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, 2004
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 of (I.R.S. Employer
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 26, 2004, 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" or the "Company") files herewith balance
sheets of ZEVEX as of March 31, 2004, and December 31, 2003, and the related
statements of operations and cash flows for the respective three month periods
ended March 31, 2004 and 2003. 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, 2003.
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
ASSETS (unaudited)
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Current assets
Cash and cash equivalents $ 663,600 $ 668,089
Designated cash for sinking fund payment on industrial
development bond 120,549 95,277
Accounts receivable, net of allowance for doubtful
accounts of $185,000 3,361,360 3,830,341
Other receivable 70,500 1,200,000
Inventories 3,464,921 4,114,567
Marketable securities 95,200 88,000
Income taxes receivable 438,933 442,548
Prepaid expenses and other current assets 62,798 115,457
Total current assets 8,277,861 10,554,279
Property and equipment, net 4,632,012 4,799,120
Patents, trademarks and other intangibles, net 333,483 330,277
Goodwill, net 4,048,264 4,048,264
Other assets 12,156 145
Total assets $ 17,303,776 $ 19,732,085
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,334,597 $ 1,540,700
Other accrued liabilities 476,827 525,071
Deferred revenue 14,043 538,770
Bank line of credit - 1,810,970
Current portion of industrial development bond 100,000 100,000
Current portion of other long-term debt 51,120 50,430
Current portion of capital leases 81,055 122,950
Total current liabilities 2,057,642 4,688,891
Industrial development bond 1,300,000 1,300,000
Other long-term debt 806,567 819,608
Stockholders' equity
Common stock; $.001 par value, 10,000,000
authorized shares, 3,440,197 issued and 3,400,964
outstanding at March 31, 2004 and December 31, 2003 3,440 3,440
Additional paid in capital 16,290,452 16,290,452
Unrealized gain on marketable securities 10,267 3,067
Treasury stock, 39,233 shares (at cost) at
March 31, 2004 and December 31, 2003 (89,422) (89,422)
Accumulated deficit (3,075,170) (3,283,951)
Total stockholders' equity 13,139,567 12,923,586
Total liabilities and stockholders' equity $ 17,303,776 $ 19,732,085
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31
2004 2003
(unaudited) (unaudited)
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Revenue:
Product sales $ 6,114,532 $ 5,824,695
Engineering services 94,172 823,489
Total revenue 6,208,704 6,648,184
Cost of sales 3,882,408 3,868,233
Gross profit 2,326,296 2,779,951
Operating expenses:
General and administrative 890,701 1,033,457
Selling and marketing 797,446 1,033,663
Research and development 386,528 373,631
Total operating expenses 2,074,675 2,440,751
Operating income 251,621 339,200
Other income (expense):
Interest and other income 1,786 5,228
Interest expense (41,011) (85,071)
Income before income taxes 212,396 259,357
Provision for income taxes (3,615) (81,921)
Net income $ 208,781 $ 177,436
Basic net income per share $ 0.06 $ 0.05
Weighted average shares outstanding 3,400,964 3,400,964
Diluted net income per share $ 0.06 $ 0.05
Diluted weighted average shares outstanding 3,461,575 3,410,196
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31
2004 2003
(unaudited) (unaudited)
---------------------- -------------------
---------------------- -------------------
Cash flows from operating activities
Net income $ 208,781 $ 177,436
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 214,293 403,107
Deferred income taxes - (45,076)
Changes in operating assets and liabilities
Designated cash for sinking fund payment
on industrial development bond (25,272) (25,991)
Accounts receivable 468,981 (215,739)
Inventories 649,646 129,976
Prepaid expenses and other assets 68,742 19,123
Accounts payable (206,103) (336,427)
Accrued and other liabilities (48,244) 33,019
Deferred revenue (412,024) -
Income taxes receivable/payable 3,615 126,996
Net cash provided by operating activities 922,415 266,424
Cash flows from investing activities
Purchase of property and equipment (41,146) (87,269)
Additions of patents and trademarks (9,245) (19,031)
Proceeds from other receivable from sale of business 988,703 -
Net cash provided by (used in) investing activities 938,312 (106,300)
Cash flows from financing activities
Principal payments on capital lease and long-term debt (54,246) (732,592)
Payments on business and product line acquisition debt - (1,738,970)
Net (payments on) proceeds from bank line of credit (1,810,970) 2,311,438
Net cash used in financing activities (1,865,216) (160,124)
Net decrease in cash and cash equivalents (4,489) -
Cash and cash equivalents at beginning of period 668,089 -
Cash and cash equivalents at end of period $ 663,600 $ -
ZEVEX INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
1. Description of Organization and Business and 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. The Company, through its divisions
and subsidiaries, engages in the business of designing, manufacturing and
distributing medical devices. The Therapeutics division markets enteral
nutrition delivery devices. Until December 31, 2003 when it was sold, the
Physical Evaluation division marketed industry-leading physical evaluation
testing systems. The Applied Technology division designs and manufactures
advanced medical components and systems for medical technology companies.
On December 31, 2003, the Company completed the sale of its Physical Evaluation
business. The transaction was accomplished by the sale of all the issued and
outstanding capital stock of JTech Medical Industries, Inc., ("JTech"), a wholly
owned subsidiary of the Company. The transaction was effected by a Stock
Purchase Agreement (the "Stock Purchase Agreement") dated December 31, 2003 by
and between the Company and a former employee, officer and director of the
Company (see Note 3).
For additional information regarding the Company, refer to its 2003 Annual
Report on SEC Form 10-K.
Principles of Consolidation
The consolidated financial statements as of March 31, 2004 include the accounts
of ZEVEX International, Inc. (the Company) and its wholly owned operating
subsidiary ZEVEX, Inc. For the period ended March 31, 2003, the consolidated
statement of operations included the accounts of the Company's wholly owned
operating subsidiary, JTech. As discussed above and in Note 3, JTech was sold
effective December 31, 2003. All significant intercompany balances and
transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information along with the instructions to Form 10-Q. 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 2003 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.
Stock Based Compensation
The Company follows the intrinsic value method of accounting as prescribed by
APB No. 25 to account for employee stock options. No stock-based employee
compensation cost has been recorded 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 been determined based on the fair value of the options 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 three months ended March 31 as indicated below:
March 31, 2004 March 31, 2003
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Net income as reported $ 208,781 $ 177,436
Less: Stock compensation expense determined under fair
value method, net of related tax effects 125,235 98,635
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Pro forma net income $ 83,546 $ 78,801
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Earnings per share:
Basic - as reported $ 0.06 $ 0.05
Basic - pro forma $ 0.02 $ 0.02
Diluted - as reported $ 0.06 $ 0.05
Diluted - pro forma $ 0.02 $ 0.02
2. Debt
The Company maintains a line of credit arrangement with a financial institution.
The line was reduced from $6 million to $3 million on March 10, 2004. The line
of credit matures on May 29, 2004. The line of credit is collateralized by
accounts receivable and inventory and bears interest at the prime rate, which
was 4.00% at March 31, 2004 and December 31, 2003. The Company's balance on its
line of credit was $0 at March 31, 2004 and $1,810,970 at December 31, 2003.
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, 2004, the Company was in compliance with
these financial covenants.
On April 18, 2001, the Company entered into a Term Loan Agreement with a bank
for the amount of $1,000,000. The agreement is secured by the Company's
manufacturing facility. The note was due on May 15, 2003. The Term Loan
Agreement which was renegotiated effective May 15, 2003, is now due May 15, 2008
and is being amortized over a thirteen-year term, at an interest rate of 5.4%.
The Company owed $857,687 on the Term Loan Agreement at March 31, 2004.
3. Related Party Transactions
On December 31, 2003, the Company completed the sale of its Physical Evaluation
business. The transaction was accomplished through the sale of all the issued
and outstanding capital stock of JTech, previously a wholly owned subsidiary of
the Company. The transaction was effected by a Stock Purchase Agreement dated
December 31, 2003 by and between the Company and Mr. Leonard C. Smith, a former
employee, officer and director of the Company, for a purchase price of $1.2
million, which was recorded as an "other receivable" at December 31, 2003. Cash
of $1,129,500 was received on January 15, 2003, with the remainder to be paid
when the Company satisfies certain obligations to JTech as set forth in the
Stock Purchase Agreement. Such obligations include the requirement to deliver
inventory, upon completion of production, and certain other equipment. Deferred
revenue of $324,000 was recorded related to these obligations, of which
approximately $196,000 was recognized in the first quarter 2004 in product sales
in the consolidated statement of operations and of which approximately $113,000
was recorded in other income offset by costs associated with the other income of
$113,000. Additionally, pursuant to the Stock Purchase Agreement, the Company
may receive additional payments from the purchaser based upon specifically
identified JTech product sales in 2004 and 2005.
4. Comprehensive Income
For the three months ended March 31, 2004, the Company had comprehensive income
of $215,981. For the three months ended March 31, 2003, the Company did not have
any additional elements of comprehensive income. Therefore, comprehensive income
equaled net income.
5. Inventories
Inventories consist of the following:
March 31, 2004 December 31, 2003
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Materials $ 1,828,032 $ 2,144,926
Work in progress 562,144 504,921
Finished goods, including completed subassemblies 1,074,745 1,464,720
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$ 3,464,921 $ 4,114,567
=================================================
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. For the three months ended March 31,
2004 and March 31, 2003, 563,500 option shares and 636,550 option shares were
not included because they were antidilutive.
7. Business Segments
Through December 31, 2003 the Company operated in three business segments:
Therapeutics, Physical Evaluation, and Applied Technology. The Therapeutics
segment includes the manufacture and sale of 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 manufacture and 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
medical device companies 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.
On December 31, 2003, the Company completed the sale of its Physical Evaluation
business (See Note 3).
Segment information for the three months ended March 31, 2004 (in thousands)
follows:
Corporate and
Physical Applied Unallocated
Therapeutics Evaluation Technology Total
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Revenue $ 2,995 n/a $ 3,214 $ -- $ 6,209
Cost of sales 1,517 n/a 2,365 -- 3,882
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Gross profit 1,478 n/a 849 -- 2,327
Selling and marketing 700 n/a 97 -- 797
Research and development 227 n/a 160 -- 387
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Contribution margin 551 n/a 592 -- 1,143
General and administrative -- n/a -- 891 891
Other (income)/expenses -- n/a -- 39 39
Provision for income taxes -- n/a -- 4 4
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Net income $ 209
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=============
Total assets $ 654 n/a $ 4,048 $ 12,602 $ 17,304
=============== =============== =============== ============== =============
Included in the segment assets disclosed above are specifically identified fixed
assets and goodwill. All assets other than those specifically identified fixed
assets and goodwill are included in Corporate and Unallocated. The only
specifically identified fixed assets include nutritional pumps and tooling,
which are included in the Therapeutics segment. All other fixed assets are used
jointly by the segments. Goodwill represents approximately $4,048,000 in Applied
Technology.
Segment information for the three months ended March 31, 2003 (in thousands)
follows:
Corporate and
Physical Applied Unallocated
Therapeutics Evaluation Technology Total
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Revenue $ 3,349 $ 761 $ 2,538 $ -- $ 6,648
Cost of sales 2,214 222 1,432 -- 3,868
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
Gross profit 1,135 539 1,106 -- 2,780
Selling and marketing 551 380 103 -- 1,034
Research and development 123 177 74 -- 374
--------------- --------------- --------------- -------------- -------------
--------------- --------------- --------------- -------------- -------------
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 $ 3,042 $ 5,199 $ 4,048 $ 5,194 $ 16,178
=============== =============== =============== ============== =============
Prior to the second quarter 2003, the Company also included accounts receivable
and inventory in segment assets. However, due to changes in the accumulation of
the Company's financial information, accounts receivable and inventory are no
longer tracked separately by segment. The Company has restated the information
for the three months ended March 31, 2003 to conform to this presentation.
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Overview
Through our divisions and subsidiaries, we engage in the business of designing,
manufacturing and distributing medical devices. Our Applied Technology division
designs and manufactures advanced medical components and systems for original
equipment manufacturers ("OEM's"). Our Therapeutics division markets enteral
nutrition delivery devices. Until its sale on December 31, 2003 our Physical
Evaluation division marketed industry-leading physical evaluation testing
systems. Please refer to Note 7 to the Unaudited Consolidated Financial
Statements for discussion of our business segments.
Since 1987, we have been a contract manufacturer providing design and
manufacturing services to medical companies who sell our components and systems
under private label, primarily incorporating our core technologies of
ultrasound, fluid delivery and optoelectronics. This business is conducted
through our Applied Technology division. Applied Technology division revenue
increased 27% during the first quarter of 2004, compared to the first quarter of
2003.
The products of our Therapeutics division include ambulatory enteral feeding
pumps and related disposable sets for mobile patients, as well as stationary
enteral feeding pumps and disposable sets. We entered the home health care
segment of the enteral nutrition delivery market in 1996 with the introduction
of the EnteraLite(R) ambulatory enteral feeding pump, which continues to gain
acceptance due to its superior mobility and state-of-the-art features. We
believe that by improving the convenience of nutrition delivery, the
EnteraLite(R) can contribute to better clinical outcomes and improved quality of
life for enteral patients. Domestic sales of our EnteraLite(R) product line grew
by approximately 7% in the first quarter of 2004, compared to the first quarter
of 2003.
At the time of the 1998 acquisition of the Nutrition Medical line of stationary
enteral feeding pumps and the 2000 acquisition of the Nestle USA, Inc. enteral
nutrition delivery business, we intended to aggressively expand into the
long-term care market for enteral feeding delivery products. After several years
of downward competitive pricing pressure in this market segment, our revenue has
decreased by over 50%, which includes a decrease in revenue of approximately
$100,000 from the first quarter of 2004 compared to the first quarter 2003.
Last year, in response to the changing marketplaces of our business segments, we
evaluated our business opportunities and refocused on our core market offerings
of ambulatory enteral feeding and our specialized contract manufacturing
services. We established a lean manufacturing philosophy, including the
transition from batch processing to continuous flow production, developed a
business model with market development strategies designed to capitalize on
profitable business opportunities, and sold the Physical Evaluation business in
December 2003.
The sale of our Physical Evaluation business was accomplished by the sale of all
the issued and outstanding capital stock of JTech Medical Industries, Inc. our
wholly-owned operating subsidiary. The transaction was effected by a Stock
Purchase Agreement dated December 31, 2003 by and between us and Mr. Leonard C.
Smith, a former employee, officer and director of ZEVEX. Please refer to Note 3
to the Unaudited Consolidated Financial Statements for discussion of the sale.
Results of Operations
Revenue for the Applied Technology and Therapeutics divisions increased by 5%
during the first quarter of 2004, compared to the first quarter of 2003. Revenue
for these two divisions was $6,208,704 during the first quarter of 2004,
compared to $5,887,496 for the first quarter of 2003. These comparisons do not
include revenue from the Physical Evaluation division, which was sold on
December 31, 2003. Revenue in the first quarter of 2003 from the Physical
Evaluation division was $760,688.
The increase in revenue over last year's first quarter, excluding the Physical
Evaluation business, is largely due to a 28% increase in Applied Technology
division revenue. Specifically, surgical handpiece and sensor revenue increased
29%, and medical systems revenue increased by approximately $900,000 for the
quarter. These increases more than offset lower engineering revenue, as certain
programs have now moved from engineering to manufacturing. Approximately
$255,000 of Applied Technology systems revenue growth was generated by the sale
of products manufactured for JTech, the Physical Evaluation business that was
sold at year-end under a Stock Purchase Agreement. Within the Therapeutics
division, EnteraLite feeding pump and disposable set revenue increased 7%, but
this growth only partially offset a 12% decrease in stationary disposable set
revenue and a 48% decrease in international enteral pump revenue. Overall, sales
for the Therapeutics division declined approximately 11% during the first
quarter of 2004, compared the first quarter of 2003.
Applied Technology contract manufactured products generated 52% of total revenue
during the first quarter of 2004, and our proprietary Therapeutics products
generated 48% of revenue during the quarter. Excluding revenue from the Physical
Evaluation business which has since been sold, Applied Technology revenue was
43% of total revenue for the first quarter of 2003 and our proprietary
Therapeutics products generated 57% of revenue. If sales from the Physical
Evaluation division were included in this comparison, proprietary product
revenue would have represented 62% of total revenue and Applied Technology
revenue would have been 38% of total revenue in the first quarter of 2003.
During the first quarter of 2004 and 2003, no single customer accounted for over
10% of our revenue.
Our gross profit as a percentage of revenue was approximately 37% for the first
quarter of 2004, compared to 42% for the first quarter of 2003. We attribute the
decrease in gross profit percentage from 2004 to 2003 to the required deliveries
under the Stock Purchase Agreement from the sale of JTech, which included the
delivery of approximately $255,000 in product at little or no margin, pass
through revenue on NRE tooling costs for a customer, and differences in the
product mix delivered during the quarters.
Depreciation and amortization expenses decreased to $214,293 in the first
quarter 2004 from $403,107 in the first quarter 2003. The decrease is primarily
due the impairment loss recorded on assets in 2003, resulting in a subsequent
decline in depreciation expense.
Selling, general and administrative expenses decreased during the first quarter
of 2004 to $1,688,147, as compared to $2,067,120 for the first quarter of 2003.
The decrease is primarily related to reduction in personnel from the sale of the
Physical Evaluation business.
We invested $386,528 in the research and development of new products during the
first quarter of 2004, compared to $373,631 in the first quarter of 2003. In the
first quarter of 2004, research and development costs represented approximately
6% of our revenue, consistent with 6% in the first quarter of 2003. We are
continuing our efforts to develop and introduce new proprietary products and are
currently planning at least one new product introduction 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 6% of revenue during 2004.
Operating income decreased to $251,621, 4% of revenue in the first quarter of
2004, compared to $339,200, 5% of revenue in the first quarter of 2003 due to
the factors described above. Net income increased 18% to $208,781, 3% of revenue
in the first quarter of 2004, compared to net income of $177,436, 3% of revenue
in the first quarter of 2003. The increase in net income during 2004, as
compared to 2003, is due to a decrease of $44,060 in interest expense, as the
company has reduced its debt during the past year, and the realization of a
deferred tax asset valuation allowance (see below).
We had income tax expense of $3,615 in the first quarter of 2004, compared to
income tax expense of $81,921 for the first quarter of 2003. The decrease in tax
expense in 2004 from 2003 is due to the reversal of part of our deferred tax
asset valuation allowance in the first quarter of 2004. We expect that we will
be able to realize a portion of the deferred tax valuation allowance related to
net operating loss carry forwards in 2004, thereby resulting in a partial
reversal of the related valuation allowance.
At March 31, 2004 and December 31, 2003, we had net current deferred tax assets
of $0. Realization of our gross deferred tax assets is dependent on our ability
to generate taxable income in the year the assets are realized. Under FAS 109
Accounting for Income Taxes, guidance has been issued relating to cumulative
losses in recent years. Under this guidance, when there is a cumulative pretax
loss for financial reporting for the current and two preceding years and a
company does not have objective planning strategies designed to realize its
deferred tax assets, generally no deferred tax asset should be recognized. In
following this guidance management has established a full valuation allowance
for all deferred tax assets. We are allowed to realize a portion of the
valuation allowance as we have taxable income. Due to the taxable income
generated by us, approximately $83,000 of the valuation allowance was realized
in the first quarter of 2004.
As of March 31, 2004, our backlog of customer orders was $5,255,000, as compared
to $3,319,000 on March 31, 2003. We estimate that approximately 80% of the
backlog will be shipped before December 31, 2004. Our backlog is for contract
manufacturing only and can be significantly affected by the timing of annual or
semi-annual purchase orders placed by our customers.
Liquidity and Capital Resources
Our primary sources of liquidity have consisted of cash flow from operations,
borrowings under our revolving line of credit and other financial arrangements
described below. In prior years, we also have increased working capital through
the issuance of stock and we may do so in the future.
Cash flows provided by operating activities for the first three months of 2004
were $922,415, compared to $266,424 for the first three months of 2003. In the
first three months of 2004, cash provided by operating activities was primarily
associated with receipt of the payment related to the JTech portion of the
deferred revenue aspect of the Stock Purchase Agreement, our continued reduction
in inventories and our improved collection procedures. In the first three months
of 2003, cash provided by operating activities was primarily associated with net
income and our continued reduction of inventories as we continued to stream-line
our purchasing and manufacturing processes.
Our working capital at March 31, 2004 was $6,220,219, compared to $6,370,351 at
March 31, 2003. The portion of working capital represented by cash at such dates
was $663,600 and $0 respectively. The ratio of current assets to current
liabilities increased to 4.02 at March 31, 2004, from 2.18 at March 31, 2003.
We have a $3,000,000 open line of credit arrangement with a financial
institution. The line matures on May 29, 2004. The line of credit is
collateralized by accounts receivable and inventories, and bears interest at the
financial institution's prime rate, 4% at March 31, 2004. We owed $0 on the line
of credit at March 31, 2004 and $1,810,970 at December 31, 2003. We expect to
renew the line of credit before 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 the balance on our
line of credit. The note was due on May 15, 2003. The Term Loan Agreement which
was renegotiated effective May 15, 2003, is now due May 15, 2008 and is being
amortized over a thirteen-year term at an interest rate of 5.4%. We owed
$857,687 on the Term Loan Agreement at March 31, 2004.
In 1997, we completed construction of our new 51,000 square foot headquarters
and manufacturing facility. The cost of this undertaking was $2,591,177. In
1996, we negotiated a $2.0 million Industrial Development Bond ("IDB") to
finance this construction. As of March 31, 2004, the remaining principal balance
on the IBD was $1,400,000. During the first three months of 2004, the interest
paid monthly ranged from 1.06% to 1.22% (APR).
In conjunction with certain 1998 business acquisitions, we issued convertible
debentures in the aggregate amount of $5,447,188. The final payments on the
debentures were made in January 2003 for $788,970 and in March 2003 for
$950,000, primarily using proceeds from our line of credit.
Purchases of leasehold improvements to our facilities, tooling and new
engineering, production and testing equipment totaled $41,146 for the first
three months of 2004, compared to $87,269 for the first three months of 2003. We
expect to spend approximately $300,000 during the remainder of 2004 for
additional manufacturing equipment and software, for normal replacement of aging
equipment, and manufacturing tooling related to our 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. These sources
include our projected cash from operations and, if necessary, draws from our
existing revolving line of credit.
Off Balance Sheet Items
We have no off-balance sheet items.
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 our Annual Report on Form 10-K for the year ended December 31, 2003.
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 material 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, historical bad debt
rates, and specific identification of uncollectible accounts. Based on these
factors, we record an allowance to provide for accounts that we believe may not
be ultimately collectable. Additionally, customers' financial condition and
credit worthiness are regularly evaluated. Historically losses on collections
have not been material. As of March 31, 2004, we have recorded an allowance for
bad debts of $185,000, approximately 5.2% of accounts receivable.
Product and Inventory Obsolescence
Rapid change and technological innovation characterize the marketplace for
medical products. As a result, we and our customers are subject to the risk of
product and inventory obsolescence, whether from prolonged development,
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. Accordingly, we write down
inventory that we believe is in excess or obsolete. Inventories are stated at
the lower of cost or market; cost is determined using the first-in, first-out
method. As of March 31, 2004, we have reduced inventory by the amount of
$254,000, which is approximately 6.8% of gross 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 or understated and expenses could
be understated or overstated. We have recorded a sales return and warranty
expense allowance in the amount of $85,000 as of March 31, 2004.
Revenue Recognition
We recognize 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 title has passed, and collectibility is
reasonably assured. If such criteria are not met, revenue is deferred.
Contracts to perform engineering design and product development services are
generally performed on a time and materials basis. Revenue generally is
recognized as milestones are achieved.
We accounted for revenue from software transactions pursuant to SOP No. 97-2,
Software Revenue Recognition, as amended by SOP No. 98-4 and SOP No. 98-9. SOP
No. 97-2 requires that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements,
post-contract customer support, installation, or training. Under SOP No. 97-2,
the determination of fair value is based on objective evidence, which is
specific to the vendor. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered. As of December 31, 2003 we sold our Physical
Evaluation business and no longer sell software or related services.
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 $4.4 million as of
March 31, 2004. Net fixed assets amounted to approximately $4.6 million as of
March 31, 2004.
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. As of March 31, 2004 a full valuation has been recorded for all
deferred tax 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 U.S. Office of
Inspector General (OIG), served a subpoena on the 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 documents relating to our enteral pump customers, marketing
and billing practices. We responded to the subpoena. Since October of 2001 we
have not been contacted further by the OIG, although we understand the
investigation is proceeding and we intend to cooperate with the investigation
when contacted again. At this time we are uncertain as to any future impact this
investigation will have on our 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 our statements
about the level of anticipated expenses during 2004 and our 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 we disclaim any
obligation to update them. All of these forward-looking statements are based on
estimates and assumptions made by our management, 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 us not to
achieve the benefits contemplated herein, or otherwise cause our 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 our growth and operating strategies; (iii) loss
or retirement of key members of management; (iv) increase in interest rates of
our 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 our control. Please refer to our SEC Form 10-K for the
fiscal year ended December 31, 2003 for additional cautionary statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
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No significant changes in market risk have occurred since December 31, 2003.
Please refer to our SEC Form 10-K for the fiscal year ended December 31, 2003
for additional discussion on market risk.
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ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------------------------------------------------------
Our management, including our CEO and CFO, has 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) as of the end of the first quarter.
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 a simple error or mistake, or that
a person may circumvent the controls. Also, because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
There has been no change in our internal control over financial reporting that
occurred during the first fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
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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
31.01 Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
31.02 Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
32.01 Section 1350 Certification of Chief Executive Officer
32.02 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K
Item(s) Reported Date Filed
Item 2 - Acquisition or Disposition of Assets
Pro Forma Financial Statements from
Sale of Business January 15, 2004
* 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 6, 2004
By /s/ David J. McNally
--------------------------
David J. McNally, CEO
(Chief Executive Officer)
By /s/ Phillip L. McStotts
------------------------------
Phillip L. McStotts, Secretary
(Principal Financial Officer)
Exhibit 31.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER,
AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
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 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 annual report;
4. The registrant's other certifying officers and I, are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Dated: May 6, 2004
By /s/ David J. McNally
--------------------------
David J. McNally, CEO
(Chief Executive Officer)
Exhibit 31.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER,
AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
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 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 annual report;
4. The registrant's other certifying officers and I, are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Dated: May 6, 2004
By /s/ Phillip L. McStotts
-----------------------------
Phillip L. McStotts, CFO
(Chief Financial Officer)
EXHIBIT 32.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER,
AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
I, David J. McNally, hereby certify pursuant to 18 U.S.C. Section 1350 adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
(i) The accompanying annual report on Form 10-K for the quarter ended
March 31, 2004, fully complies with the requirements of Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of ZEVEX
International, Inc.
Dated: May 6, 2004
By /s/ David J. McNally
David J. McNally, CEO
(Chief Executive Officer)
EXHIBIT 32.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER,
AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
I, Phillip L. McStotts, hereby certify pursuant to 18 U.S.C. Section 1350
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
(i) The accompanying annual report on Form 10-K for the quarter ended
March 31, 2004, fully complies with the requirements of Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of ZEVEX
International, Inc.
Dated: May 6, 2004
By /s/ Phillip L. McStotts
Phillip L. McStotts, CFO
(Chief Financial Officer)