 30, 2002, ZEVEX invested $178,703 in research and development,
compared to $379,862 for the nine months ended September 30, 2001. The Company
is continuing its efforts to develop and introduce new proprietary products and
is currently planning new product introductions during the next fiscal year.
Additionally, the Company is investing in developing proprietary component
technologies for its contract manufacturing services. Management anticipates
that research and development expenses for 2002 will be approximately 2% of
total revenues.
For the third quarter of 2002, ZEVEX had net income of $56,256, approximately 1%
of revenues compared to a net loss of $809,629, for the third quarter of 2001.
The increase in net income during the third quarter of 2002, as compared to the
third quarter of 2001, is due to a number of factors, including, (1) the one
time impairment loss on marketable securities in the amount of $917,628 in the
third quarter 2001, (2) higher gross profit achieved in the third quarter of
2002, (3) a reduction in interest expense from $227,348 to $137,471, due to
decreased debt and interest rates, and (4) nonamortization of goodwill
amortization under SFAS No. 142, which was adopted as of January 1, 2002.
However, the impact of these changes was reduced by lower revenue during the
third quarter of 2002. Net income for the nine months ended September 30, 2002,
increased to $183,416, or 1% of revenues, compared to a net loss of $732,616,
for the nine months ended September 30, 2001. The increase in net income during
the first nine months of 2002, as compared to the first nine months of 2001, is
due to a number of factors, including, (1) the one time impairment loss on
marketable securities in the amount of $917,628 in the third quarter 2001, (2)
higher gross profit achieved in the first nine months of 2002, (3) a reduction
in interest expense from $813,619 to $444,079, due to decreased debt and
interest rates, (4) nonamortization of goodwill amortization under SFAS No. 142,
which was adopted as of January 1, 2002, and (5) the tax benefit derived from a
capital loss which, for the State of Utah, was treated as a net operating loss
carryback for income tax purposes and resulted in a refund recognized in 2002.
However, the impact of these changes was reduced by lower revenue during the
first nine months of 2002.
Depreciation and amortization expenses decreased to $403,396 in the third
quarter 2002 from $510,228 in the third quarter 2001, and to $1,201,193 for the
first nine months of 2002, from $1,539,369 for the first nine months of 2001.
The decrease is due to the elimination of goodwill amortization as of January 1,
2002 with the adoption of SFAS No. 142. See Note 2 of the Financial Statements
for more information on the effect of this change.
ZEVEX had income tax expense of $25,850 in the third quarter of 2002 compared to
an income tax benefit of $428,133 for the third quarter of 2001. The increase in
tax expense from 2002 from 2001 is primarily due to the tax effect of the
impairment loss on marketable securities in the amount of $917,628 in the third
quarter of 2001.
As of September 30, 2002, ZEVEX' backlog of customer orders was $3,527,000, as
compared to $4,987,000 on September 30, 2001. Management estimates that
approximately 80% of the backlog will be shipped before December 31, 2002.
During the first nine months of 2002, some of ZEVEX' contract manufacturing
customers have shortened their forecasting visibility and subsequently, the
schedule of deliveries on each purchase order. Management does not believe that
this reflects an overall decrease in demand, and is only an indication that some
customers are controlling inventory expense. ZEVEX' backlog is for contract
manufacturing only and can be significantly affected by the timing of annual or
semi-annual purchase orders placed by its customers.
Liquidity and Capital Resources
ZEVEX' primary sources of liquidity have consisted of cash flow from operations,
borrowings under its revolving line of credit and other financial arrangements
described below. In prior years, ZEVEX also has increased working capital
through the issuance of stock and may do so in the future.
Cash flows provided from operating activities for the first nine months of 2002
were $3,453,896 compared to cash flows provided from operating activities for
the first nine months of 2001 of $3,331,651. In 2002, cash provided by operating
activities was primarily associated with reduction of accounts receivable due to
improved collection procedures, reduction in inventories as ZEVEX recognized the
benefit of its manufacturing resource planning software, and income tax refunds
related to capital loss carrybacks, partially offset by a reduction of accounts
payable.
ZEVEX' working capital at September 30, 2002 was $6,029,962, compared to
$7,003,260 at September 30, 2001. ZEVEX' decrease in working capital was
primarily due to the reduction of accounts receivable and inventories, the cash
flow which was used for debt reduction, and the classification of the Term Loan
secured by its manufacturing facility due May 15, 2003 as current. The portion
of working capital represented by cash and short-term investments at such dates
was $1,198,971, and $895,078 respectively. The ratio of current assets to
current liabilities increased to 1.91 at September 30, 2002, from 1.69 at
September 30, 2001.
ZEVEX has a $6,000,000 open line of credit arrangement with a financial
institution. The line matures on May 28, 2003. The line of credit is
collateralized by accounts receivable and inventories, and bears interest at the
financial institution's prime rate. ZEVEX owed $0 on the line of credit at
September 30, 2002 and $1,713,610 at December 31, 2001. Management expects to
renew the existing line of credit upon its expiration.
On March 29, 2000, the Company entered into an agreement to acquire certain
assets from Nestle USA, Inc. relating to Nestle's enteral nutrition delivery
devices. The purchase was completed on April 6, 2000 for a purchase price of
approximately $2.6 million, plus the actual cost of inventory acquired by the
Company, which totaled approximately $1.2 million. Upon closing, cash of
approximately $600,000 was paid. An additional $2.2 million was paid in October
2000, which included $1.2 million for inventory. The remainder of the purchase
price, approximately $1,000,000, was calculated based upon the sales generated
by the acquired assets of which approximately $778,000 was paid in July 2001.
The remainder of the balance will be paid upon resolution of certain
contingencies.
On March 15, 2001, ZEVEX entered into a Secured Financing Agreement with a bank
for the amount of $1,500,000. The agreement is secured by ZEVEX' enteral feeding
pumps, which were purchased from Nestle and are now manufactured by ZEVEX. The
proceeds from the agreement were used to reduce ZEVEX' line of credit balance.
The agreement has a 36-month term, is due on February 15, 2004, and bears
interest at a rate of 8.24%. ZEVEX owed $794,331 on the agreement at September
30, 2002.
On April 18, 2001, ZEVEX entered into a Term Loan Agreement with a bank for the
amount of $1,000,000. The agreement is secured by ZEVEX' manufacturing facility.
The proceeds from the Promissory Note were used to reduce ZEVEX' line of credit
balance. The note is due on May 15, 2003 and is amortized over a fifteen-year
term, and bears interest at the financial institution's prime rate, currently
4.75%. ZEVEX owed $947,436 on the Term Loan Agreement at September 30, 2002.
In 1997, ZEVEX completed construction of its new 51,000 square foot headquarters
and manufacturing facility. The cost of this undertaking was approximately
$2,591,177. In 1996, ZEVEX negotiated a $2.0 million Industrial Development Bond
("IDB") to finance this construction. As of September 30, 2002, the remaining
principal balance on the IBD was $1,500,000. During the first the first nine
months of 2002, the interest paid monthly ranged from 1.45% to 2.03% (APR).
ZEVEX, in conjunction with certain 1998 business acquisitions, issued
convertible debentures in the aggregate amount of $5,447,188. As of September
30, 2002 the remaining balance on the debentures was $2,996,970. The principle
payments on the debentures will be paid in the following amounts, $2,046,970 in
January 2003, and the remaining balance of $950,000 in April 2003. All or part
of the outstanding principal of each debenture is convertible at the holder's
option into ZEVEX' Common Stock at a rate of $11.00 per share at any time prior
to maturity of the debentures.
ZEVEX' purchases of leasehold improvements to its facilities, self-constructed
enteral feeding pumps, MRP software system and new engineering, production and
testing equipment, and tooling totaled $257,362 for the first nine months of
2002, compared to $1,010,020 for the first nine months of 2001. ZEVEX expects to
spend approximately $150,000 during the remainder of 2002 for additional
manufacturing equipment and software, for normal replacement of aging equipment,
equipment for lease, and manufacturing tooling related to its proprietary
products. ZEVEX also expects to invest approximately $250,000 in the research
and development of new proprietary products during the fourth quarter of 2002.
ZEVEX' expected principal liquidity requirements are working capital,
investments in capital expenditures, and convertible debt reduction. ZEVEX
believes its sources of liquidity are sufficient for operations during the
coming twelve months with its projected cash flows from operations and if
necessary, the availability of funds under its revolving line of credit.
Critical Accounting Policies
ZEVEX has not had significant changes to its accounting policies with the
exception of the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets," and SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
Under SFAS No. 142, ZEVEX no longer amortizes its goodwill. However, ZEVEX is
required to assess goodwill for impairment at least annually at a level within
ZEVEX referred to as a reporting unit, as defined by SFAS No. 142. Impairment of
goodwill is deemed to exist when the carrying amount of the goodwill for the
reporting unit exceeds its implied fair value. In order to determine if such
impairment exists, ZEVEX is required to complete Step 1 (determining and
comparing the fair value of the reporting units to the reporting units' carrying
value) impairment test. In the year of adoption, ZEVEX is required to complete
Step 1 within six months of adopting SFAS No. 142. If Step 1 of the goodwill
impairment test is failed in any of ZEVEX' reporting units, thereby indicating a
potential impairment, ZEVEX is required to complete Step 2 of the impairment
test as soon as possible. In the year of adoption, this is required to be
completed no later than the end of the year of adoption (December 31, 2002 for
ZEVEX). Under Step 2, ZEVEX is required to calculate the implied fair value of
goodwill and compare it to the carrying value of goodwill. ZEVEX has completed
Step 1 of the impairment assessment. Based upon ZEVEX' valuation procedures,
ZEVEX has determined that the fair value of the reporting units exceeds the
carrying value including goodwill, as such ZEVEX is not required to complete
Step 2 of the impairment assessment and no impairment loss has been recognized.
Under SFAS No. 144, ZEVEX evaluates its long-lived assets other than goodwill
(amortizable intangible assets, property, plant and equipment, and other such
assets) for impairment. In order to perform this evaluation, ZEVEX groups its
long-lived assets with other assets and liabilities at the lowest level for
which identifiable cash flows are largely independent of the cash flows of other
assets and liabilities. Consistent with SFAS No. 121, ZEVEX continues to
consider whether indicators of impairment of long-lived assets are present. If
indicators exist, ZEVEX determines whether the sum of the estimated undiscounted
future cash flows attributable to the assets in question are less than their
carrying amount. If so, ZEVEX recognizes an impairment loss based on the excess
of the carrying amount of the assets over their respective fair values. ZEVEX
currently has no indicators of impairment of any of its long-lived assets.
Other
As part of a nationwide investigation into billing practices associated with
enteral nutrition delivery products, particularly in regard to billing practices
for pumps and disposable delivery sets, on July 2, 2001, the Office of Inspector
General (OIG), served a subpoena on ZEVEX' ZEVEX, Inc. subsidiary. According to
published reports, the investigation involved most manufacturers, distributors
and health care service providers in the United States enteral pump industry and
similar subpoenas were served on many of those parties. The subpoena requested
Company documents relating to its enteral pump customers, marketing and billing
practices. ZEVEX has responded to the subpoena and it is cooperating with the
investigation. At this time ZEVEX is uncertain as to any future impact this
investigation will have on its operations or financial position.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995
When used in this report, the words such as "estimate," "believe," "project,"
"anticipate" and similar expressions, together with other discussion of future
trends or results, are intended to identify forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Such statements, which include the Company's
statements about the level of anticipated expenses during 2002 and its liquidity
position are subject to certain risks and uncertainties, including those
discussed below that could cause actual results to differ materially from those
projected. These forward-looking statements speak only as of the date hereof and
the Company disclaims any obligation to update them. All of these
forward-looking statements are based on estimates and assumptions made by
management of the Company, which although believed to be reasonable, are
inherently uncertain and difficult to predict. Therefore, undue reliance should
not be placed upon such estimates. There can be no assurance that the benefits
anticipated in these forward-looking statements will be achieved. The following
important factors, among others, could cause the Company not to achieve the
benefits contemplated herein, or otherwise cause the Company's results of
operations to be adversely affected in future periods: (i) continued or
increased competitive pressures from existing competitors and new entrants; (ii)
unanticipated costs related to the Company's growth and operating strategies;
(iii) loss or retirement of key members of management; (iv) increase in interest
rates of the Company's cost of borrowing, or a default under any material debt
agreement; (v) adverse state or federal legislation or regulation that increases
the cost of compliance, or adverse findings by a regulator with respect to
existing operations; (vi) loss of customers; (vii) inability to achieve future
sales; (viii) the unavailability of sufficient funds for operations or capital
expenditures; and (ix) inability to introduce new products as planned. Many of
such factors are beyond the control of the Company. Please refer to the
Company's SEC Form 10-K for its fiscal year ended December 31, 2001 for
additional cautionary statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
- -------------------------------------------------------------------------------
No significant changes in market risk have occurred since December 31, 2001.
Please refer to the Company's SEC Form 10-K for its fiscal year ended December
31, 2001 for additional discussions on market risks.
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ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------------------------------------------------------
As of September 30, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the CEO and CFO,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2002. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to September 30, 2002.
PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are attached hereto or are incorporated herein
by reference as indicated in the table below:
Exhibit Location if other
No. Title of Document than attached hereto
------ ----------------- --------------------
3.01* Certificate of Incorporation Amendment No. 1 to Form S-1,
filed October 24, 1997
3.02* Amended Bylaws March 31, 2002 Form 10-Q
filed May 10, 2002
(b) Reports on Form 8-K
Item(s) Reported Date Filed
1. Item 9 - Regulation FD Disclosure August 1, 2002 Form 8-K
Company Presentation
2. Item 9 - Regulation FD Disclosure
Certification Pursuant to
18 U.S.C. Section 1350 August 8, 2002 Form 8-K
* Denotes exhibits specifically incorporated in this Form 10-Q by
reference to other filings of the Company pursuant to the provisions of
Securities and Exchange Commission rule 12b-32 and Regulation S-K. These
documents are located under File No. 001-10287 at, among other locations, the
Securities and Exchange Commission, Public Reference Branch, 450 5th St., N.W.,
Washington,
D.C. 20549.
- -------------------------------------------------------------------------------
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZEVEX INTERNATIONAL, INC.
Dated: November 8, 2002
By /s/ David J. McNally
--------------------------
David J. McNally, CEO
(Chief Executive Officer)
By /s/ Phillip L. McStotts
------------------------------
Phillip L. McStotts, Secretary
(Principal Financial Officer)
CERTIFICATIONS
I, David J. McNally, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ZEVEX International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 8, 2002
By /s/ David J. McNally
--------------------------
David J. McNally, CEO
(Chief Executive Officer)
CERTIFICATIONS
I, Phillip L. McStotts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ZEVEX International,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 8, 2002
By /s/ Phillip L. McStotts
------------------------------
Phillip L. McStotts, Secretary
(Principal Financial Officer)