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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................to.................
Commission file number 001-1296
ZEVEX INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
DELAWARE 87-0462807
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(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 April 30, 2003, the
Company had outstanding 3,400,964 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") files herewith balance sheets of ZEVEX as of
March 31, 2003, and December 31, 2002, and the related statements of operations
and cash flows for the respective three month periods ended March 31, 2003 and
2002. In the opinion of ZEVEX' management, the financial statements reflect all
adjustments, all of which are normal recurring adjustments, necessary to fairly
present the financial condition of ZEVEX 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 ZEVEX and the notes thereto
included in the Annual Report of ZEVEX on Form 10-K for the year ended December
31, 2002.
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
ASSETS (unaudited)
-------------------------------------------
Current assets
Designated cash for sinking fund payment on industrial
development bond $ 119,776 $ 93,785
Accounts receivable, net of allowance for doubtful
accounts of $200,000 4,738,524 4,522,785
Inventories 6,218,880 6,348,856
Deferred income taxes 348,323 348,506
Income taxes receivable 156,526 283,522
Prepaid expenses and other current assets 185,717 184,492
---------- ----------
Total current assets 11,767,746 11,781,946
Property and equipment, net 6,191,691 6,498,957
Patents, trademarks and acquisition costs, net 375,099 364,640
Goodwill, net 10,089,035 10,089,035
Other assets 43,310 63,658
------------ ------------
Total assets $ 28,466,881 $ 28,798,236
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,235,886 $ 1,572,313
Other accrued liabilities 618,784 585,765
Bank line of credit 2,354,395 42,957
Current portion of industrial development bond 100,000 100,000
Payable related to product line acquisition and
convertible debt, short-term - 1,738,970
Current portion of other long-term debt 911,369 1,461,640
Current portion of capital leases 176,961 177,801
--------- ---------
Total current liabilities 5,397,395 5,679,446
Deferred income taxes 212,934 258,193
Industrial development bond 1,400,000 1,400,000
Other long-term debt - 139,586
Capital lease obligations 81,055 122,950
Stockholders' equity
Common stock; $.001 par value, 10,000,000
authorized shares, 3,440,197 issued, and 3,400,964
outstanding, at March 31, 2003 and December 31, 2002 3,440 3,440
Additional paid in capital 16,290,452 16,290,452
Treasury stock, 39,233 shares (at cost) at March 31, 2003
and December 31, 2002 (89,422) (89,422)
Retained earnings 5,171,027 4,993,591
---------- ----------
Total stockholders' equity 21,375,497 21,198,061
---------- ----------
Total liabilities and stockholders' equity $ 28,466,881 $ 28,798,236
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED INCOME STATEMENTS
Three months ended
March 31,
2003 2002
(unaudited) (unaudited)
------------------------------------
------------------------------------
Revenue:
Product sales $ 5,824,695 $ 5,927,931
Engineering services 823,489 167,723
---------- ----------
Total revenue 6,648,184 6,095,654
Cost of sales 4,057,091 3,656,001
Gross profit 2,591,093 2,439,653
Operating expenses:
General and administrative 1,033,457 1,285,503
Selling and marketing 1,033,663 860,920
Research and development 184,773 79,579
Total operating expenses 2,251,893 2,226,002
Operating income 339,200 213,651
Other income (expense):
Interest and other income 5,228 604
Interest expense (85,071) (150,638)
Gain on sale of marketable securities - 38,079
Income before income taxes 259,357 101,696
(Provision) benefit for income taxes (81,921) 20,680
-------- -------
Net income $ 177,436 $ 122,376
Basic net income per share $ 0.05 $ 0.04
Weighted average shares outstanding 3,400,964 3,415,197
Diluted net income per share $ 0.05 $ 0.04
Diluted weighted average shares outstanding 3,410,196 3,420,828
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
2003 2002
(unaudited) (unaudited)
---------------------- -------------------
---------------------- -------------------
Cash flows from operating activities
Net income $ 177,436 $ 122,376
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 403,107 396,367
Deferred income taxes (45,076) 7,262
Realized gain on marketable securities - (38,079)
Changes in operating assets and liabilities
Designated cash for sinking fund payment
on industrial development bond (25,991) (17,171)
Accounts receivable (215,739) 1,057,696
Inventories 129,976 535,212
Prepaid expenses and other assets 19,123 (147,263)
Accounts payable (336,427) (672,454)
Accrued and other liabilities 33,019 32,679
Income taxes receivable/payable 126,996 (27,940)
Net cash provided by operating activities 266,424 1,248,685
Cash flows from investing activities
Purchase of property and equipment (87,269) (91,240)
Additions of patents and trademarks (19,031) -
Redemption of available-for-sale marketable securities - 225,797
Net cash (used in) provided by investing activities (106,300) 134,557
Cash flows from financing activities
Principal payments on capital lease and long-term debt (732,592) (166,689)
Payments on business and product line acquisition debt (1,738,970) (5,000)
Net proceeds from (payments on) bank line of credit 2,311,438 (990,859)
Net cash used in financing activities (160,124) (1,162,548)
Net increase in cash and cash equivalents - 220,694
Cash and cash equivalents at beginning of period - 1,028,086
Cash and cash equivalents at end of period $ - $ 1,248,780
ZEVEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
1. Summary of Significant Accounting Policies
Description of Organization and Business
Founded in 1986, ZEVEX(R) International, Inc. ("the Company") through our
divisions and subsidiaries, engages in the business of designing, manufacturing,
and distributing medical devices. Our Therapeutics division markets
award-winning enteral nutrition delivery devices. Our Physical Evaluation
division markets industry-leading physical evaluation testing systems. Our
Applied Technology division designs and manufactures advanced medical components
and systems for other medical technology companies.
Principles of Consolidation
The consolidated financial statements at March 31, 2003 include the
accounts of ZEVEX International, Inc. and its wholly owned operating
subsidiaries: ZEVEX, Inc. and JTech Medical Industries, Inc. (JTech). For
additional information regarding the Company, refer to the 2002 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 2002 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
New Accounting Pronouncements
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 was effective for the Company on January 1, 2003. The adoption of this
statement did not have a material impact on the consolidated financial position
or consolidated results of operations of the Company.
In November of 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. This issue addresses certain aspects of
accounting for arrangements whereby a vendor performs multiple
revenue-generating activities. This issue addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting and how the related revenue should be measured and allocated to the
separate units of accounting. This issue is effective for revenue arrangements
entered into for fiscal periods beginning after June 15, 2003. The Company plans
to adopt EITF No. 00-21 in the third quarter which begins on July 1, 2003. The
Company believes that the effect of EITF No. 00-21 on the Company's results of
operations, financial position or liquidity will not be material because the
Company currently has few multiple deliverable revenue arrangements.
1. Description of Organization and Business and Summary of Significant
Accounting Policies (continued)
New Accounting Pronouncements (continued)
In December of 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS 148 are effective for financial
statements for fiscal years ending after December 15, 2002 and interim periods
beginning after December 31, 2002. The disclosure provisions of SFAS No. 148
have been adopted by the Company. SFAS No. 148 did not require the Company to
change to the fair value based method of accounting for stock-based
compensation. The Company has elected to continue to follow the intrinsic value
method of accounting as prescribed by APB No. 25, to account for employee stock
options. No stock-based employee compensation cost is reflected in net income,
as all options granted had an exercise price equal to or greater than the market
value of the underlying common stock on the date of grant.
Had compensation expense for options under the Company's two stock-based
compensation plans, which are not subject to variable plan accounting, been
determined based on the fair value of the option at the grant dates for awards
under those plans consistent with SFAS No. 123, the Company's net income and
earnings per share would have been adjusted to the pro forma amounts for the
quarter ended March 31 as indicated below:
March 31, 2003 March 31, 2002
----------------- -----------------
Net income as reported $ 177,436 $ 122,376
Less: Stock compensation expense determined under fair
value method, net of related tax effects 98,635 58,889
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----------------- -----------------
Pro forma net income $ 78,801 $ 63,487
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Earnings per share:
Basic - as reported $ 0.05 $ 0.04
Basic - pro forma $ 0.02 $ 0.02
Diluted - as reported $ 0.05 $ 0.04
Diluted - pro forma $ 0.02 $ 0.02
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation significantly changes current
practice in the accounting for, and disclosure of, guarantees. Guarantees
meeting the characteristics described in the Interpretation, which are not
included exceptions, are required to be initially recorded at fair value, which
is different from the general current practice of recording a liability only
when a loss is probable and reasonably estimable, as those terms are defined in
FASB Statement No. 5, Accounting for Contingencies. The Interpretation also
requires a guarantor to make significant new disclosures for virtually all
guarantees even when the likelihood of the guarantor's having to make payments
under the guarantee is remote. The Company believes provisions of this
interpretation will not have a material effect on ZEVEX' future results of
operations or financial condition, and does not believe that significant
additional disclosures are required.
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 4.25% at March 31, 2003 and December
31, 2002. The Company's balance on its line of credit was $2,354,395 at March
31, 2003 and $42,957 at December 31, 2002. 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. As of March 31,
2003, the Company was in compliance with these financial covenants. Management
expects to renew the existing line of credit upon its expiration.
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) was paid
on December 31, 2002.
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 ending March 31, 2003, and 2002, the Company did not have any
other elements of comprehensive income. Therefore, comprehensive income equaled
net income.
5. Inventories
Inventories consist of the following:
March 31, 2003 December 31, 2002
-------------------------------------------------
Materials $ 3,207,123 $ 3,028,782
Work in progress 402,918 1,087,474
Finished goods, including completed subassemblies 2,608,839 2,232,600
-------------------------------------------------
$ 6,218,880 $ 6,348,856
=================================================
6. Net Income Per Common Share
Basic net income per common share is calculated by dividing net income for the
period by the weighted-average number of the Company's common shares
outstanding.
Diluted net income 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.
7. Business Segments
The Company operates in three business segments, Therapeutics, Physical
Evaluation, and Applied Technology. The Therapeutics segment includes feeding
pumps, disposable sets and feeding tubes used by patients who require direct
gastrointestinal nutrition therapy (also called enteral feeding). The Physical
Evaluation segment includes the sale of stand-alone and computerized products
that measure isolated muscle strength, joint range of motion and sensation. In
the Applied Technology segment the Company provides design and manufacturing
services to global medical device leaders who, in turn, sell the Company's
components and systems under private labels or incorporate them into their
products. The Company evaluates the performance of the segments through gross
profit, less selling and marketing expenses, and research and development
expenses (or contribution margin). The Company does not allocate general and
administrative expenses by segment. General and administrative expenses are
included in Corporate and Unallocated amounts indicated below.
7. Business Segments (continued)
For the three months ended March 31, 2003 (in thousands):
Corporate
Physical Applied and
Therapeutics Evaluation Technology Unallocated Total
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Revenue $ 3,349 $ 761 $ 2,538 $ -- $ 6,648
Cost of sales 2,271 280 1,506 -- 4,057
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Gross profit 1,078 481 1,032 -- 2,591
Selling and marketing 551 380 103 -- 1,034
Research and development 66 119 -- -- 185
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Contribution margin 461 (18) 929 -- 1,372
General and administrative -- -- -- 1,033 1,033
Other (income)/expenses -- -- -- 80 80
Provision for income taxes -- -- -- 82 82
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-------------
Net income $ 177
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=============
Total assets $ 7,990 $ 6,163 $ 9,120 $ 5,194 $ 28,467
=============== =============== =============== ============== =============
Included in the segment assets disclosed above are accounts receivable,
inventories, specifically identified fixed assets and goodwill. Goodwill
represents approximately $842,000 in Therapeutics, $5,199,000 in Physical
Evaluation, and $4,048,000 in Applied Technology.
For the three months ended March 31, 2002 (in thousands):
Corporate
Physical Applied and
Therapeutics Evaluation Technology Unallocated Total
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Revenue $ 2,636 $ 882 $ 2,578 $ -- $ 6,096
Cost of sales 1,686 410 1,560 -- 3,656
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Gross profit 950 472 1,018 -- 2,440
Selling and marketing 509 263 74 15 861
Research and development 32 36 12 -- 80
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Contribution margin 409 173 932 (15) 1,499
General and administrative -- -- -- 1,285 1,285
Other (income)/expenses -- -- -- 112 112
Provision for income taxes -- -- -- (20) (20)
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-------------
Net loss $ 122
=============
=============
Total assets $ 9,036 $ 7,941 $ 8,597 $ 6,362 $ 31,936
=============== =============== =============== ============== =============
Included in the segment assets disclosed above are accounts receivable,
inventories, specifically identified fixed assets and goodwill. Goodwill
represents approximately $907,000 in Therapeutics, $5,199,000 in Physical
Evaluation, and $ 4,048,000 in Applied Technology.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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General
Founded in 1986, ZEVEX(R) International, Inc. ("ZEVEX") through our divisions
and subsidiaries, engages in the business of designing, manufacturing, and
distributing medical devices. Our Therapeutics division markets award-winning
enteral nutrition delivery devices. Our Physical Evaluation division markets
industry-leading physical evaluation testing systems. Our Applied Technology
division designs and manufactures advanced medical components and systems for
other medical technology companies. See Note 1 of the Financial Statements,
Description of Organization and Business for more information.
Results of Operations
Revenue was $6,648,184 for the first quarter ended March 31, 2003, compared to
$6,095,654 for the prior year, a 9% increase. The increase in revenue over last
years first quarter is largely due to a 19% increase in domestic sales of
EnteraLite(R) ambulatory enteral nutrition delivery pump and disposable sets
products and an increase of over $700,000 in international sales of our enteral
pumps, within our Therapeutics division. In addition revenue from engineering
services of our Applied Technology division quadrupled over those of the first
quarter of 2002. The revenue growth was partially offset by a decline in orders
for stationary enteral nutrition delivery pump disposable sets, weaker demand
for Physical Evaluation products, and reduced sales of some
contract-manufactured products of our Applied Technology division during the
quarter.
The percentage of revenue generated from proprietary products by our
Therapeutics and Physical Evaluation divisions increased to 62% compared to 58%
of from the first quarter of 2002. Sales of our Therapeutics products accounted
for approximately 50% of total revenue for the first quarter ended March 31,
2003, compared to 43% for the first quarter ended March 31, 2002. Sales from our
Physical Evaluation product line accounted for approximately 11% of total
revenue for the first quarter 2003, compared to 14% for the same period 2002.
Thirty-eight percent of our revenue during the first quarter 2003 was derived
from products manufactured for and sold to our contract manufacturing customers,
compared to 42% in the first quarter 2002. This shift in revenue sources from
contract manufacturing to proprietary products over the last three years has the
benefit of decreasing the percentage of our revenue generated by a small number
of major customers. During the first quarter 2003 and 2002, no single customer
accounted for over 10% of our revenue.
Our gross profit as a percentage of revenues was approximately 39% for the first
quarter of 2003, compared to 40% for the first quarter of 2002. We attribute the
slight decrease in gross profit percentage from 2002 to 2003 to the particular
product mix delivered during the quarters.
Selling, general and administrative expenses decreased slightly during the first
quarter of 2003 to $2,067,120, as compared to $2,146,423 for the first quarter
of 2002. Although we have decreased certain general and administrative costs, we
continue to invest in building our domestic sales forces for the Physical
Evaluation and Therapeutics divisions. Overall, sales and marketing expenses
increased to $1,033,663, for the first quarter 2003, from $860,920 for the first
quarter 2002.
We combine the resources of our full-time engineers and several other
independent contractors to perform research and development projects. We
invested $184,773 in the first quarter of 2003, compared to $79,579 in the first
quarter of 2002 for research and development of new products. In the first
quarter of 2003, research and development costs represented approximately 3% of
our revenue, compared to 1% in the first quarter of 2002. We are continuing our
efforts to develop and introduce new proprietary products and are currently
planning new product introductions during the fiscal year. Additionally, we are
investing in developing proprietary component technologies for our contract
manufacturing business. We expect research and development costs to be
approximately 3% of revenue during 2003.
Operating income increased 59% to $339,200, 5% of revenue in the first quarter
of 2003, compared to $213,651, 4% of revenue in the first quarter of 2002. Net
income increased 45% to $177,436, 3% of revenue in the first quarter of 2003,
compared to a net income of $122,376, 2% of revenue in the first quarter of
2002. The increase in net income during 2003, as compared to 2002, is due to
increased gross profit from sales growth, the decrease in general and
administrative expenses, and a reduction in interest expense from $150,638 to
$85,071, due to decreased debt and lower interest rates. For comparison
purposes, the 2002 net income figure includes a tax benefit as described below.
Depreciation and amortization expenses increased to $403,107 in the first
quarter 2003 from $396,367 in the first quarter 2002.
We had income tax expense of $81,921 in the first quarter of 2003 compared to an
income tax benefit of $20,680 for the first quarter of 2002. The increase in tax
expense from 2003 from 2002 is primarily due to the tax benefit derived from a
capital loss in 2002, 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 the first quarter of 2002 as well as increased taxable income.
As of March 31, 2003, our backlog of customer orders was $3,319,000, as compared
to $4,089,000 on March 31, 2002. We estimate that approximately 80% of the
backlog will be shipped before December 31, 2003. Our 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
Our 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, we 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 quarter of 2003 were
$266,424 compared to cash flows provided from operating activities for the first
quarter of 2002 of $1,248,685. In the first quarter of 2003, cash provided by
operating activities was primarily associated with an increase in net income and
our continued reduction in inventories. In the first quarter of 2002, cash
provided by operating activities was primarily associated with reduction of
accounts receivable due to improved collection procedures, reduction in
inventories as we continued to stream-line our purchasing and manufacturing
process, and income tax refunds related to capital loss carrybacks, partially
offset by a reduction of accounts payable.
Our working capital at March 31, 2003 was $6,370,351, compared to $6,726,487 at
March 31, 2002. The decrease in working capital was primarily due to the
reduction of inventories, deferred income taxes, and income taxes receivable,
the cash flow of which was used for debt reduction. The portion of working
capital represented by cash at such dates was $0 and $1,248,780 respectively.
The ratio of current assets to current liabilities increased to 2.18 at March
31, 2003, from 1.92 at March 31, 2002.
We have 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. We owed $2,354,395 on the line of credit at
March 31, 2003 and $42,957 at December 31, 2002. Management expects to renew the
existing line of credit upon its expiration.
On March 15, 2001, we entered into a Secured Financing Agreement with a bank for
the amount of $1,500,000. The agreement was secured by our existing base of
enteral feeding pumps, which were purchased from Nestle and are now manufactured
by us. The proceeds from the agreement were used to reduce our line of credit
balance. The agreement had a 36-month term, is due on February 15, 2004, and
bears interest at a rate of 8.24%. We paid off the financing agreement in March
2003, primarily using proceeds from our line of credit in the amount of
$589,998.
On April 18, 2001, we entered into a Term Loan Agreement with a bank for the
amount of $1,000,000. The agreement is secured by our manufacturing facility.
The proceeds from the Promissory Note were used to reduce our line of credit
balance. The note is due on May 15, 2003, is amortized over a fifteen-year term,
and bears interest at the financial institution's prime rate, currently 4.25%.
We owed $911,369 on the Term Loan Agreement at March 31, 2003. It is anticipated
that, upon maturity we will be able to refinance the Term Loan Agreement under
terms similar to the existing terms.
In 1997, we completed construction of our new 51,000 square foot headquarters
and manufacturing facility. The cost of this undertaking was approximately
$2,591,177. In 1996, we negotiated a $2.0 million Industrial Development Bond
("IDB") to finance this construction. As of March 31, 2003, the remaining
principal balance on the IBD was $1,500,000. During the first three months of
2003, the interest paid monthly ranged from 1.23% to 1.38% (APR).
In conjunction with certain 1998 business acquisitions, issued convertible
debentures in the aggregate amount of $5,447,188. The final principal payments
on the debentures were maid in January 2003 for $788,970 and March 2003 for
$950,000.
Purchases of leasehold improvements to our facilities, and new engineering,
production and testing equipment, and tooling totaled $87,269 for the first
three months of 2003, compared to $91,240 for the first three months of 2002. We
expects to spend approximately $300,000 during the remainder of 2003 for
additional manufacturing equipment and software, for normal replacement of aging
equipment, and manufacturing tooling related to its proprietary products.
Our expected principal liquidity requirements are working capital, investments
in capital expenditures, and debt reduction. We believe our sources of liquidity
are sufficient for operations during the coming twelve months with our projected
cash flows from operations and if necessary, the availability of funds under our
revolving line of credit.
Critical Accounting Policies and Estimates
In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" and 33-8056, "Commission
Statement about Management's Discussion and Analysis of Financial Condition and
Results of Operations," we have identified the following critical accounting
policies that affect the more significant judgments and estimates used in the
preparation of the consolidated financial statements. The preparation of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
judgments that affect our reported amounts of assets and liabilities, revenues
and expenses, and related disclosures. Our significant accounting policies are
included in Note 1 to the Consolidated Financial Statements and included in the
Annual Report of ZEVEX on Form 10-K for the year ended December 31, 2002.
We evaluate our estimates and judgments on an on-going basis. We base our
estimates on historical experience and on assumptions that we believe to be
reasonable under the circumstances. Our experience and assumptions form the
basis for our judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may vary from what
we anticipate and different assumptions or estimates about the future could
change our reported results. We believe the following accounting policies are
the most critical to us, in that they are important to the portrayal of our
financial statements and they require our most difficult, subjective, or complex
judgments in the preparation of our consolidated financial statements:
Allowance for Doubtful Accounts
As a general policy, collateral is not required for accounts receivable;
however, we periodically monitor the need for an allowance for doubtful accounts
based upon expected collections of accounts receivable and specific
identification of uncollectible accounts. Additionally, customers' financial
condition and credit worthiness are regularly evaluated. Historically losses on
collections have not been material. As of March 31, 2003, we have recorded an
allowance for bad debts of $200,000, approximately 4% of accounts receivable.
Product and Inventory Obsolescence
Rapid change and technological innovation characterize the marketplace for
medical products. As a result, we are subject to the risk of product and
inventory obsolescence, whether from prolonged development or government
approval cycles or the development of improved products or processes by
competitors. In addition, the marketplace could conclude that the task for which
a customer's medical product was designed is no longer an element of a generally
accepted diagnostic or treatment regimen. Inventories are stated at the lower of
cost or market; cost is determined using the standard cost method. As of March
31, 2003, we have recorded an obsolescence reserve in the amount of $254,000,
which is approximately 4% of inventories.
Sales Returns and Warranty
We record a provision for estimated sales returns and allowances and warranty
reserve on products we have sold. These estimates are based on historical sales
returns and warranty expenses and other known factors. If the historical data we
use to calculate these estimates does not properly reflect future returns and
warranty expenses, revenue could be overstated and expenses could be
understated. We have recorded a sales return and warranty expense allowance in
the amount of $85,000 as of March 31, 2003.
Revenue Recognition
ZEVEX recognizes revenue from products sold directly to end customers when
persuasive evidence of an arrangement exists, the price is fixed and
determinable, shipment is made and collectibility is reasonably assured.
Shipping and handling costs are expensed as incurred and are included in cost of
sales.
Contracts to perform engineering design and product development services are
generally performed on a time-and-materials basis. Revenue and expenses are
recognized as costs are incurred.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statement of Position (SOP) 97-2, Software
Revenue Recognition, in October 1997. SOP 97-2, provides authoritative guidance
on software revenue recognition, applies to all entities that earn revenue from
licensing, selling or otherwise marketing software. Our Physical Evaluation
product line derives a portion of its revenue from software products that
include post-contract customer support. We have recorded deferred revenue in the
amount of $25,000 for such post-contract customer support as of March 31, 2003.
Impairment
We have made acquisitions in the past that included a significant amount of
fixed assets, goodwill, and other intangible assets. The cost of the acquired
companies was allocated first to identifiable assets based on estimated fair
values. Intangible assets consist of goodwill, contracts, patents, and licenses.
Effective in 2002, goodwill is no longer amortized but is subject to an annual
(or, under certain circumstances, more frequent) impairment test, based on a
comparison of the carrying value of the goodwill and the fair value of the
respective business unit. Other intangible assets will generally continue to be
amortized over their useful lives and also will be subject to an impairment
test. Estimated fair value is typically less than values based on undiscounted
operating earnings because fair value estimates include a discount factor in
valuing future cash flows. There are many assumptions and estimates underlying
the determination of an impairment loss. Another estimate using different, but
still reasonable, assumptions could produce a significantly different result.
Therefore, impairment losses could be recorded in the future.
Currently, we assess the impairment of fixed assets and identifiable intangibles
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important that could trigger an
impairment review include the following:
o A significant underperformance relative to expected historical or projected
future operating results;
o A significant change in the manner of how we use the acquired asset or the
strategy for our overall business;
o A significant negative industry or economic trend.
When we determine that one or more of the above indicators of impairment exist,
we evaluate the carrying amounts of the affected assets. The evaluation, which
involves significant management judgment, is based on various analyses including
cash flow and profitability projections. To the extent such projections indicate
that future undiscounted cash flows are not sufficient to recover the carrying
amounts of the related long-lived assets, the carrying amount of the underlying
assets will be reduced, with the reduction charged to expense, so that the
carrying amount is equal to fair value, primarily based on future discounted
cash flows, using a discount rate determined by management to be commensurate
with the risk inherent in our current business model.
Net intangible assets and goodwill amounted to approximately $10.5 million as of
March 31, 2003. Net fixed assets amounted to approximately $6.2 million as of
March 31, 2003.
Income Taxes
Income taxes are recorded based on the liability method, which requires
recognition of deferred tax assets and liabilities based on differences between
financial reporting and tax bases of assets and liabilities measured using
enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. A valuation allowance is recorded to reduce
our deferred tax asset to an amount that is more likely than not to be realized,
as determined based on our analyses of projected taxable income, including tax
strategies available to generate future taxable income. Our analyses of future
taxable income are subject to a wide range of variables, many of which involve
our estimates, and therefore our deferred tax asset may not be ultimately
realized.
New Accounting Pronouncements
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 was effective for ZEVEX on January 1, 2003. The adoption of this statement
did not have a material impact on the consolidated financial position or
consolidated results of operations of ZEVEX.
In November of 2002, the EITF reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. This issue addresses certain aspects of
accounting for arrangements whereby a vendor performs multiple
revenue-generating activities. This issue addresses how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting and how the related revenue should be measured and allocated to the
separate units of accounting. This issue is effective for revenue arrangements
entered into for fiscal periods beginning after June 15, 2003. ZEVEX plans to
adopt EITF No. 00-21 in the third quarter which begins on July 1, 2003. ZEVEX
believes that the effect of EITF No. 00-21 on ZEVEX' results of operations,
financial position or liquidity will not be material because ZEVEX currently has
few multiple deliverable revenue arrangements.
In December of 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The provisions of SFAS 148 are effective for financial
statements for fiscal years ending after December 15, 2002 and interim periods
beginning after December 31, 2002. The disclosure provisions of SFAS No. 148
have been adopted by ZEVEX. SFAS No. 148 did not require ZEVEX to change to the
fair value based method of accounting for stock-based compensation. ZEVEX has
elected to continue to follow the intrinsic value method of accounting as
prescribed by APB No. 25, to account for employee stock options. No stock-based
employee compensation cost is reflected in net income, as all options granted
had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant.
Had compensation expense for options under our two stock-based compensation
plans, which are not subject to variable plan accounting, been determined based
on the fair value of the option at the grant dates for awards under those plans
consistent with SFAS No. 123, ZEVEX' net income and earnings per share would
have been adjusted to the pro forma amounts for the quarter ended March 31 as
indicated below:
March 31, 2003 March 31, 2002
----------------- -----------------
Net income as reported $ 177,436 $ 122,376
Less: Stock compensation expense determined under fair
value method, net of related tax effects 98,635
58,889
----------------- -----------------
----------------- -----------------
Pro forma net income $ 78,801 $ 63,487
================= =================
================= =================
Earnings per share:
Basic - as reported $ 0.05 $ 0.04
Basic - pro forma $ 0.02 $ 0.02
Diluted - as reported $ 0.05 $ 0.04
Diluted - pro forma $ 0.02 $ 0.02
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation significantly changes current
practice in the accounting for, and disclosure of, guarantees. Guarantees
meeting the characteristics described in the Interpretation, which are not
included exceptions, are required to be initially recorded at fair value, which
is different from the general current practice of recording a liability only
when a loss is probable and reasonably estimable, as those terms are defined in
FASB Statement No. 5, Accounting for Contingencies. The Interpretation also
requires a guarantor to make significant new disclosures for virtually all
guarantees even when the likelihood of the guarantor's having to make payments
under the guarantee is remote. We believe provisions of this interpretation will
not have a material effect on our future results of operations or financial
condition, and do not believe that significant additional disclosures are
required.
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 ZEVEX' statements
about the level of anticipated expenses during 2003 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 ZEVEX disclaims
any obligation to update them. All of these forward-looking statements are based
on estimates and assumptions made by management of ZEVEX, 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
ZEVEX not to achieve the benefits contemplated herein, or otherwise cause ZEVEX'
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 ZEVEX' growth and operating strategies;
(iii) loss or retirement of key members of management; (iv) increase in interest
rates of ZEVEX' 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 ZEVEX. Please refer to ZEVEX' SEC Form
10-K for its fiscal year ended December 31, 2002 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, 2002.
Please refer to ZEVEX' SEC Form 10-K for its fiscal year ended December 31, 2002
for additional discussions on market risks.
- -------------------------------------------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------------------------------------------------------
Within 90 days prior to the date of this report, our management, including our
CEO and CFO, evaluated the effectiveness of our "disclosure controls and
procedures" (the controls and other procedures for recording, processing,
summarizing and reporting on a timely basis the information required to be
disclosed in the periodic reports that we file with the U.S. Securities and
Exchange Commission). Based on that evaluation, and subject to the limitations
noted below, our management concluded that our disclosure controls and
procedures are effective to ensure that material information about us and our
subsidiaries is made known to management by others in our company on a timely
basis for preparation of our periodic reports. While we believe our disclosure
controls and procedures are effective, we note that controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the controls and procedures are met.
There are inherent limitations, including the possibility that judgments in
decision-making can be faulty, that breakdowns can occur because of simple error
or mistake, or that a person may circumvent the controls. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Additionally, since the date of our last evaluation of our internal controls
(the controls and procedures designed to permit the preparation of our financial
statements in conformity with generally accepted accounting principles), there
have been no significant changes in such controls or, to our knowledge, in other
factors that could significantly affect those controls.
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
99.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
This document is being furnished
in accordance with SEC Release Nos. 33-8212
and 34-47551.
99.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
This document is being furnished
in accordance with SEC Release Nos. 33-8212
and 34-47551.
(b) Reports on Form 8-K
Item(s) Reported Date Filed
1. Item 9 - Regulation FD Disclosure
Certification Pursuant to
18 U.S.C. Section 1350 March 27, 2003 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: May 12, 2003
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: May 12, 2003
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: May 12, 2003
By /s/ Phillip L. McStotts
------------------------------
Phillip L. McStotts, Secretary
(Principal Financial Officer)
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, David J. McNally, certify to the best of my knowledge and belief, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of
ZEVEX International, Inc. (the "Company") on Form 10-Q for the quarter ending
March 31, 2003 as filed with the Securities and Exchange Commission on May 13,
2003 (the "Report"), fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and the information contained in
the Report fairly presents in all material respects the financial condition and
results of operations of the Company.
/s/ David J. McNally
David J. McNally
Chief Executive Officer
May 12, 2003
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Phillip L. McStotts, certify to the best of my knowledge and belief, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of
ZEVEX International, Inc. (the "Company") on Form 10-Q for the quarter ending
March 31, 2003 as filed with the Securities and Exchange Commission on May 13,
2003 (the "Report"), fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and the information contained in
the Report fairly presents in all material respects the financial condition and
results of operations of the Company.
/s/ Phillip L. McStotts
Phillip L. McStotts
Chief Financial Officer
May 12, 2003