10-Q 1 q092001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 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 001-12965 ZEVEX INTERNATIONAL, INC. (Exact name of registrant as specified in charter) DELAWARE 87-0462807 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123 (Address of principal executive offices and zip code) (801) 264-1001 -------------- (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] Not Applicable [ X ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of November 1, 2001, the Company had outstanding 3,415,197 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. (the "Company") files herewith balance sheets of the Company as of September 30, 2001 and December 31, 2000, and the related statements of operations and cash flows for the respective three month and nine month periods ended September 30, 2001 and 2000. In the opinion of the Company's management, the financial statements reflect all adjustments, all of which are normal recurring adjustments, necessary to fairly present the financial condition of the Company for the interim periods presented. The financial statements included in this report on Form 10-Q should be read in conjunction with the audited financial statements of the Company and the notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2000.
ZEVEX INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS September 30 December 31 2000 2001 (unaudited) ---------------- --------------- ---------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 895,078 $ 327,157 Restricted cash for sinking fund payment on IDB 59,256 90,070 Accounts receivable 6,160,898 7,501,089 Inventories 7,869,620 9,687,446 Marketable securities 863,179 1,065,275 Other current assets 10,367 9,867 Deferred income taxes 675,815 628,676 Income tax deposits/refunds 481,748 319,990 Prepaid expenses 87,818 27,956 ------------ ----------- Total current assets 17,103,779 19,657,526 Property and equipment, net 7,870,722 7,979,061 Patents, trademarks and acquisition costs, net 337,655 343,685 Goodwill, net 10,288,198 10,688,271 Other assets 33,149 19,419 ------ ------ $ 35,633,503 $ 38,687,962 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,175,486 $ 2,212,726 Other accrued expenses 570,649 569,264 Bank line of credit 2,860,989 5,936,995 Current portion of industrial development bond 100,000 100,000 Payable related to business acquisition and convertible debt, short-term 4,719,390 1,000,000 Term loan, short-term 34,881 -- Current portion of capital lease obligation 148,783 ---------- -------------- 639,124 Total current liabilities 10,100,519 9,967,768 Deferred income taxes 228,990 151,667 Industrial development bond 1,500,000 1,600,000 Convertible debt, long-term 950,000 5,447,188 Capital lease obligation 1,139,247 463,834 Term loan, long-term 947,436 -- Stockholders' equity: Common stock, $.001 par value: authorized 10,000,000 shares, issued 3,440,197 and 3,440,064, respectively, at September 30, 2001 and December 31, 2000 3,440 3,440 Additional paid in capital 16,290,452 16,289,787 Treasury stock, 25,000 shares (at cost) (60,956) -- Unrealized loss on marketable securities, net -- (502,713) Retained earnings 4,534,375 5,266,991 --------------- --------------- Total stockholders' equity 20,767,311 21,057,505 --------------- ---------- $ 35,633,503 $ 38,687,962 ============ ============
ZEVEX INTERNATIONAL, INC. STATEMENTS OF OPERATIONS Three months ended Nine months ended September 30, September 30, 2001 2000 2001 2000 ------------------- ----------------- ------------------- ------------------- (unaudited) (unaudited) (unaudited) (unaudited) Revenue: Product sales $ 6,621,464 $ 7,524,412 $ 20,912,434 $ 21,871,850 Engineering services 277,833 202,309 949,914 550,517 ------------------ ------------------ ------------------ -------------------- Total revenue 6,899,297 7,726,721 21,862,348 22,422,367 Cost of sales 4,558,593 4,763,286 13,890,896 13,713,722 ------------------ ------------------ ------------------ -------------------- Gross profit 2,340,704 2,963,435 7,971,452 8,708,645 Operating expenses: General and administrative 1,438,634 1,192,049 4,487,086 3,643,673 Selling and marketing 707,415 753,854 2,032,956 1,988,017 Goodwill amortization 133,439 144,583 400,073 414,849 Research and development 173,688 187,392 379,862 547,605 ----------------- ------------------ ------------------- -------------------- Total operating expenses 2,453,176 2,277,878 7,299,977 6,594,144 Operating income (loss) (112,472) 685,557 671,475 2,114,501 Other income (expense): Interest and other income 19,686 2,696 23,278 85,535 Interest expense (227,348) (159,055) (813,619) (456,911) Gain on sale of marketable securities -- -- 40,978 298,048 Other than temporary impairment loss on available for sale marketable securities (917,628) -- (917,628) -- ------------------ ------------------ ------------------ -------------------- Income (loss) before benefit (provision) for income taxes (1,237,762) 529,198 (995,516) 2,041,173 Benefit (provision) for income taxes 428,133 (172,369) 262,900 (811,813) ------------------ ------------------ ------------------ -------------------- Net income (loss) $ (809,629) $ 356,829 $ (732,616) $ 1,229,360 ================== ================== ================== ==================== Basic net income (loss) per share $ (.24) $ .10 $ (.21) $ .36 ================== ================== ================== ==================== Weighted average shares outstanding 3,431,372 3,439,326 3,437,180 3,433,052 ================== ================== ================== ==================== Diluted net income (loss) per share $ (.24) $ .10 $ (.21) $ .33 ================== ================== ================== ==================== Diluted weighted average shares outstanding 3,431,372 3,647,866 3,437,180 3,689,081 ================== ================== ================== ====================
ZEVEX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 2001 2000 --------------- ---------------- (unaudited) (unaudited) Cash flows from operating activities Net income (loss) $ (732,616) $ 1,229,360 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,539,369 1,230,578 Deferred income taxes (268,878) (62,129) Realized gain on marketable securities (40,978) (298,048) Other than temporary loss on available for sale marketable securities 917,628 -- Changes in operating assets and liabilities: Restricted cash for sinking fund payment on industrial development bond 30,814 22,436 Accounts receivable 1,340,191 (2,178,838) Trading securities -- 313,993 Inventories 1,817,826 (3,789,066) Prepaid expenses (59,862) (6,748) Other assets (14,230) (29,405) Accounts payable (1,037,240) 1,262,066 Accrued and other liabilities 1,385 433,769 Income taxes receivable/payable (161,758) (884,865) --------------- ---------------- Net cash provided by (used in) operating activities 3,331,651 (2,756,897) Cash flows from investing activities Purchase of property and equipment (1,010,020) (1,344,911) Additions of patents and trademarks (14,907) (21,430) Purchase of product line -- (2,586,092) Redemption of available-for-sale marketable securities 127,221 763,039 --------------- ---------------- Net cash used in investing activities (897,706) (3,189,394) Cash flows from financing activities Proceeds from capital leases and term loan 2,500,000 -- Payments on capital leases and term loan (351,929) -- Issuance of debt related to product line acquisition -- 2,000,000 Payments on debt related to business and product line acquisitions (777,798) (1,164,208) Payment on industrial development bond (100,000) (100,000) Net change on bank line of credit (3,076,006) 1,974,717 Purchase of treasury stock (60,956) -- Proceeds from exercise of stock options 665 75,340 --------------- -- ---------------- Net cash (used in) provided by financing activities (1,866,024) 2,785,849 --------------- ---------------- Net increase (decrease) in cash and cash equivalents 567,921 (3,160,442) Cash and cash equivalents at beginning of period 327,157 3,383,544 --------------- ---------------- Cash and cash equivalents at end of period $ 895,078 $ 223,102 =============== ================ Supplemental disclosure: Non-cash activities Unrealized gain on available-for-sale marketable securities $ -- $ 54,746
ZEVEX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2001 1. Summary of Significant Accounting Policies Description of Organization and Business The Company was incorporated under the laws of the State of Nevada on December 30, 1987. The Company was originally incorporated as Downey Industries, Inc. and changed its name to ZEVEX International, Inc. on August 15, 1988. In November 1997, the Company reincorporated in Delaware. Through its three wholly owned subsidiaries, The Company is in the business of designing, manufacturing and distributing medical devices. The Company's ZEVEX Inc. subsidiary provides products for enteral nutrition delivery. Through its OEM division, ZEVEX Inc. is also a contract manufacturer of medical devices, which include ultrasonic sensors, surgical handpieces, and electronic instruments. The Company's Aborn Electronics, Inc. subsidiary specializes in the design and manufacturing of optoelectronic components. The Company's JTech Medical Industries, Inc. ("JTech") subsidiary provides musculoskeletal evaluation products to chiropractors, occupational therapists, osteopaths, and physical therapists. Principles of Consolidation The consolidated balance sheets at September 30, 2001 and December 31, 2000 include the accounts of ZEVEX International, Inc. and its three wholly-owned operating subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information along with the instructions to Form 10-Q of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's 2000 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 are not indicative of the results of operations to be expected for a full year. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS Nos. 137 and 138, was effective for the Company as of January 1, 2001. The new rule establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Historically, the Company has not used derivative instruments, and the Company does not hold any derivative instruments at December 31, 2000 and September 30, 2001. The Company adopted SFAS No. 133, as amended, in the first quarter of 2001. The adoption of SFAS No. 133 did not have an impact on earnings or the financial position of the Company, as expected. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions), for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121. The Company is required to adopt SFAS No. 142, effective January 1, 2002. Management is currently evaluating the Company's intangible assets in relation to the provisions of SFAS No. 142 to determine the impact that adoption of SFAS No. 142 will have on the Company's results of operations or financial position. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations and Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that opinion). This Statement also amends ARB No. 51, "Consolidated Financial Statements", to eliminate the consolidation for a subsidiary for which control is likely to be temporary. The Company is required to adopt SFAS No. 144, effective January 1, 2002. The Company is currently evaluating the impact of this Statement on its financial statements. 2. Bank Loans The Company renewed its line of credit arrangement with a financial institution with availability of $7 million as of September 30, 2001. In the fourth quarter of 2001, the availability was reduced to $6 million. The line matures on May 28, 2002. The line of credit is collateralized by accounts receivable and inventory and bears interest at the prime rate, 6%, at September 30, 2001 and 9.5% at December 31, 2000. The Company's balance on its line of credit was $2,860,989 at September 30, 2001 and $5,936,995 at December 31, 2000. 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. On March 15, 2001, the Company entered into a Financing Lease with a bank for the amount of $1,500,000. The lease is secured by the Company's enteral feeding pumps purchased from Nestle and manufactured by the Company. The proceeds from the Financing Lease were used to reduce the Company's Line of Credit balance. The lease has a 36 month term, is due on February 15, 2004, and bears interest at a rate of 8.24%. On April 18, 2001, the Company entered into a Term Loan Agreement with a bank for the amount of $1,000,000. The proceeds from the Promissory Note were used to reduce the Company's Line of Credit balance. The note is due on May 15, 2003 and is amortized over a fifteen-year term at the interest rate of 8.5%. 3. Related Party Transactions On December 31, 1998, the Company acquired JTech pursuant to a Stock Purchase Agreement between 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 convertible debenture, in the principal amount of $1,290,000, is due January 6, 2002 and is convertible at Mr. Smith's option during the period from January 6, 2000 to January 6, 2002 at $11 per share. On April 3, 2000 Mr. Smith received $73,594 in cash and a convertible debenture in connection with the earn-out portion of the JTech Stock Purchase. The convertible debenture, in the principal amount of $73,594, is due March 31, 2002 and is convertible at Mr. Smith's option during the period from March 31, 2000 to March 31, 2002 at $11 per share. JTech also entered into an Employment Agreement with Leonard C. Smith, dated December 31, 1998, which provides that Mr. Smith serve as President of JTech for three years at a salary of at least $100,000 per year. Pursuant to the employment agreement, Mr. Smith also received an option to purchase 40,000 shares of the Company's common stock, vesting over four years, at $4.875 per share, the closing price of such stock on Nasdaq on the date of the JTech Stock Purchase. Mr. Smith was appointed to fill a vacancy on the Company's Board of Directors, effective April 26, 1999. Mr. Smith's term on the Board will expire at the 2001 annual meeting of shareholders. Mr. Smith was appointed President of the Company as well as President of ZEVEX, Inc. on September 1, 2000. 4. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires that all items recognized under accounting standards as components of comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This statement also requires that an entity classify items of other comprehensive income by their nature in an annual financial statement. Other comprehensive income may include foreign currency translation adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. In accordance with the provisions of SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities", and Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity Securities", the Company recorded an "other-than-temporary" impairment loss on its available for sale securities of $917,628 in the three and nine months ended September 30, 2001, which is reflected as a component of net income. This writedown is the amount of the unrealized loss on the Company's available for sale marketable securities that had previously been recorded in equity as part of comprehensive income, resulting in lower comprehensive income in comparison to net income in prior periods. Now that the impairment loss has been recognized in net income, comprehensive income is $517,259 and $502,713 higher than net income for the three and nine months ended September 30, 2001. For the three months and nine months ending September 30, 2000, respectively the Company's comprehensive income (loss) was $18,810 and ($34,326) (net of tax effect) higher (lower) than net income reported on the Company's financial statements. 5. Inventories
Inventories consist of the following: September 30, 2001 December 31, 2000 Materials $ 3,949,602 $ 4,832,947 Work in Progress 1,234,917 1,057,146 Finished goods, including completed subassemblies 2,685,101 3,797,353 ----------------- ------------------ ----------------- ------------------ $ 7,869,620 $ 9,687,446 ================= ==============
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. Because a net loss has been reported for the three and nine months ended September 30, 2001, there are no dilutive securities. ------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------- General Through its three wholly owned subsidiaries, ZEVEX(R)International, Inc. (the "Company") is in the business of designing, manufacturing and distributing medical devices. The Company's ZEVEX Inc. subsidiary provides products for enteral nutrition delivery. Through its OEM division, ZEVEX Inc. is also a contract manufacturer of medical devices, which include ultrasonic sensors, surgical handpieces, and electronic instruments. The Company's Aborn Electronics, Inc. subsidiary specializes in the design and manufacturing of optoelectronic components. The Company's JTech Medical Industries, Inc., subsidiary, ("JTech") provides musculoskeletal evaluation products to chiropractors, occupational therapists, osteopaths, and physical therapists. Results of Operations The Company's revenues for the third quarter ended September 30, 2001 decreased approximately 11% to $6,899,297 from $7,726,721 for the third quarter of 2000. For the first nine months of 2001, revenues decreased 3% to $21,862,348 from $22,422,367 for the nine months ended September 30, 2000. Management attributes the decline in third quarter and nine month revenues compared to those of the prior year primarily to the completion of a major contract manufacturing agreement last year that was not entirely replaced with new work this year, a significant reduction in private-label enteral feeding pump orders from a European customer and the significant decrease in revenues after the September 11th terrorist attacks on the World Trade Center in New York City. Sales of the Company's proprietary enteral nutrition delivery product line accounted for approximately 44% of total revenues for the third quarter of 2001, compared to 48% for the third quarter of 2000, and 45% for the first nine months of 2001, compared to 41% for the nine months ended September 30, 2000. The decrease in enteral nutrition delivery revenues for the three months ended September 30, 2001 compared to the same period in 2000 was due to a significant reduction in private label enteral feeding pump orders from a European customer and the effects after the September 11th terrorist attacks. The growth of enteral nutrition delivery revenues the first nine months of 2001 was largely due to the acquisition of the enteral nutrition delivery device product line of Nestle Clinical Nutrition, which was completed on April 6, 2000. The prior year's first quarter revenues did not include any Nestle related sales. Sales of the Company's proprietary JTech product line accounted for approximately 11% of total revenues for the third quarter of 2001 compared to 8% for the third quarter of 2000, and 11% for the first nine months of 2001, compared to 13% for the nine months ended September 30, 2000. Sales to the Company's OEM customers accounted for approximately 45% of the total revenues for the third quarter of 2001 compared to 44% for the third quarter of 2000, and 44% for the first nine months of 2001, compared to 46% for the nine months ended September 30, 2000. The Company's gross profit as a percentage of revenues was approximately 34% for the third quarter ended September 30, 2001 as compared to 38% for the third quarter of 2000. Gross profit for the nine months ended September 30, 2001 was approximately 36%, compared to 39% for the same nine month period of 2000. Management attributes the decrease in gross profit percentage year over year to several matters, including changes in product mix toward lower margin products, costs related to bringing in-house the manufacturing and servicing of the stationary enteral feeding pump lines, including the acquired Nestle pumps, and increased distribution costs related to the Company's proprietary products. Selling, general and administrative expenses increased during the third quarter of 2001 to $2,146,049, or 31% of gross sales, compared to $1,945,903, or 25% of gross sales for the third quarter of 2000. For the nine months ended September 30, 2001, selling, general and administrative expenses increased to $6,520,042, or 30% of gross sales, as compared to $5,631,690, or 25% of gross sales for the same nine month period of 2000. During the third quarter and the nine month period ending September 30, 2001, an expanded sales and marketing initiative increased staffing, travel, advertising, and administrative expenses related to the Company's enteral nutrition delivery and JTech proprietary product lines. The Company also experienced an increase in employee-related expenses, such as insurance, taxes, and pension benefits resulting from more employees in the third quarter of 2001 compared to third quarter of 2000. The Company believes that selling, general and administrative expenses for 2001 will be approximately 30% of sales. Research and development expenses vary from quarter to quarter depending on the number and nature of pending research and development projects and their various stages of completion. For the three months ended September 30, 2001, research and development expenses were $173,688, compared to $187,392 in 2000. For the nine months ended September 30, 2001, research and development expenses were $379,862, compared to $547,605 in 2000. Expenses incurred during the third quarter and for the nine months ended September 30, 2001 were primarily for the continued development of the Company's enteral nutrition delivery and JTech proprietary products. Management intends to continue this investment for the foreseeable future and currently anticipates that research and development expenses for 2001 will be approximately 2% of total revenues. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity Securities", the Company recorded an "other-than-temporary" impairment loss on its available for sale securities of $917,628 in the three and nine months ended September 30, 2001. For the three months ended September 30, 2001 the Company had a net loss of $809,629, compared to net income of $356,829, or 4.6% of revenues, for the three months ended September 30, 2000. The Company's net loss for the nine months ended September 30, 2001, was $732,616, compared to net income of $1,229,360, or 5.5% of revenues for the nine months ended September 30, 2000. The decrease in net income during the third quarter of 2001, compared to the third quarter of 2000 is due to a number of factors, including (1) the impairment loss on marketable securities in the amount of $917,628 (2) a decrease in proprietary product revenues of approximately 40% during the three week period following the September 11th terrorist attacks on the World Trade Center in New York City, (3) lower gross margins associated with the Company's product mix, (4) the expanded sales effort and expenses related to the Company's proprietary products including sales personnel, support staff, and customer service and compliance personnel, and (5) interest expense increased from $159,055 to $227,348 due to the increased use of the Company's line of credit and other debt instruments. The decrease in net income during the first nine months ended September 30, 2001, as compared to the first nine months ended September 30, 2000 is due to (1) an impairment loss on marketable securities in the amount of $917,628 (2) a decrease in proprietary product revenues of approximately 40% during the three week period following the September 11th terrorist attacks, (3) lower gross margins associated with the Company's product mix, (4) the expanded sales effort and expenses related to the Company's proprietary products including sales personnel, support staff, and customer service and compliance personnel, (5) interest expense increased from $456,911 to $813,619, due to the increased use of the Company's line of credit and other debt instruments, and (6) a gain realized on the sale of securities sold during the first nine months of 2000 of $298,048, that was not matched during the first nine months of 2001, where the Company realized a gain of $40,978. As of September 30, 2001, the Company's backlog of customer orders was $4,987,000, compared to $5,732,000 on September 30, 2000. Management estimates that approximately 60% of the backlog will be shipped before December 31, 2001. The Company's backlog is for contract manufacturing customers only and can be significantly affected by the timing of annual or semi-annual purchase orders placed by its customers. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flow provided by operations and its revolving credit facility with Bank One Utah. During the nine month period ended September 30, 2001, the Company's operations provided $3,331,651 in cash flow, compared to using $2,756,897 in cash for the nine month period ended September 30, 2000. Cash increased by $567,921 for the first nine months of 2001, as the Company reduced its accounts receivable and inventories and entered into a new term loan and capital lease. This was partially offset by a decrease in accounts payable and decreased borrowings under the Company's line of credit. The Company's line of credit, which is secured by accounts receivable and inventory, permits borrowing up to $7 million. It bears interest at the prime rate, 6% at September 30, 2001 and 9.5% at December 31, 2000. The Company's balance on its line of credit was $2,860,989 at September 30, 2001 and $5,936,995 at December 31, 2000. The line matures on May 28, 2002 and the Company expects to renew the line in the ordinary course of business. 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. With regard to capital expenditures, the Company's investment in property, patents from new research, manufacturing and production test equipment and tooling, as well as equipment for lease was $1,024,927 for the nine months of 2001, compared to $1,366,341 for the first nine months of 2000. The Company expects to invest approximately $200,000 during the remainder of 2001 for additional manufacturing equipment and software, for normal replacement of aging equipment, and for equipment for lease. The Company also expects to invest approximately $150,000 in the research and development of new proprietary products during the same period. On March 29, 2000, the Company entered into an agreement to acquire certain assets from Nestle Clinical Nutrition, Inc. relating to Nestle's enteral nutrition delivery devices. The purchase was completed on April 6, 2000 for a purchase price of approximately $2.6 million, plus the actual cost of inventory acquired by the Company, which totaled approximately $1.2 million. Upon closing, cash of approximately $600,000 was paid. An additional $2.2 million was paid in October 2000, which included $1.2 million for inventory. The remainder of the purchase price, approximately $1,000,000, was calculated based upon the sales generated by the acquired assets of which approximately $778,000 was paid in July 2001. The remainder of the balance will be paid upon resolution of certain contingencies within the agreement. The Company's working capital at September 30, 2001 was $7,003,260, compared to $10,176,527 at September 30, 2000. The portion of working capital represented by cash at such dates was $895,078 and $223,102 respectively. The decrease in working capital is primarily due to a shift in the long-term portion of the convertible debt to short-term, and the acquisition of the Nestle product line, which shifted current assets (cash) to property and equipment (pumps). The Company also uses substantial portions of its cash from time to time to fund its operations, including increases in inventories, accounts receivable and work in process. The Company believes its working capital is sufficient for operations during the coming twelve months. On March 15, 2001, the Company entered into a Financing Lease with a bank for the amount of $1,500,000. The lease is secured by the Company's enteral feeding pumps, which were purchased from Nestle and are now manufactured by the Company. The proceeds from the Financing Lease were used to reduce the Company's Line of Credit balance. The lease has a 36 month term, is due on February 15, 2004, and bears interest at a rate of 8.24%. On April 18, 2001, the Company entered into a Term Loan Agreement with a bank for the amount of $1,000,000. The proceeds from the Promissory Note were used to reduce the Company's Line of Credit balance. The note is due on May 15, 2003 and is amortized over a fifteen-year term at the interest rate of 8.5%. Other As part of a nationwide investigation into billing practices associated with enteral nutrition delivery products, particularly with regards to billing practices for pumps and disposable delivery sets, on July 2, 2001, the Office of Inspector General (OIG), served a subpoena on the Company's ZEVEX, Inc. subsidiary. According to published reports, the investigation involved most manufacturers, distributors and health care service providers in the United Stat enteral pump industry. The subpoena requested Company documents relating to its enteral pump customers and marketing and billing practices. The Company has responded to the subpoena and it is cooperating with the investigation. During the three week period following the September 11, 2001 terrorist attacks on the World Trade Center in New York City, order volume for the Company's proprietary enteral nutrition delivery and JTech Medical Industries products dropped by approximately 40%. Although management believes this to be a temporary situation, and also believes the medical device industry will be less affected by global conflict and recession than other industries, such events represent risk to the Company's business. 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," "anticipates" and similar expressions, together with other discussion of future trends or results, are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements, which include the Company's statements about the level of anticipated expenses during 2001 and its liquidity position are subject to certain risks and uncertainties, including those discussed below that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof and the Company disclaims any obligation to update them. All of these forward-looking statements are based on estimates and assumptions made by management of the Company, which although believed to be reasonable, are inherently uncertain and difficult to predict. Therefore, undue reliance should not be placed upon such estimates. There can be no assurance that the benefits anticipated in these forward-looking statements will be achieved. The following important factors, among others, could cause the Company not to achieve the benefits contemplated herein, or otherwise cause the Company's results of operations to be adversely affected in future periods: (i) continued or increased competitive pressures from existing competitors and new entrants; (ii) unanticipated costs related to the Company's growth and operating strategies; (iii) loss or retirement of key members of management; (iv) increase in interest rates of the Company's cost of borrowing, or a default under any material debt agreement; (v) adverse state or federal legislation or regulation that increases the cost of compliance, or adverse findings by a regulator with respect to existing operations; (vi) loss of customers;(vii) inability to achieve future sales; (viii) the unavailability of sufficient funds for operations or capital expenditures; and (ix) inability to introduce new products as planned. Many of such factors are beyond the control of the Company. Please refer to the Company's SEC Form 10-K for its fiscal year ended December 31, 2000 for additional cautionary statements. ------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ------------------------------------------------------------------------------- No significant changes in the Company's market risk have occurred since December 31, 2000. Please refer to the Company's SEC Form 10-K for its fiscal year ended December 31, 2000 for additional discussions of market risks. PART II Item 2. Changes in Securities and Use of Proceeds. During the period ending September 30, 2001, there were 133 shares of Common Stock issued pursuant to exercise of stock options by employees of the Company. The exercise price on such shares ranges from $2.50 to $5.00 per share. The shares issued upon exercise of the options were issued pursuant to the exemption from registration under SEC Rule 505. 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* Bylaws 1997 Form 10-K (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended September 30, 2001. * 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 14, 2001 By /s/ David J. McNally -------------------------- David J. McNally, CEO (Chief Executive Officer) By /s/ Phillip L. McStotts ------------------------------ Phillip L. McStotts, Secretary (Principal Financial Officer)