-----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, LTS34flzXwAMN8nKARLomIgkDKW3wgPN9hJHWGUWOaZ5aV5KOOkafIdTegoP0eFs aCFt3I8d2oLzI6kHhACl2w== 0000827056-03-000017.txt : 20030513 0000827056-03-000017.hdr.sgml : 20030513 20030513081411 ACCESSION NUMBER: 0000827056-03-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030513 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: 03693929 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 f10q033103.txt ZEVEX INTERNATIONAL 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from .................to................. Commission file number 001-1296 ZEVEX INTERNATIONAL, INC. (Exact name of registrant as specified in charter) DELAWARE 87-0462807 - -------------------------------- ---------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 4314 ZEVEX Park Lane, Salt Lake City, Utah 84123 (Address of principal executive offices and zip code) (801) 264-1001 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes No [ X ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of April 30, 2003, the Company had outstanding 3,400,964 shares of common stock, par value $0.001 per share. PART I FINANCIAL INFORMATION - ------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q - ------------------------------------------------------------------------------- ZEVEX International, Inc. ("ZEVEX") files herewith balance sheets of ZEVEX as of March 31, 2003, and December 31, 2002, and the related statements of operations and cash flows for the respective three month periods ended March 31, 2003 and 2002. In the opinion of ZEVEX' management, the financial statements reflect all adjustments, all of which are normal recurring adjustments, necessary to fairly present the financial condition of ZEVEX for the interim periods presented. The financial statements included in this report on Form 10-Q should be read in conjunction with the audited financial statements of ZEVEX and the notes thereto included in the Annual Report of ZEVEX on Form 10-K for the year ended December 31, 2002.
ZEVEX INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS March 31, December 31, 2003 2002 ASSETS (unaudited) ------------------------------------------- Current assets Designated cash for sinking fund payment on industrial development bond $ 119,776 $ 93,785 Accounts receivable, net of allowance for doubtful accounts of $200,000 4,738,524 4,522,785 Inventories 6,218,880 6,348,856 Deferred income taxes 348,323 348,506 Income taxes receivable 156,526 283,522 Prepaid expenses and other current assets 185,717 184,492 ---------- ---------- Total current assets 11,767,746 11,781,946 Property and equipment, net 6,191,691 6,498,957 Patents, trademarks and acquisition costs, net 375,099 364,640 Goodwill, net 10,089,035 10,089,035 Other assets 43,310 63,658 ------------ ------------ Total assets $ 28,466,881 $ 28,798,236 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 1,235,886 $ 1,572,313 Other accrued liabilities 618,784 585,765 Bank line of credit 2,354,395 42,957 Current portion of industrial development bond 100,000 100,000 Payable related to product line acquisition and convertible debt, short-term - 1,738,970 Current portion of other long-term debt 911,369 1,461,640 Current portion of capital leases 176,961 177,801 --------- --------- Total current liabilities 5,397,395 5,679,446 Deferred income taxes 212,934 258,193 Industrial development bond 1,400,000 1,400,000 Other long-term debt - 139,586 Capital lease obligations 81,055 122,950 Stockholders' equity Common stock; $.001 par value, 10,000,000 authorized shares, 3,440,197 issued, and 3,400,964 outstanding, at March 31, 2003 and December 31, 2002 3,440 3,440 Additional paid in capital 16,290,452 16,290,452 Treasury stock, 39,233 shares (at cost) at March 31, 2003 and December 31, 2002 (89,422) (89,422) Retained earnings 5,171,027 4,993,591 ---------- ---------- Total stockholders' equity 21,375,497 21,198,061 ---------- ---------- Total liabilities and stockholders' equity $ 28,466,881 $ 28,798,236
ZEVEX INTERNATIONAL, INC. CONSOLIDATED INCOME STATEMENTS
Three months ended March 31, 2003 2002 (unaudited) (unaudited) ------------------------------------ ------------------------------------ Revenue: Product sales $ 5,824,695 $ 5,927,931 Engineering services 823,489 167,723 ---------- ---------- Total revenue 6,648,184 6,095,654 Cost of sales 4,057,091 3,656,001 Gross profit 2,591,093 2,439,653 Operating expenses: General and administrative 1,033,457 1,285,503 Selling and marketing 1,033,663 860,920 Research and development 184,773 79,579 Total operating expenses 2,251,893 2,226,002 Operating income 339,200 213,651 Other income (expense): Interest and other income 5,228 604 Interest expense (85,071) (150,638) Gain on sale of marketable securities - 38,079 Income before income taxes 259,357 101,696 (Provision) benefit for income taxes (81,921) 20,680 -------- ------- Net income $ 177,436 $ 122,376 Basic net income per share $ 0.05 $ 0.04 Weighted average shares outstanding 3,400,964 3,415,197 Diluted net income per share $ 0.05 $ 0.04 Diluted weighted average shares outstanding 3,410,196 3,420,828
ZEVEX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2003 2002 (unaudited) (unaudited) ---------------------- ------------------- ---------------------- ------------------- Cash flows from operating activities Net income $ 177,436 $ 122,376 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 403,107 396,367 Deferred income taxes (45,076) 7,262 Realized gain on marketable securities - (38,079) Changes in operating assets and liabilities Designated cash for sinking fund payment on industrial development bond (25,991) (17,171) Accounts receivable (215,739) 1,057,696 Inventories 129,976 535,212 Prepaid expenses and other assets 19,123 (147,263) Accounts payable (336,427) (672,454) Accrued and other liabilities 33,019 32,679 Income taxes receivable/payable 126,996 (27,940) Net cash provided by operating activities 266,424 1,248,685 Cash flows from investing activities Purchase of property and equipment (87,269) (91,240) Additions of patents and trademarks (19,031) - Redemption of available-for-sale marketable securities - 225,797 Net cash (used in) provided by investing activities (106,300) 134,557 Cash flows from financing activities Principal payments on capital lease and long-term debt (732,592) (166,689) Payments on business and product line acquisition debt (1,738,970) (5,000) Net proceeds from (payments on) bank line of credit 2,311,438 (990,859) Net cash used in financing activities (160,124) (1,162,548) Net increase in cash and cash equivalents - 220,694 Cash and cash equivalents at beginning of period - 1,028,086 Cash and cash equivalents at end of period $ - $ 1,248,780
ZEVEX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2003 1. Summary of Significant Accounting Policies Description of Organization and Business Founded in 1986, ZEVEX(R) International, Inc. ("the Company") through our divisions and subsidiaries, engages in the business of designing, manufacturing, and distributing medical devices. Our Therapeutics division markets award-winning enteral nutrition delivery devices. Our Physical Evaluation division markets industry-leading physical evaluation testing systems. Our Applied Technology division designs and manufactures advanced medical components and systems for other medical technology companies. Principles of Consolidation The consolidated financial statements at March 31, 2003 include the accounts of ZEVEX International, Inc. and its wholly owned operating subsidiaries: ZEVEX, Inc. and JTech Medical Industries, Inc. (JTech). For additional information regarding the Company, refer to the 2002 Annual Report on SEC Form 10-K. All significant intercompany balances and transactions have been eliminated in consolidation. Basis of Presentation The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information along with the instructions to Form 10-Q of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company's 2002 Annual Report on SEC Form 10-K. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for interim periods may not be indicative of the results of operations to be expected for a full year. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. New Accounting Pronouncements In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities was issued. This statement provides guidance on the recognition and measurement of liabilities associated with disposal activities and was effective for the Company on January 1, 2003. The adoption of this statement did not have a material impact on the consolidated financial position or consolidated results of operations of the Company. In November of 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. This issue addresses certain aspects of accounting for arrangements whereby a vendor performs multiple revenue-generating activities. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the related revenue should be measured and allocated to the separate units of accounting. This issue is effective for revenue arrangements entered into for fiscal periods beginning after June 15, 2003. The Company plans to adopt EITF No. 00-21 in the third quarter which begins on July 1, 2003. The Company believes that the effect of EITF No. 00-21 on the Company's results of operations, financial position or liquidity will not be material because the Company currently has few multiple deliverable revenue arrangements. 1. Description of Organization and Business and Summary of Significant Accounting Policies (continued) New Accounting Pronouncements (continued) In December of 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for financial statements for fiscal years ending after December 15, 2002 and interim periods beginning after December 31, 2002. The disclosure provisions of SFAS No. 148 have been adopted by the Company. SFAS No. 148 did not require the Company to change to the fair value based method of accounting for stock-based compensation. The Company has elected to continue to follow the intrinsic value method of accounting as prescribed by APB No. 25, to account for employee stock options. No stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation expense for options under the Company's two stock-based compensation plans, which are not subject to variable plan accounting, been determined based on the fair value of the option at the grant dates for awards under those plans consistent with SFAS No. 123, the Company's net income and earnings per share would have been adjusted to the pro forma amounts for the quarter ended March 31 as indicated below:
March 31, 2003 March 31, 2002 ----------------- ----------------- Net income as reported $ 177,436 $ 122,376 Less: Stock compensation expense determined under fair value method, net of related tax effects 98,635 58,889 ----------------- ----------------- ----------------- ----------------- Pro forma net income $ 78,801 $ 63,487 ================= ================= ================= ================= Earnings per share: Basic - as reported $ 0.05 $ 0.04 Basic - pro forma $ 0.02 $ 0.02 Diluted - as reported $ 0.05 $ 0.04 Diluted - pro forma $ 0.02 $ 0.02
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation significantly changes current practice in the accounting for, and disclosure of, guarantees. Guarantees meeting the characteristics described in the Interpretation, which are not included exceptions, are required to be initially recorded at fair value, which is different from the general current practice of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. The Interpretation also requires a guarantor to make significant new disclosures for virtually all guarantees even when the likelihood of the guarantor's having to make payments under the guarantee is remote. The Company believes provisions of this interpretation will not have a material effect on ZEVEX' future results of operations or financial condition, and does not believe that significant additional disclosures are required. 2. Bank Line of Credit In 2002, the Company renewed its line of credit arrangement with a financial institution with availability of $6 million. The line matures on May 28, 2003. The line of credit is collateralized by accounts receivable and inventory and bears interest at the prime rate, which was 4.25% at March 31, 2003 and December 31, 2002. The Company's balance on its line of credit was $2,354,395 at March 31, 2003 and $42,957 at December 31, 2002. Under the line of credit agreement, the Company is restricted from declaring cash dividends. In addition, the Company's line of credit contains certain financial covenants. As of March 31, 2003, the Company was in compliance with these financial covenants. Management expects to renew the existing line of credit upon its expiration. 3. Related Party Transactions On December 31, 1998, the Company acquired JTech pursuant to a Stock Purchase Agreement among the Company and the four shareholders of JTech (the "JTech Stock Purchase"). Leonard C. Smith, one of the selling JTech shareholders, received $1,311,188 in cash and a convertible debenture in connection with the JTech Stock Purchase. The Company paid $290,000 of the convertible debenture in December 2001, and the remaining principal amount of $1,073,594 (inclusive of the 1999 earn-out provision of $73,594 which was paid on April 2, 2002) was paid on December 31, 2002. 4. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires that all items recognized under accounting standards as components of comprehensive income be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This statement also requires that an entity classify items of other comprehensive income by their nature in an annual financial statement. Other comprehensive income may include foreign currency translation adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. For the three months ending March 31, 2003, and 2002, the Company did not have any other elements of comprehensive income. Therefore, comprehensive income equaled net income.
5. Inventories Inventories consist of the following: March 31, 2003 December 31, 2002 ------------------------------------------------- Materials $ 3,207,123 $ 3,028,782 Work in progress 402,918 1,087,474 Finished goods, including completed subassemblies 2,608,839 2,232,600 ------------------------------------------------- $ 6,218,880 $ 6,348,856 =================================================
6. Net Income Per Common Share Basic net income per common share is calculated by dividing net income for the period by the weighted-average number of the Company's common shares outstanding. Diluted net income per common share includes the dilutive effect of options in the weighted-average number of the Company's common shares outstanding as calculated using the treasury stock method. 7. Business Segments The Company operates in three business segments, Therapeutics, Physical Evaluation, and Applied Technology. The Therapeutics segment includes feeding pumps, disposable sets and feeding tubes used by patients who require direct gastrointestinal nutrition therapy (also called enteral feeding). The Physical Evaluation segment includes the sale of stand-alone and computerized products that measure isolated muscle strength, joint range of motion and sensation. In the Applied Technology segment the Company provides design and manufacturing services to global medical device leaders who, in turn, sell the Company's components and systems under private labels or incorporate them into their products. The Company evaluates the performance of the segments through gross profit, less selling and marketing expenses, and research and development expenses (or contribution margin). The Company does not allocate general and administrative expenses by segment. General and administrative expenses are included in Corporate and Unallocated amounts indicated below. 7. Business Segments (continued) For the three months ended March 31, 2003 (in thousands):
Corporate Physical Applied and Therapeutics Evaluation Technology Unallocated Total --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Revenue $ 3,349 $ 761 $ 2,538 $ -- $ 6,648 Cost of sales 2,271 280 1,506 -- 4,057 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Gross profit 1,078 481 1,032 -- 2,591 Selling and marketing 551 380 103 -- 1,034 Research and development 66 119 -- -- 185 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Contribution margin 461 (18) 929 -- 1,372 General and administrative -- -- -- 1,033 1,033 Other (income)/expenses -- -- -- 80 80 Provision for income taxes -- -- -- 82 82 ------------- ------------- Net income $ 177 ============= ============= Total assets $ 7,990 $ 6,163 $ 9,120 $ 5,194 $ 28,467 =============== =============== =============== ============== =============
Included in the segment assets disclosed above are accounts receivable, inventories, specifically identified fixed assets and goodwill. Goodwill represents approximately $842,000 in Therapeutics, $5,199,000 in Physical Evaluation, and $4,048,000 in Applied Technology. For the three months ended March 31, 2002 (in thousands):
Corporate Physical Applied and Therapeutics Evaluation Technology Unallocated Total --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Revenue $ 2,636 $ 882 $ 2,578 $ -- $ 6,096 Cost of sales 1,686 410 1,560 -- 3,656 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Gross profit 950 472 1,018 -- 2,440 Selling and marketing 509 263 74 15 861 Research and development 32 36 12 -- 80 --------------- --------------- --------------- -------------- ------------- --------------- --------------- --------------- -------------- ------------- Contribution margin 409 173 932 (15) 1,499 General and administrative -- -- -- 1,285 1,285 Other (income)/expenses -- -- -- 112 112 Provision for income taxes -- -- -- (20) (20) ------------- ------------- Net loss $ 122 ============= ============= Total assets $ 9,036 $ 7,941 $ 8,597 $ 6,362 $ 31,936 =============== =============== =============== ============== =============
Included in the segment assets disclosed above are accounts receivable, inventories, specifically identified fixed assets and goodwill. Goodwill represents approximately $907,000 in Therapeutics, $5,199,000 in Physical Evaluation, and $ 4,048,000 in Applied Technology. - ------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- General Founded in 1986, ZEVEX(R) International, Inc. ("ZEVEX") through our divisions and subsidiaries, engages in the business of designing, manufacturing, and distributing medical devices. Our Therapeutics division markets award-winning enteral nutrition delivery devices. Our Physical Evaluation division markets industry-leading physical evaluation testing systems. Our Applied Technology division designs and manufactures advanced medical components and systems for other medical technology companies. See Note 1 of the Financial Statements, Description of Organization and Business for more information. Results of Operations Revenue was $6,648,184 for the first quarter ended March 31, 2003, compared to $6,095,654 for the prior year, a 9% increase. The increase in revenue over last years first quarter is largely due to a 19% increase in domestic sales of EnteraLite(R) ambulatory enteral nutrition delivery pump and disposable sets products and an increase of over $700,000 in international sales of our enteral pumps, within our Therapeutics division. In addition revenue from engineering services of our Applied Technology division quadrupled over those of the first quarter of 2002. The revenue growth was partially offset by a decline in orders for stationary enteral nutrition delivery pump disposable sets, weaker demand for Physical Evaluation products, and reduced sales of some contract-manufactured products of our Applied Technology division during the quarter. The percentage of revenue generated from proprietary products by our Therapeutics and Physical Evaluation divisions increased to 62% compared to 58% of from the first quarter of 2002. Sales of our Therapeutics products accounted for approximately 50% of total revenue for the first quarter ended March 31, 2003, compared to 43% for the first quarter ended March 31, 2002. Sales from our Physical Evaluation product line accounted for approximately 11% of total revenue for the first quarter 2003, compared to 14% for the same period 2002. Thirty-eight percent of our revenue during the first quarter 2003 was derived from products manufactured for and sold to our contract manufacturing customers, compared to 42% in the first quarter 2002. This shift in revenue sources from contract manufacturing to proprietary products over the last three years has the benefit of decreasing the percentage of our revenue generated by a small number of major customers. During the first quarter 2003 and 2002, no single customer accounted for over 10% of our revenue. Our gross profit as a percentage of revenues was approximately 39% for the first quarter of 2003, compared to 40% for the first quarter of 2002. We attribute the slight decrease in gross profit percentage from 2002 to 2003 to the particular product mix delivered during the quarters. Selling, general and administrative expenses decreased slightly during the first quarter of 2003 to $2,067,120, as compared to $2,146,423 for the first quarter of 2002. Although we have decreased certain general and administrative costs, we continue to invest in building our domestic sales forces for the Physical Evaluation and Therapeutics divisions. Overall, sales and marketing expenses increased to $1,033,663, for the first quarter 2003, from $860,920 for the first quarter 2002. We combine the resources of our full-time engineers and several other independent contractors to perform research and development projects. We invested $184,773 in the first quarter of 2003, compared to $79,579 in the first quarter of 2002 for research and development of new products. In the first quarter of 2003, research and development costs represented approximately 3% of our revenue, compared to 1% in the first quarter of 2002. We are continuing our efforts to develop and introduce new proprietary products and are currently planning new product introductions during the fiscal year. Additionally, we are investing in developing proprietary component technologies for our contract manufacturing business. We expect research and development costs to be approximately 3% of revenue during 2003. Operating income increased 59% to $339,200, 5% of revenue in the first quarter of 2003, compared to $213,651, 4% of revenue in the first quarter of 2002. Net income increased 45% to $177,436, 3% of revenue in the first quarter of 2003, compared to a net income of $122,376, 2% of revenue in the first quarter of 2002. The increase in net income during 2003, as compared to 2002, is due to increased gross profit from sales growth, the decrease in general and administrative expenses, and a reduction in interest expense from $150,638 to $85,071, due to decreased debt and lower interest rates. For comparison purposes, the 2002 net income figure includes a tax benefit as described below. Depreciation and amortization expenses increased to $403,107 in the first quarter 2003 from $396,367 in the first quarter 2002. We had income tax expense of $81,921 in the first quarter of 2003 compared to an income tax benefit of $20,680 for the first quarter of 2002. The increase in tax expense from 2003 from 2002 is primarily due to the tax benefit derived from a capital loss in 2002, which, for the State of Utah, was treated as a net operating loss carryback for income tax purposes and resulted in a refund recognized in the first quarter of 2002 as well as increased taxable income. As of March 31, 2003, our backlog of customer orders was $3,319,000, as compared to $4,089,000 on March 31, 2002. We estimate that approximately 80% of the backlog will be shipped before December 31, 2003. Our backlog is for contract manufacturing only and can be significantly affected by the timing of annual or semi-annual purchase orders placed by its customers. Liquidity and Capital Resources Our primary sources of liquidity have consisted of cash flow from operations, borrowings under its revolving line of credit and other financial arrangements described below. In prior years, we also has increased working capital through the issuance of stock, and may do so in the future. Cash flows provided from operating activities for the first quarter of 2003 were $266,424 compared to cash flows provided from operating activities for the first quarter of 2002 of $1,248,685. In the first quarter of 2003, cash provided by operating activities was primarily associated with an increase in net income and our continued reduction in inventories. In the first quarter of 2002, cash provided by operating activities was primarily associated with reduction of accounts receivable due to improved collection procedures, reduction in inventories as we continued to stream-line our purchasing and manufacturing process, and income tax refunds related to capital loss carrybacks, partially offset by a reduction of accounts payable. Our working capital at March 31, 2003 was $6,370,351, compared to $6,726,487 at March 31, 2002. The decrease in working capital was primarily due to the reduction of inventories, deferred income taxes, and income taxes receivable, the cash flow of which was used for debt reduction. The portion of working capital represented by cash at such dates was $0 and $1,248,780 respectively. The ratio of current assets to current liabilities increased to 2.18 at March 31, 2003, from 1.92 at March 31, 2002. We have a $6,000,000 open line of credit arrangement with a financial institution. The line matures on May 28, 2003. The line of credit is collateralized by accounts receivable and inventories, and bears interest at the financial institution's prime rate. We owed $2,354,395 on the line of credit at March 31, 2003 and $42,957 at December 31, 2002. Management expects to renew the existing line of credit upon its expiration. On March 15, 2001, we entered into a Secured Financing Agreement with a bank for the amount of $1,500,000. The agreement was secured by our existing base of enteral feeding pumps, which were purchased from Nestle and are now manufactured by us. The proceeds from the agreement were used to reduce our line of credit balance. The agreement had a 36-month term, is due on February 15, 2004, and bears interest at a rate of 8.24%. We paid off the financing agreement in March 2003, primarily using proceeds from our line of credit in the amount of $589,998. On April 18, 2001, we entered into a Term Loan Agreement with a bank for the amount of $1,000,000. The agreement is secured by our manufacturing facility. The proceeds from the Promissory Note were used to reduce our line of credit balance. The note is due on May 15, 2003, is amortized over a fifteen-year term, and bears interest at the financial institution's prime rate, currently 4.25%. We owed $911,369 on the Term Loan Agreement at March 31, 2003. It is anticipated that, upon maturity we will be able to refinance the Term Loan Agreement under terms similar to the existing terms. In 1997, we completed construction of our new 51,000 square foot headquarters and manufacturing facility. The cost of this undertaking was approximately $2,591,177. In 1996, we negotiated a $2.0 million Industrial Development Bond ("IDB") to finance this construction. As of March 31, 2003, the remaining principal balance on the IBD was $1,500,000. During the first three months of 2003, the interest paid monthly ranged from 1.23% to 1.38% (APR). In conjunction with certain 1998 business acquisitions, issued convertible debentures in the aggregate amount of $5,447,188. The final principal payments on the debentures were maid in January 2003 for $788,970 and March 2003 for $950,000. Purchases of leasehold improvements to our facilities, and new engineering, production and testing equipment, and tooling totaled $87,269 for the first three months of 2003, compared to $91,240 for the first three months of 2002. We expects to spend approximately $300,000 during the remainder of 2003 for additional manufacturing equipment and software, for normal replacement of aging equipment, and manufacturing tooling related to its proprietary products. Our expected principal liquidity requirements are working capital, investments in capital expenditures, and debt reduction. We believe our sources of liquidity are sufficient for operations during the coming twelve months with our projected cash flows from operations and if necessary, the availability of funds under our revolving line of credit. Critical Accounting Policies and Estimates In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" and 33-8056, "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations," we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures. Our significant accounting policies are included in Note 1 to the Consolidated Financial Statements and included in the Annual Report of ZEVEX on Form 10-K for the year ended December 31, 2002. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our financial statements and they require our most difficult, subjective, or complex judgments in the preparation of our consolidated financial statements: Allowance for Doubtful Accounts As a general policy, collateral is not required for accounts receivable; however, we periodically monitor the need for an allowance for doubtful accounts based upon expected collections of accounts receivable and specific identification of uncollectible accounts. Additionally, customers' financial condition and credit worthiness are regularly evaluated. Historically losses on collections have not been material. As of March 31, 2003, we have recorded an allowance for bad debts of $200,000, approximately 4% of accounts receivable. Product and Inventory Obsolescence Rapid change and technological innovation characterize the marketplace for medical products. As a result, we are subject to the risk of product and inventory obsolescence, whether from prolonged development or government approval cycles or the development of improved products or processes by competitors. In addition, the marketplace could conclude that the task for which a customer's medical product was designed is no longer an element of a generally accepted diagnostic or treatment regimen. Inventories are stated at the lower of cost or market; cost is determined using the standard cost method. As of March 31, 2003, we have recorded an obsolescence reserve in the amount of $254,000, which is approximately 4% of inventories. Sales Returns and Warranty We record a provision for estimated sales returns and allowances and warranty reserve on products we have sold. These estimates are based on historical sales returns and warranty expenses and other known factors. If the historical data we use to calculate these estimates does not properly reflect future returns and warranty expenses, revenue could be overstated and expenses could be understated. We have recorded a sales return and warranty expense allowance in the amount of $85,000 as of March 31, 2003. Revenue Recognition ZEVEX recognizes revenue from products sold directly to end customers when persuasive evidence of an arrangement exists, the price is fixed and determinable, shipment is made and collectibility is reasonably assured. Shipping and handling costs are expensed as incurred and are included in cost of sales. Contracts to perform engineering design and product development services are generally performed on a time-and-materials basis. Revenue and expenses are recognized as costs are incurred. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, Software Revenue Recognition, in October 1997. SOP 97-2, provides authoritative guidance on software revenue recognition, applies to all entities that earn revenue from licensing, selling or otherwise marketing software. Our Physical Evaluation product line derives a portion of its revenue from software products that include post-contract customer support. We have recorded deferred revenue in the amount of $25,000 for such post-contract customer support as of March 31, 2003. Impairment We have made acquisitions in the past that included a significant amount of fixed assets, goodwill, and other intangible assets. The cost of the acquired companies was allocated first to identifiable assets based on estimated fair values. Intangible assets consist of goodwill, contracts, patents, and licenses. Effective in 2002, goodwill is no longer amortized but is subject to an annual (or, under certain circumstances, more frequent) impairment test, based on a comparison of the carrying value of the goodwill and the fair value of the respective business unit. Other intangible assets will generally continue to be amortized over their useful lives and also will be subject to an impairment test. Estimated fair value is typically less than values based on undiscounted operating earnings because fair value estimates include a discount factor in valuing future cash flows. There are many assumptions and estimates underlying the determination of an impairment loss. Another estimate using different, but still reasonable, assumptions could produce a significantly different result. Therefore, impairment losses could be recorded in the future. Currently, we assess the impairment of fixed assets and identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following: o A significant underperformance relative to expected historical or projected future operating results; o A significant change in the manner of how we use the acquired asset or the strategy for our overall business; o A significant negative industry or economic trend. When we determine that one or more of the above indicators of impairment exist, we evaluate the carrying amounts of the affected assets. The evaluation, which involves significant management judgment, is based on various analyses including cash flow and profitability projections. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of the related long-lived assets, the carrying amount of the underlying assets will be reduced, with the reduction charged to expense, so that the carrying amount is equal to fair value, primarily based on future discounted cash flows, using a discount rate determined by management to be commensurate with the risk inherent in our current business model. Net intangible assets and goodwill amounted to approximately $10.5 million as of March 31, 2003. Net fixed assets amounted to approximately $6.2 million as of March 31, 2003. Income Taxes Income taxes are recorded based on the liability method, which requires recognition of deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. A valuation allowance is recorded to reduce our deferred tax asset to an amount that is more likely than not to be realized, as determined based on our analyses of projected taxable income, including tax strategies available to generate future taxable income. Our analyses of future taxable income are subject to a wide range of variables, many of which involve our estimates, and therefore our deferred tax asset may not be ultimately realized. New Accounting Pronouncements In June 2002, SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities was issued. This statement provides guidance on the recognition and measurement of liabilities associated with disposal activities and was effective for ZEVEX on January 1, 2003. The adoption of this statement did not have a material impact on the consolidated financial position or consolidated results of operations of ZEVEX. In November of 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. This issue addresses certain aspects of accounting for arrangements whereby a vendor performs multiple revenue-generating activities. This issue addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the related revenue should be measured and allocated to the separate units of accounting. This issue is effective for revenue arrangements entered into for fiscal periods beginning after June 15, 2003. ZEVEX plans to adopt EITF No. 00-21 in the third quarter which begins on July 1, 2003. ZEVEX believes that the effect of EITF No. 00-21 on ZEVEX' results of operations, financial position or liquidity will not be material because ZEVEX currently has few multiple deliverable revenue arrangements. In December of 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for financial statements for fiscal years ending after December 15, 2002 and interim periods beginning after December 31, 2002. The disclosure provisions of SFAS No. 148 have been adopted by ZEVEX. SFAS No. 148 did not require ZEVEX to change to the fair value based method of accounting for stock-based compensation. ZEVEX has elected to continue to follow the intrinsic value method of accounting as prescribed by APB No. 25, to account for employee stock options. No stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. Had compensation expense for options under our two stock-based compensation plans, which are not subject to variable plan accounting, been determined based on the fair value of the option at the grant dates for awards under those plans consistent with SFAS No. 123, ZEVEX' net income and earnings per share would have been adjusted to the pro forma amounts for the quarter ended March 31 as indicated below:
March 31, 2003 March 31, 2002 ----------------- ----------------- Net income as reported $ 177,436 $ 122,376 Less: Stock compensation expense determined under fair value method, net of related tax effects 98,635 58,889 ----------------- ----------------- ----------------- ----------------- Pro forma net income $ 78,801 $ 63,487 ================= ================= ================= ================= Earnings per share: Basic - as reported $ 0.05 $ 0.04 Basic - pro forma $ 0.02 $ 0.02 Diluted - as reported $ 0.05 $ 0.04 Diluted - pro forma $ 0.02 $ 0.02
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation significantly changes current practice in the accounting for, and disclosure of, guarantees. Guarantees meeting the characteristics described in the Interpretation, which are not included exceptions, are required to be initially recorded at fair value, which is different from the general current practice of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. The Interpretation also requires a guarantor to make significant new disclosures for virtually all guarantees even when the likelihood of the guarantor's having to make payments under the guarantee is remote. We believe provisions of this interpretation will not have a material effect on our future results of operations or financial condition, and do not believe that significant additional disclosures are required. Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private Securities Litigation Reform Act of 1995 When used in this report, the words such as "estimate," "believe," "project," "anticipate" and similar expressions, together with other discussion of future trends or results, are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements, which include ZEVEX' statements about the level of anticipated expenses during 2003 and its liquidity position are subject to certain risks and uncertainties, including those discussed below that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof and ZEVEX disclaims any obligation to update them. All of these forward-looking statements are based on estimates and assumptions made by management of ZEVEX, which although believed to be reasonable, are inherently uncertain and difficult to predict. Therefore, undue reliance should not be placed upon such estimates. There can be no assurance that the benefits anticipated in these forward-looking statements will be achieved. The following important factors, among others, could cause ZEVEX not to achieve the benefits contemplated herein, or otherwise cause ZEVEX' results of operations to be adversely affected in future periods: (i) continued or increased competitive pressures from existing competitors and new entrants; (ii) unanticipated costs related to ZEVEX' growth and operating strategies; (iii) loss or retirement of key members of management; (iv) increase in interest rates of ZEVEX' cost of borrowing, or a default under any material debt agreement; (v) adverse state or federal legislation or regulation that increases the cost of compliance, or adverse findings by a regulator with respect to existing operations; (vi) loss of customers; (vii) inability to achieve future sales; (viii) the unavailability of sufficient funds for operations or capital expenditures; and (ix) inability to introduce new products as planned. Many of such factors are beyond the control of ZEVEX. Please refer to ZEVEX' SEC Form 10-K for its fiscal year ended December 31, 2002 for additional cautionary statements. - ------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------------------------------------------------------------------------------- No significant changes in market risk have occurred since December 31, 2002. Please refer to ZEVEX' SEC Form 10-K for its fiscal year ended December 31, 2002 for additional discussions on market risks. - ------------------------------------------------------------------------------- ITEM 4. CONTROLS AND PROCEDURES - ------------------------------------------------------------------------------- Within 90 days prior to the date of this report, our management, including our CEO and CFO, evaluated the effectiveness of our "disclosure controls and procedures" (the controls and other procedures for recording, processing, summarizing and reporting on a timely basis the information required to be disclosed in the periodic reports that we file with the U.S. Securities and Exchange Commission). Based on that evaluation, and subject to the limitations noted below, our management concluded that our disclosure controls and procedures are effective to ensure that material information about us and our subsidiaries is made known to management by others in our company on a timely basis for preparation of our periodic reports. While we believe our disclosure controls and procedures are effective, we note that controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls and procedures are met. There are inherent limitations, including the possibility that judgments in decision-making can be faulty, that breakdowns can occur because of simple error or mistake, or that a person may circumvent the controls. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Additionally, since the date of our last evaluation of our internal controls (the controls and procedures designed to permit the preparation of our financial statements in conformity with generally accepted accounting principles), there have been no significant changes in such controls or, to our knowledge, in other factors that could significantly affect those controls. PART II Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The following exhibits are attached hereto or are incorporated herein by reference as indicated in the table below: Exhibit Location if other No. Title of Document than attached hereto ------ ----------------- -------------------- 3.01* Certificate of Incorporation Amendment No. 1 to Form S-1, filed October 24, 1997 3.02* Amended Bylaws March 31, 2002 Form 10-Q filed May 10, 2002 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. This document is being furnished in accordance with SEC Release Nos. 33-8212 and 34-47551. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. This document is being furnished in accordance with SEC Release Nos. 33-8212 and 34-47551. (b) Reports on Form 8-K Item(s) Reported Date Filed 1. Item 9 - Regulation FD Disclosure Certification Pursuant to 18 U.S.C. Section 1350 March 27, 2003 Form 8-K * Denotes exhibits specifically incorporated in this Form 10-Q by reference to other filings of the Company pursuant to the provisions of Securities and Exchange Commission rule 12b-32 and Regulation S-K. These documents are located under File No. 001-10287 at, among other locations, the Securities and Exchange Commission, Public Reference Branch, 450 5th St., N.W., Washington, D.C. 20549. - ------------------------------------------------------------------------------- SIGNATURES - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ZEVEX INTERNATIONAL, INC. Dated: May 12, 2003 By /s/ David J. McNally -------------------------- David J. McNally, CEO (Chief Executive Officer) By /s/ Phillip L. McStotts ------------------------------ Phillip L. McStotts, Secretary (Principal Financial Officer) CERTIFICATIONS I, David J. McNally, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ZEVEX International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 12, 2003 By /s/ David J. McNally -------------------------- David J. McNally, CEO (Chief Executive Officer) CERTIFICATIONS I, Phillip L. McStotts, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ZEVEX International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 12, 2003 By /s/ Phillip L. McStotts ------------------------------ Phillip L. McStotts, Secretary (Principal Financial Officer) Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, David J. McNally, certify to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of ZEVEX International, Inc. (the "Company") on Form 10-Q for the quarter ending March 31, 2003 as filed with the Securities and Exchange Commission on May 13, 2003 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents in all material respects the financial condition and results of operations of the Company. /s/ David J. McNally David J. McNally Chief Executive Officer May 12, 2003 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Phillip L. McStotts, certify to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of ZEVEX International, Inc. (the "Company") on Form 10-Q for the quarter ending March 31, 2003 as filed with the Securities and Exchange Commission on May 13, 2003 (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents in all material respects the financial condition and results of operations of the Company. /s/ Phillip L. McStotts Phillip L. McStotts Chief Financial Officer May 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----