-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uhj4BzTiin5sBW4xqgZ6NqA0Kg2ZPqoIeERPxvaenQALzLkZSsyX8tZy4fDNA6vF QUP5fPT7M/nVBvgHpy/fkQ== 0000827056-03-000023.txt : 20031113 0000827056-03-000023.hdr.sgml : 20031113 20031112191715 ACCESSION NUMBER: 0000827056-03-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZEVEX INTERNATIONAL INC CENTRAL INDEX KEY: 0000827056 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 870462807 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12965 FILM NUMBER: 03995474 BUSINESS ADDRESS: STREET 1: 4314 ZEVEX PARK LANE CITY: MURRAY STATE: UT ZIP: 84123 BUSINESS PHONE: 8012641001 MAIL ADDRESS: STREET 1: 4314 ZEVEX PARK LANE CITY: MURRAY STATE: UT ZIP: 84123 FORMER COMPANY: FORMER CONFORMED NAME: DOWNEY INDUSTRIES INC DATE OF NAME CHANGE: 19880811 10-Q 1 fm10q093003.txt ZEVEX INTERNATIONAL SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 - ----------------- ------------------- (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 October 30, 2003, the Company had outstanding 3,400,964 shares of common stock, par value $0.001 per share. PART I FINANCIAL INFORMATION - ------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q - ------------------------------------------------------------------------------- ZEVEX International, Inc. ("ZEVEX" or the "Company") files herewith balance sheets of ZEVEX as of September 30, 2003, and December 31, 2002, and the related statements of operations and cash flows for the respective three month and nine month periods ended September 30, 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 September 30, December 31, 2003 2002 ASSETS (unaudited) ------------------------------------------- Current assets Cash $ 232,573 $ - Designated cash for sinking fund payment on industrial development bond 70,064 93,785 Accounts receivable, net of allowance for doubtful accounts of $200,000, in 2003 and 2002 4,169,863 4,522,785 Inventories 5,528,982 6,348,856 Deferred income taxes 347,956 348,506 Income taxes receivable 279,714 283,522 Prepaid expenses and other current assets 61,261 184,492 Total current assets 10,690,413 11,781,946 Property and equipment, net 5,822,135 6,498,957 Patents, trademarks and acquisition costs, net 382,098 364,640 Goodwill, net 10,089,035 10,089,035 Other assets 39,319 63,658 Total assets $ 27,023,000 $ 28,798,236 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 1,201,996 $ 1,572,313 Other accrued liabilities 561,735 585,765 Bank line of credit 1,730,922 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 49,750 1,461,640 Current portion of capital leases 168,988 177,801 Total current liabilities 3,813,391 5,679,446 Deferred income taxes 137,078 258,193 Industrial development bond 1,300,000 1,400,000 Other long-term debt 832,469 139,586 Capital lease obligations - 122,950 Stockholders' equity Common stock; $.001 par value, 10,000,000 authorized shares, 3,400,964 issued and outstanding, at September 30, 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 September 30, 2003 and December 31, 2002 (89,422) (89,422) Retained earnings 4,735,592 4,993,591 Total stockholders' equity 20,940,062 21,198,061 Total liabilities and stockholders' equity $ 27,023,000 $ 28,798,236
ZEVEX INTERNATIONAL, INC. CONSOLIDATED INCOME STATEMENTS Three months ended Nine months ended September 30, September 30, 2003 2002 2003 2002 (unaudited) (unaudited) (unaudited) (unaudited) ----------------------------------------------------- ----------------- ----------------------------------------------------- ----------------- Revenue: Product sales $ 5,906,271 $ 5,930,711 $ 17,946,058 $ 17,359,263 Engineering services 219,486 594,559 1,657,676 1,066,102 Total revenue 6,125,757 6,525,270 19,603,734 18,425,365 Cost of sales 4,374,851 4,019,564 12,758,976 11,137,439 Gross profit 1,750,906 2,505,706 6,844,758 7,287,926 Operating expenses: General and administrative 817,508 1,221,988 2,786,377 3,796,041 Selling and marketing 1,185,378 1,015,054 3,386,161 2,762,146 Research and development 285,572 50,287 815,899 178,703 Total operating expenses 2,288,458 2,287,329 6,988,437 6,736,890 Operating (loss) income (537,552) 218,377 (143,679) 551,036 Other income (expense): Interest and other income 967 1,200 7,213 14,389 Interest expense (54,519) (137,471) (238,289) (444,079) Gain on sale of marketable securities - - - 38,079 (Loss) income before income taxes (591,104) 82,106 (374,755) 159,425 Benefit (provision)for income taxes 183,776 (25,850) 116,756 23,991 Net (loss) income $ (407,328) $ 56,256 $ (257,999) $ 183,416 Basic net (loss) income per share $ (0.12) $ 0.02 $ (0.08) $ 0.05 Weighted average shares outstanding 3,400,964 3,415,197 3,400,964 3,415,197 Diluted net (loss) income per share $ (0.12) $ 0.02 $ (0.08) $ 0.05 Diluted weighted average shares outstanding 3,400,964 3,415,287 3,400,964 3,417,314
ZEVEX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2003 2002 (unaudited) (unaudited) ---------------------- ------------------- ---------------------- ------------------- Cash flows from operating activities Net (loss) income $ (257,999) $ 183,416 Adjustments to reconcile net (loss) income to net cash provided by operating activities Depreciation and amortization 1,200,182 1,201,193 Deferred income taxes (120,565) 255,075 Realized gain on marketable securities - (38,079) Changes in operating assets and liabilities Designated cash for sinking fund payment on industrial development bond 23,721 24,291 Accounts receivable 352,922 1,369,835 Inventories 819,874 974,193 Prepaid expenses and other assets 147,570 16,038 Accounts payable (370,317) (644,883) Accrued and other liabilities (24,030) 48,772 Income taxes receivable/payable 3,808 64,045 Net cash provided by operating activities 1,775,166 3,453,896 Cash flows from investing activities Purchase of property and equipment (497,265) (257,362) Additions of patents and trademarks (43,553) - Redemption of available-for-sale marketable securities - 225,797 Net cash used in investing activities (540,818) (31,565) Cash flows from financing activities Principal payments on capital lease and long-term debt (850,770) (511,648) Payments on business and product line acquisition debt (1,738,970) (926,188) Payments on industrial development bond (100,000) (100,000) Net proceeds from (payments on) bank line of credit 1,687,965 (1,713,610) Net cash used in financing activities (1,001,775) (3,251,446) Net increase in cash and cash equivalents 232,573 170,885 Cash and cash equivalents at beginning of period - 1,028,086 Cash and cash equivalents at end of period $ 232,573 $ 1,198,971
ZEVEX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 1. Description of Organization and Business and Summary of Significant Accounting Policies Description of Organization and Business Founded in 1986, ZEVEX(R) International, Inc. ("ZEVEX" or the "Company") through its divisions and subsidiaries, engages in the business of designing, manufacturing, and distributing medical devices. The Company's Therapeutics division markets award-winning enteral nutrition delivery devices. The Company's Physical Evaluation division markets industry-leading physical evaluation testing systems. The Company's Applied Technology division designs and manufactures advanced medical components and systems for other medical technology companies. Principles of Consolidation The consolidated financial statements 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 its 2002 Annual Report on SEC Form 10-K. 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 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 adopted EITF No. 00-21 in the third quarter which began on July 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. 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 No. 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 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 option at the grant dates for awards under those plans consistent with SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts for the three months and nine months ended September 30 as indicated below:
Three months ended Nine months ended ------------------------------- -------------------------------- Sept. 30, Sept. 30, Sept. 30, Sept.30, 2003 2002 2003 2002 --------------- --------------- ---------------- --------------- Net (loss) income as reported $ (407,328) $56,256 $ (257,999) $ 183,416 Less: Stock compensation expense determined under the fair value method, net of related tax effects 82,873 63,487 265,352 185,813 --------------- --------------- ---------------- --------------- --------------- --------------- ---------------- --------------- Pro forma net (loss) income $ (490,201) $ (7,231) $ (523,351) $ (2,397) =============== =============== ================ =============== =============== =============== ================ =============== (Loss) earnings per share: Basic - as reported $ (.12) $ .00 $ (.08) $ .00 Basic - pro forma $ (.14) $ .00 $ (.15) $ .00 Diluted - as reported $ (.12) $ .00 $ (.08) $ .00 Diluted - pro forma $ (.14) $ .00 $ (.15) $ .00
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. Management believes provisions of this interpretation will not have a material effect on the Company's future results of operations or financial condition, and does not believe that significant additional disclosures are required. 2. Debt In 2003, the Company renewed its line of credit arrangement with a financial institution. The line of credit, which has a $6 million limit, 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 September 30, 2003 and 4.25% at December 31, 2002. The Company's balance on its line of credit was $1,730,922 at September 30, 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 September 30, 2003, 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 proceeds from the Promissory Note were used to reduce the balance on the Company's line of credit. The note was due on May 15, 2003. The Term Loan Agreement 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 $882,219 on the Term Loan Agreement at September 30, 2003. 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. The remaining 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 (Loss) 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 and nine months ended September 30, 2003, and 2002, the Company did not have any additional elements of comprehensive income (loss). Therefore, comprehensive income (loss) equaled net income (loss). 5. Inventories Inventories consist of the following:
September 30, 2003 December 31, 2002 ------------------------------------------------- Materials $ 2,781,880 $ 3,028,782 Work in progress 610,604 1,087,474 Finished goods, including completed subassemblies 2,136,498 2,232,600 ------------------------------------------------- $ 5,528,982 $ 6,348,856 =================================================
6. Net Income (Loss) 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. 6. Net Income (Loss) Per Common Share continued Diluted net income (loss) per common share includes the dilutive effect of options in the weighted-average number of the Company's common shares outstanding as calculated using the treasury stock method. 7. Business Segments The Company operates 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. For the three months ended September 30, 2003 (in thousands):
Corporate Physical Applied and Therapeutics Evaluation Technology Unallocated Total --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Revenue $ 2,686 $ 834 $ 2,606 $ -- $ 6,126 Cost of sales 1,928 342 2,105 -- 4,375 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Gross profit 758 492 501 -- 1,751 Selling and marketing 688 394 103 -- 1,185 Research and development 98 188 -- -- 286 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Contribution margin (28) (90) 398 -- 280 General and administrative -- -- -- 817 817 Other (income)/expenses -- -- -- 54 54 Income tax benefit -- -- -- (184) (184) ------------- ------------- Net loss $ (407) ============= ============= Total assets $ 2,811 $ 5,199 $ 4,048 $ 14,965 $ 27,023 =============== =============== =============== ============== =============
The Company changed its methodology during the second quarter of 2003 to better reflect its manufacturing overhead costs by business segment. The impact of this methodology change on the gross profit of each segment for the third quarter was: an increase in Therapeutics by approximately $36,000, a decrease in Physical Evaluation by approximately $71,000, and an increase in Applied Technology by approximately $35,000. Other than the second quarter of 2003 gross profit by segment for previous periods has not been adjusted for this change in methodology. Included in the segment assets disclosed above are specifically identified fixed assets and goodwill. 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 all periods to conform to this presentation. All assets other than those specifically identified fixed assets and goodwill are included in Corporate and Unallocated. The only specifically identified 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 $842,000 in Therapeutics, $5,199,000 in Physical Evaluation, and $4,048,000 in Applied Technology. 7. Business Segments (continued) For the three months ended September 30, 2002 (in thousands):
Corporate Physical Applied and Therapeutics Evaluation Technology Unallocated Total --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Revenue $ 3,190 $ 863 $ 2,472 $ -- $ 6,525 Cost of sales 1,928 300 1,792 -- 4,020 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Gross profit 1,262 563 680 -- 2,505 Selling and marketing 585 311 97 22 1,015 Research and development 6 40 4 -- 50 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Contribution margin 671 212 579 (22) 1,440 General and administrative -- -- -- 1,222 1,222 Other (income)/expenses -- -- -- 136 136 Provision for income taxes -- -- -- 26 26 ------------- ------------- Net income $ 56 ============= ============= Total assets $ 3,402 $ 5,199 $ 4,048 $ 17,292 $ 29,941 =============== =============== =============== ============== =============
Included in the segment assets disclosed above are 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 nine months ended September 30, 2003 (in thousands):
Corporate Physical Applied and Therapeutics Evaluation Technology Unallocated Total --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Revenue $ 9,567 $ 2,440 $ 7,597 $ -- $ 19,604 Cost of sales 6,456 1,093 5,210 -- 12,759 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Gross profit 3,111 1,347 2,387 -- 6,845 Selling and marketing 1,904 1,170 312 -- 3,386 Research and development 303 512 1 -- 816 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Contribution margin 904 (335) 2,074 -- 2,643 General and administrative -- -- -- 2,786 2,786 Other (income)/expenses -- -- -- 231 231 Income tax benefit -- -- -- (116) (116) ------------- ------------- Net (loss) $ (258) ============= ============= Total assets $ 2,811 $ 5,199 $ 4,048 $ 14,965 $ 27,023 =============== =============== =============== ============== =============
The Company changed its methodology during the second quarter of 2003 to better reflect its manufacturing overhead costs by business segment. The impact of this methodology change on the gross profit of each segment for the second and third quarter was: an increase in Therapeutics by approximately $152,000, a decrease in Physical Evaluation by approximately $267,000, and an increase in Applied Technology by approximately $115,000. Included in the segment assets disclosed above are 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. 7. Business Segments (continued) For the nine months ended September 30, 2002 (in thousands):
Corporate Physical Applied and Therapeutics Evaluation Technology Unallocated Total --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Revenue $ 8,753 $ 2,626 $ 7,046 $ -- $ 18,425 Cost of sales 5,385 997 4,755 -- 11,137 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Gross profit 3,368 1,629 2,291 -- 7,288 Selling and marketing 1,618 862 232 50 2,762 Research and development 44 114 21 -- 179 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Contribution margin 1,706 653 2,038 (50) 4,347 General and administrative -- -- -- 3,796 3,796 Other (income)/expenses -- -- -- 392 392 Benefit for income taxes -- -- -- (24) (24) ------------- ------------- Net loss $ 183 ============= ============= Total assets $ 3,402 $ 5,199 $ 4,048 $ 17,292 $ 29,941 =============== =============== =============== ============== =============
Included in the segment assets disclosed above are 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. - ------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- General Through our divisions and subsidiaries, we engage 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. Results of Operations Revenue was $6,125,757 for the third quarter ended September 30, 2003, compared to $6,525,270 for the third quarter of the prior year, a 6% decrease. The decrease in revenue from last year's third quarter is largely due to lower engineering service contract revenue, international orders for fewer enteral delivery pumps, and a decline in orders for stationary enteral nutrition delivery pump disposable sets. Revenue was $19,603,734 for the first nine months of 2003, compared to $18,425,365 for the same period of the prior year, a 6% increase. The increase in revenue over the first nine months of 2002 is largely due to a 13% increase in domestic sales of EnteraLite(R) ambulatory enteral nutrition delivery pump and disposable set products and an increase of over $1,100,000 in international sales of our enteral pumps, within our Therapeutics division. In addition, in our Applied Technology division revenue from engineering services increased over 55%. This 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 in our Applied Technology division during the first nine months of 2003. The percentage of revenue generated from proprietary products by our Therapeutics and Physical Evaluation divisions decreased to 57%, compared to 62% for the third quarter of 2002, and decreased to 61% for the first nine months of 2003, compared to 62% for the first nine months of 2002. Sales of Therapeutics products accounted for approximately 44% of total revenue for the third quarter ended September 30, 2003, compared to 49% for the third quarter ended September 30, 2002, and 49% for the first nine months of 2003, compared to 48% for the first nine months of 2002. Sales from our Physical Evaluation product line accounted for approximately 14% of total revenue for the third quarter of 2003, compared to 13% for the third quarter ended September 30, 2002, and 12% for the first nine months of 2003, compared to 14% for the same period in 2002. Forty-three percent of our revenue during the third quarter of 2003 was derived from products manufactured for and sold to our Applied Technology contract manufacturing customers, compared to 38% in the third quarter of 2002, and 39% for the first nine months of 2003, compared to 38% for the first nine months of 2002. During the third quarters of 2003 and 2002, and the first nine months of 2003 and 2002, no single customer accounted for over 10% of our revenue. Our gross profit as a percentage of revenue was approximately 29% for the third quarter of 2003, compared to 38% for the third quarter of 2002. Gross profit for the nine months ended September 30, 2003 was approximately 35%, compared to 40% for the same nine month period of 2002. We attribute the decrease in gross profit percentage from 2002 to 2003 to increased engineering costs related to the transition of several projects from the development stage to manufacturing, higher than expected setup and non-recurring manufacturing engineering costs associated with establishing new product lines in manufacturing, and the product mix delivered during the quarters. Selling, general and administrative expenses decreased during the third quarter of 2003 to $2,002,886, as compared to $2,237,042 for the third quarter of 2002, and decreased for the first nine months of 2003 to $6,172,538, compared to $6,558,187 for the same period 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 $1,185,378, for the third quarter of 2003, from $1,015,054 for the third quarter of 2002, and $3,386,161 for the first nine months of 2003, compared to $2,762,146 for the first nine months of 2002. We combine the resources of our full-time engineers and several other independent contractors to perform research and development projects. We invested $285,572 in the third quarter of 2003, compared to $50,287 in the third quarter of 2002 for research and development of new proprietary products. For the nine months ended September 30, 2003, we invested $815,899 in research and development, compared to $178,703 for the nine months ended September 30, 2002. In the first nine months of 2003, research and development costs represented approximately 4% of our revenue, compared to 1% in the first nine months 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 decrease in the fourth quarter, with such costs representing approximately 3% of revenue for all of 2003. We had an operating loss of $537,552, in the third quarter of 2003, compared to operating income of $218,377, 3% of revenue in the third quarter of 2002. We also had an operating loss of $143,679, for the first nine months of 2003, compared to operating income of $551,036, 3% of revenue in the first nine months of 2002. During the third quarter of 2003 we had a net loss of $407,328, compared to net income of $56,256, 1% of revenue in the third quarter of 2002. During the first nine months of 2003 we had a net loss of $257,999, compared to net income $183,416, 1% of revenue in the first nine months of 2002. We attribute the decrease in net income during the third quarter of 2003, as compared to 2002, largely to a decrease in gross profit discussed above, increased research and development costs, and increased selling and marketing costs. These costs were partially offset by a decrease in general and administrative expense, and a reduction in interest expense from $137,471 to $54,519 due to decreased debt and lower interest rates. The decrease in net income during the first nine months of 2003, as compared to 2002 is due to a decrease in gross profit, an increase in selling and marketing expenses, and increased research and development costs. These costs were offset by a decrease in general and administrative expenses and a reduction in interest expenses from $444,079 to $238,289. For comparison purposes, the 2002 net income figure for the first nine months also includes a tax benefit as described below. Depreciation and amortization expenses decreased to $392,023 in the third quarter 2003 from $403,396 in the third quarter 2002, and to $1,200,182 for the first nine months of 2003, from $1,201,193 for the first nine months of 2002. We had an income tax benefit of $183,776 in the third quarter of 2003 compared to an income tax expense of $25,850 for the third quarter of 2002 and an income tax benefit of $116,756 for the first nine months of 2003 compared to an income tax benefit of $23,991 for the first nine months of 2002. The change in income tax expense for the first nine months of 2003 compared to the first nine months of 2002 is primarily due to the loss before income taxes we sustained during the third quarter of 2003 and the tax benefit derived from a capital loss in 2002, which, for the State of Utah, was treated as a net operating loss carryback/carryforward for income tax purposes. This loss carryback resulted in an income tax refund recognized in the first quarter of 2002. As of September 30, 2003, our backlog of customer orders was $6,069,000, as compared to $3,527,000 on September 30, 2002. We estimate that approximately 60% 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 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 nine months of 2003 were $1,775,166 compared to $3,453,896 for the first nine months of 2002. In the first nine months of 2003, cash provided by operating activities was primarily associated with our continued reduction in inventories and our improved collection procedures. In the first nine months 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 processes, and income tax refunds related to capital loss carrybacks, partially offset by a reduction of accounts payable. Our working capital at September 30, 2003 was $6,877,022, compared to $6,029,962 at September 30, 2002. This increase in working capital was primarily due to the renegotiation of the due date and terms of our Term Loan Agreement described below. The portion of working capital represented by cash at such dates was $232,573 and $1,198,971 respectively. The ratio of current assets to current liabilities increased to 2.80 at September 30, 2003, from 1.91 at September 30, 2002. We have a $6,000,000 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. We owed $1,730,922 on the line of credit at September 30, 2003 and $42,957 at December 31, 2002. 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. The proceeds from the agreement were used to reduce the balance on our line of credit. The agreement had a 36-month term, was due on February 15, 2004, and carried 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 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 $882,219 on the Term Loan Agreement at September 30, 2003. 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 September 30, 2003, the remaining principal balance on the IBD was $1,400,000. During the first nine months of 2003, the interest paid monthly ranged from 1.07% to 1.58% (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 $497,265 for the first nine months of 2003, compared to $257,362 for the first nine months of 2002. We expect to spend approximately $100,000 during the remainder of 2003 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 Note 1 to the Consolidated Financial Statements and are included in our Annual Report 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 September 30, 2003, we have recorded an allowance for bad debts of $200,000, approximately 5% 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 standard cost method. As of September 30, 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 a 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 September 30, 2003. 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 collectibility is reasonably assured. Outbound shipping costs are expensed as incurred and are included in the selling and marketing expenses. 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, and 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 September 30, 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 September 30, 2003. Net fixed assets amounted to approximately $5.8 million as of September 30, 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 that are 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 adopted EITF No. 00-21 in the third quarter which began on July 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 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 No. 148 are effective for financial statements for fiscal years ended 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 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 our two stock-based compensation plans 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 (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts for the three months and nine months ended September 30 as indicated below:
Three months ended Nine months ended ------------------------------- -------------------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2003 2002 2003 2002 --------------- --------------- ---------------- --------------- Net (loss) income as reported $ (407,328) $ 56,256 $ (257,999) $ 183,416 Less: Stock compensation expense determined under fair value method, net of related tax effects 82,873 63,487 265,352 185,813 --------------- --------------- ---------------- --------------- --------------- --------------- ---------------- --------------- Pro forma net (loss) income $ (490,201) $ (7,231) $ (523,351) $ (2,397) =============== =============== ================ =============== =============== =============== ================ =============== (Loss) earnings per share: Basic - as reported $ (.12) $ .00 $ (.08) $ .00 Basic - pro forma $ (.14) $ .00 $ (.15) $ .00 Diluted - as reported $ (.12) $ .00 $ (.08) $ .00 Diluted - pro forma $ (.14) $ .00 $ (.15) $ .00
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. 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 2003 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, 2002 for additional cautionary statements. - ------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------------------------------------------------------------------------------- No significant changes in market risk have occurred since December 31, 2002. Please refer to our SEC Form 10-K for the fiscal year ended December 31, 2002 for additional discussion on market risk. - ------------------------------------------------------------------------------- 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 third 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 in these controls and procedures, 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 third fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II OTHER INFORMATION - ------------------------------------------------------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------------------------- ZEVEX held its Annual Meeting of the Shareholders on July 17, 2003. During the meeting, David J. McNally and Bradly A. Oldroyd were elected to serve for a three-year term expiring at the 2006 Annual Meeting. The following table summarizes the tabulation for each director nominee.
- ---------------------------- -------------------------- -------------------------- -------------------------- Director nominee Votes cast For Votes Against Votes Abstained - ---------------------------- -------------------------- -------------------------- -------------------------- - ---------------------------- -------------------------- -------------------------- -------------------------- David J. McNally 2,923,811 25,112 0 - ---------------------------- -------------------------- -------------------------- -------------------------- - ---------------------------- -------------------------- -------------------------- -------------------------- Bradly A. Oldroyd 2,906,380 42,543 0 - ---------------------------- -------------------------- -------------------------- --------------------------
Directors whose three-year term of office continued after the meeting were: John T. Lemley and Richard L. Shanaman, whose term expires at the 2004 Annual Meeting, and David B. Kaysen, Phillip L. McStotts, and Dan Robertson, whose term expires at the 2005 Annual Meeting. Also, at the meeting, the shareholders were asked to ratify the appointment of Ernst & Young LLP, Certified Public Accountants, as independent auditors for the year ending December 31, 2003. Those shareholders voting in favor of the proposal represented 2,935,248 shares of ZEVEX' common voting stock, which is approximately 86% of the shares entitled to vote. Also, 10,126 shares were voted against this proposal, and 3,549 shares abstained from voting. No other matters were voted upon at the meeting. - ------------------------------------------------------------------------------- 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 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Principal Financial and Accounting Officer (b) Reports on Form 8-K Item(s) Reported Date Filed Item 9 - Regulation FD Disclosure Presentation Materials for Annual Meeting of Shareholders July 16, 2003
* Denotes exhibits specifically incorporated in this Form 10-Q by reference to other filings of the Company pursuant to the provisions of Securities and Exchange Commission Rule 12b-32 and Regulation S-K. These documents are located under File No. 001-10287 at, among other locations, the Securities and Exchange Commission, Public Reference Branch, 450 5th St., N.W., Washington, D.C. 20549. - ------------------------------------------------------------------------------- SIGNATURES - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ZEVEX INTERNATIONAL, INC. Dated: November 13, 2003 By /s/ David J. McNally -------------------------- David J. McNally, CEO (Chief Executive Officer) By /s/ Phillip L. McStotts ------------------------------ Phillip L. McStotts, Secretary (Principal Financial and Accounting Officer) Exhibit 31.1 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 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 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 report; 4. The registrant's other certifying officer(s) 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: November 13, 2003 By /s/ David J. McNally -------------------------- David J. McNally, CEO (Chief Executive Officer) Exhibit 31.2 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 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 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 report; 4. The registrant's other certifying officer(s) 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: November 13, 2003 By /s/ Phillip L. McStotts Phillip L. McStotts, Secretary (Principal Financial and Accounting Officer) Exhibit 32.1 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 ended September 30, 2003 as filed with the Securities and Exchange Commission on November 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 November 13, 2003 Exhibit 32.2 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 ended September 30, 2003 as filed with the Securities and Exchange Commission on November 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 Principal Financial and Accounting Officer November 13, 2003 -----END PRIVACY-ENHANCED MESSAGE-----