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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................to.................
Commission file number 001-1296
ZEVEX INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
DELAWARE 87-0462807
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4314 ZEVEX Park Lane, Salt Lake City, Utah 84123
(Address of principal executive offices and zip code)
(801) 264-1001
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No
Indicate by check mark whether the registrant is an accelerated filer (
as defined in Rule 12b-2 of the Exchange Act) Yes No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of April 20, 2005, the
Company had outstanding 3,405,471 shares of common stock, par value $0.001 per
share.
ZEVEX INTERNATIONAL, INC.
FORM 10-Q
For the Three Months Ended March 31, 2005
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements:
Consolidated Condensed Balance Sheets as of March 31, 2005 and
December 31, 2004 4
Consolidated Condensed Statements of Operations for the three
months ended March 31, 2005 and 2004 5
Consolidated Condensed Statements of Cash Flows for the three
months ended March 31, 2005 and 2004 6
Consolidated Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q
- -------------------------------------------------------------------------------
ZEVEX International, Inc. ("ZEVEX" or the "Company") files herewith balance
sheets of ZEVEX as of March 31, 2005, (unaudited) and December 31, 2004, and the
related (unaudited) statements of operations and (unaudited) cash flows for the
respective three month periods ended March 31, 2005 and 2004. In the opinion of
ZEVEX's 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, 2004.
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
ASSETS (unaudited)
------------- -------------
Current assets
Cash and cash equivalents $ 272,168 $ 212,859
Designated cash for sinking fund payment on industrial
development bond 121,484 96,042
Accounts receivable, net of allowance for doubtful
accounts of $158,000 and $192,000 3,912,873 3,563,436
Other receivable - 35,500
Inventories 4,521,330 4,584,755
Marketable securities 35,640 29,250
Prepaid expenses and other current assets 188,281 149,690
Total current assets 9,051,776 8,671,532
Property and equipment, net 4,281,575 4,345,942
Patents, trademarks and other intangibles, net 332,172 335,244
Goodwill, net 4,048,264 4,048,264
Total assets $ 17,713,787 $17,400,982
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,426,987 $ 1,949,618
Other accrued liabilities 640,442 606,734
Bank line of credit 760,592 -
Income taxes payable 4,640 2,005
Current portion of industrial development bond 100,000 100,000
Current portion of other long-term debt 53,974 53,246
Total current liabilities 2,986,635 2,711,603
Industrial development bond 1,200,000 1,200,000
Other long-term debt 752,592 766,362
Stockholders' equity
Common stock; $.001 par value, 10,000,000
authorized shares, 3,440,197 issued and 3,400,964
outstanding at March 31, 2005 and December 31, 2004 3,440 3,440
Additional paid in capital 16,290,452 16,290,452
Unrealized loss on marketable securities (12,135) (18,525)
Treasury stock, 39,233 shares (at cost) at
March 31, 2005 and December 31, 2004 (89,422) (89,422)
Accumulated deficit (3,417,775) (3,462,928)
Total stockholders' equity 12,774,560 12,723,017
Total liabilities and stockholders' equity $ 17,713,787 $17,400,982
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31
2005 2004
(unaudited) (unaudited)
----------------------------
Revenue:
Product sales $ 5,881,454 $ 6,114,532
Engineering services 102,710 94,172
Total revenue 5,984,164 6,208,704
Cost of sales 3,797,659 3,882,408
Gross profit 2,186,505 2,326,296
Operating expenses:
General and administrative 974,679 890,701
Selling and marketing 815,700 797,446
Research and development 321,656 386,528
Total operating expenses 2,112,035 2,074,675
Operating income 74,470 251,621
Other income (expense):
Interest and other income 3,129 1,786
Interest expense (29,811) (41,011)
Income before income taxes 47,788 212,396
Provision for income taxes (2,635) (3,615)
Net income $ 45,153 $ 208,781
Basic net income per share $ 0.01 $ 0.06
Weighted average shares outstanding 3,400,964 3,400,964
Diluted net income per share $ 0.01 $ 0.06
Diluted weighted average shares outstanding 3,512,433 3,461,575
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31
2005 2004
(unaudited) (unaudited)
-------------------- -------------------
-------------------- -------------------
Cash flows from operating activities
Net income $ 45,153 $ 208,781
Adjustments to reconcile net income to net cash
(used in) provided by operating activities
Depreciation and amortization 173,901 214,293
Provision for bad debts 4,409 (243)
Changes in operating assets and liabilities
Designated cash for sinking fund payment
on industrial development bond (25,442) (25,272)
Accounts receivable (353,846) 469,224
Inventories 63,425 649,646
Prepaid expenses and other assets (3,091) 68,742
Accounts payable (522,631) (206,103)
Accrued and other liabilities 33,708 (48,244)
Deferred revenue - (412,024)
Income taxes receivable/payable 2,635 3,615
Net cash (used in) provided by operating activities (581,779) 922,415
Cash flows from investing activities
Purchase of property and equipment (103,092) (41,146)
Additions of patents and trademarks (3,370) (9,245)
Proceeds from other receivable from sale of business - 988,703
Net cash (used in) provided by investing activities (106,462) 938,312
Cash flows from financing activities
Principal payments on capital lease and long-term debt (13,042) (54,246)
Net (payments on) proceeds from bank line of credit 760,592 (1,810,970)
Net cash provided by (used in) financing activities 747,550 (1,865,216)
Net increase (decrease) in cash and cash equivalents 59,309 (4,489)
Cash and cash equivalents at beginning of period 212,859 668,089
Cash and cash equivalents at end of period $ 272,168 $ 663,600
ZEVEX INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company, through its divisions and subsidiary, engages in the business of
designing, manufacturing and distributing medical devices. The Therapeutics
division manufactures and markets enteral nutrition delivery devices. The
Applied Technology division designs and manufactures advanced medical components
and systems for medical technology companies.
For additional information regarding the Company, refer to its 2004 Annual
Report on SEC Form 10-K.
Principles of Consolidation
The consolidated financial statements include the accounts of ZEVEX
International, Inc. (the Company) and its wholly owned operating subsidiary
ZEVEX, Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information along with the instructions to Form 10-Q. Accordingly, certain
information and footnote disclosures normally included in complete financial
statements have been condensed or omitted. These financial statements should be
read in conjunction with the financial statements and footnotes thereto included
in the Company's 2004 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 December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based
Payment, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar
to the approach described in Statement 123. However, Statement 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values.
Pro forma disclosure will no longer be an alternative.
Statement 123(R) must be adopted no later than January 1, 2006 and we expect to
adopt Statement 123(R) on that date. Statement 123(R) permits public companies
to adopt its requirements using one of two methods, the "modified prospective"
or the "modified retrospective." Management has not yet determined which method
it will use. As permitted by Statement 123, the Company currently accounts for
share-based payments to employees using Opinion 25's intrinsic value method and,
as such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have a
significant impact on our results of operations, although it will have no impact
on our overall financial position. The impact of adoption of Statement 123(R)
cannot be predicted at this time because it will depend on levels of share-based
payments granted in the future. However, had we adopted Statement 123(R) in
prior periods, the impact of that standard would have approximated the impact of
Statement 123, as described in the disclosure of pro forma net income and
earnings per share in Note 1 to our consolidated financial statements.
Stock Based Compensation
The Company follows the intrinsic value method of accounting as prescribed by
APB No. 25 to account for employee stock options. No stock-based employee
compensation cost has been recorded in net income, as all options granted had an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant.
Had compensation expense for options under the Company's two stock-based
compensation plans been determined based on the fair value of the options at the
grant dates for awards under those plans consistent with SFAS No. 123, the
Company's net income and earnings per share would have been adjusted to the pro
forma amounts for the three months ended March 31 as indicated below:
March 31, 2005 March 31, 2004
----------------- -----------------
Net income as reported $ 45,153 $ 208,781
Less: Stock compensation expense determined under fair
value method, net of related tax effects 120,210 125,235
----------------- -----------------
----------------- -----------------
Pro forma net (loss) income $ (75,057) $ 83,546
================= =================
================= =================
Earnings (loss) per share:
Basic - as reported $ 0.01 $ 0.06
Basic - pro forma $ (0.02) $ 0.02
Diluted - as reported $ 0.01 $ 0.06
Diluted - pro forma $ (0.02) $ 0.02
2. Debt
The Company maintains a $3 million line of credit arrangement with a financial
institution. . The line of credit is collateralized by accounts receivable and
inventory and bears interest at the prime rate, which was 5.75% at March 31,
2005 and 5.25% on December 31, 2004. The Company's balance on its line of credit
was $760,592 at March 31, 2005 and $0 at December 31, 2004. 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. In
the first quarter of 2005, the Company failed to meet one financial covenant of
the line of credit. The Company received a waiver for such covenant. The Company
anticipates that it will fail to meet this same covenant in the second quarter
of 2005, and has informed the financial institution. The line of credit
initially was to mature on May 29, 2005, but was renewed on May 2, 2005 and now
matures on May 29, 2006. As of December 31, 2004, the Company was in compliance
with all financial covenants.
On April 18, 2001, the Company entered into a Term Loan Agreement with a bank
for the amount of $1,000,000. The agreement is secured by the Company's
manufacturing facility. The note was due on May 15, 2003. The Term Loan
Agreement which was renegotiated effective May 15, 2003, is now due May 15, 2008
and is being amortized over a thirteen-year term, at an interest rate of 5.4%.
The Company owed $806,566 on the Term Loan Agreement at March 31, 2005.
3. Related Party Transactions
On December 31, 2003, the Company completed the sale of its Physical Evaluation
business. The transaction was accomplished through the sale of all the issued
and outstanding capital stock of JTech, previously a wholly owned subsidiary of
the Company. The transaction was effected by a Stock Purchase Agreement dated
December 31, 2003 by and between the Company and Mr. Leonard C. Smith, a former
employee, officer and director of the Company, for a purchase price of $1.2
million, which was recorded as an "other receivable" at December 31, 2003. Cash
of $1,164,500 was received in 2004, and $35,500 was received in February 2005
when the Company satisfied certain obligations to JTech as set forth in the
Stock Purchase Agreement. Such obligations included the requirement to deliver
inventory, upon completion of production, and certain other equipment. Deferred
revenue of $324,000 was recorded related to these obligations, all of which was
realized in 2004. Additionally, pursuant to the Stock Purchase Agreement, the
Company may receive additional payments from the purchaser based upon
specifically identified JTech product sales in 2005.
4. Comprehensive Income
For the three months ended March 31, 2005, the Company had comprehensive income
of $51,543. For the three months ended March 31, 2004, the Company had
comprehensive income of $215,981.
5. Inventories
Inventories consist of the following:
March 31, 2005 December 31, 2004
-------------------------------------------------
Materials $ 2,811,048 $ 2,761,508
Work in progress 556,748 470,253
Finished goods, including completed subassemblies 1,153,534 1,352,994
-------------------------------------------------
$ 4,521,330 $ 4,584,755
=================================================
6. Net Income (Loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income
for the period by the weighted-average number of the Company's common shares
outstanding.
Diluted net income per common share includes the dilutive effect of options in
the weighted-average number of the Company's common shares outstanding as
calculated using the treasury stock method. For the three months ended March 31,
2005 and March 31, 2004, 311,000 option shares and 563,500 option shares,
respectively, were not included because they were antidilutive.
7. Business Segments
The Company operates in two business segments: Therapeutics and Applied
Technology. The Therapeutics segment includes the manufacture and sale of
feeding pumps, and disposable sets used by patients who require direct
gastrointestinal nutrition therapy (also called enteral feeding). In the Applied
Technology segment, the Company provides design and manufacturing services to
medical device companies who, in turn, sell the Company's components and systems
under private labels or incorporate them into their products. The Company
evaluates the performance of the segments through gross profit, less selling and
marketing expenses, and research and development expenses (or contribution
margin). The Company does not allocate general and administrative expenses by
segment. General and administrative expenses are included in Corporate and
Unallocated amounts indicated below.
Segment information for the three months ended March 31, 2005 (in thousands)
follows:
Applied Corporate and
Therapeutics Technology Unallocated Total
------------------ ------------------ ------------------- ---------------
------------------ ------------------ ------------------- ---------------
Revenue $ 2,873 $ 3,111 $ -- $ 5,984
Cost of sales 1,953 1,845 -- 3,798
------------------ ------------------ ------------------- ---------------
------------------ ------------------ ------------------- ---------------
Gross profit 920 1,266 -- 2,186
Selling and marketing 688 127 -- 815
Research and development 129 193 -- 322
------------------ ------------------ ------------------- ---------------
------------------ ------------------ ------------------- ---------------
Contribution margin 103 946 -- 1,049
General and administrative -- -- 974 974
Other (income)/expenses -- -- 27 27
Provision for income taxes -- -- 3 3
---------------
---------------
Net income $ 45
===============
===============
Total assets $ 306 $ 4,048 $ 13,360 $ 17,714
================== ================== =================== ===============
Included in the segment assets disclosed above are specifically identified fixed
assets and goodwill. All assets other than those specifically identified fixed
assets and goodwill are included in Corporate and Unallocated. The only
specifically identified fixed assets include nutritional pumps and certain
tooling, which are included in the Therapeutics segment. All other fixed assets
are used jointly by the segments. Goodwill represents approximately $4,048,000
in Applied Technology.
Segment information for the three months ended March 31, 2004 (in thousands)
follows:
Applied Corporate and
Therapeutics Technology Unallocated Total
------------------ ------------------ ------------------- ---------------
------------------ ------------------ ------------------- ---------------
Revenue $ 2,995 $ 3,214 $ -- $ 6,209
Cost of sales 1,776 2,106 -- 3,882
------------------ ------------------ ------------------- ---------------
------------------ ------------------ ------------------- ---------------
Gross profit 1,219 1,108 -- 2,327
Selling and marketing 705 92 -- 797
Research and development 227 160 -- 387
------------------ ------------------ ------------------- ---------------
------------------ ------------------ ------------------- ---------------
Contribution margin 287 856 -- 1,143
General and administrative -- -- 891 891
Other (income)/expenses -- -- 39 39
Provision for income taxes -- -- 4 4
---------------
---------------
Net income $ 209
===============
===============
Total assets $ 654 $ 4,048 $ 12,602 $ 17,304
================== ================== =================== ===============
Included in the segment assets disclosed above are specifically identified fixed
assets and goodwill. Goodwill represents approximately $4,048,000 in Applied
Technology
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") and other parts of this Form 10-Q contain 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"). In some cases, such forward-looking
statements may be identified by the use of words such as "estimate," "believe,"
"project," "anticipate" and similar expressions, and together with other
discussion of future trends or results, are intended to identify forward-looking
statements. Such statements, which include our statements about the level of
anticipated expenses during 2005 and our liquidity position are subject to
certain risks and uncertainties, including those discussed below that could
cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof and we disclaim any
obligation to update them. All of these forward-looking statements are based on
estimates and assumptions made by our management, which although believed to be
reasonable, are inherently uncertain and difficult to predict. Therefore, undue
reliance should not be placed upon such estimates. There can be no assurance
that the benefits anticipated in these forward-looking statements will be
achieved. The following important factors, among others, could cause us not to
achieve the benefits contemplated herein, or otherwise cause our results of
operations to be adversely affected in future periods: (i) continued or
increased competitive pressures from existing competitors and new entrants; (ii)
unanticipated costs related to our growth and operating strategies; (iii) loss
or retirement of key members of management; (iv) increase in interest rates of
our cost of borrowing, or a default under any material debt agreement; (v)
adverse state or federal legislation or regulation that increases the cost of
compliance, or adverse findings by a regulator with respect to existing
operations; (vi) loss of customers; (vii) inability to achieve future sales;
(viii) the unavailability of sufficient funds for operations or capital
expenditures; and (ix) inability to introduce new products as planned. Many of
such factors are beyond our control. Please refer to our SEC Form 10-K for the
fiscal year ended December 31, 2004 for additional cautionary statements.
Overview
Through our divisions, we develop and manufacture high quality, high value
medical products. We effectively integrate, implement, and support solutions
throughout product life cycles based upon our core competencies in fluid
management and measurement, and surgical ultrasound technologies. The
Therapeutics division manufactures and markets enteral nutrition delivery
devices. The Applied Technology division designs and manufactures advanced
medical components and systems for medical technology companies.
We provide value in a continuum of product solutions, from components and
subsystems to complete medical systems of medical device companies. We also
manufacture complete systems if a significant portion of the value of the
product is derived from our technology.
We focus on product development and manufacturing, and distribute our products
through selected medical device marketing companies and distributors. We employ
product and territory managers to ensure that our services and sales support are
complementary to the quality of our innovative products. This distribution
strategy allows us to leverage our expertise and technology across diverse
applications, while remaining focused on our core competencies.
During the first quarter of 2005, we completed a research and development
project leading to the introduction of our next-generation enteral feeding pump,
the EnteraLite(R) Infinity(TM) at the American Society of Parenteral and Enteral
Nutrition Annual Conference in January 2005. We were also notified that the
EnteraLite(R) Infinity(TM) will be the recipient of a 2005 Medical Design
Excellence Award in June of this year.
In the first quarter of 2005, we had consolidated revenue of $5,984,164 and net
income of $45,153. We had consolidated revenue of $6,208,704 and net income of
$208,781 for the same period in 2004. Revenue from the Therapeutics division and
from our Applied Technology division constituted 48% and 52%, respectively, of
our first quarter 2005 and 2004 consolidated revenue.
Our Therapeutics Division
Through the sale of enteral feeding pumps and related devices, we have
established a competitive position in the U.S. enteral nutrition delivery
market. The market in which we compete includes feeding pumps and disposable
sets that are used by patients who require direct gastrointestinal nutrition
therapy (also called enteral feeding). Enteral feeding is the means of providing
liquid nutrition to patients who may have experienced head or neck trauma, or
have gastrointestinal disorders, such as short bowel syndrome, Crohn's Disease,
bowel pseudo-obstruction and other disorders that prevent normal digestion.
Our Applied Technology Division
We also provide design and manufacturing services in a multi-billion dollar
market to worldwide medical device leaders who, in turn, sell our components and
systems under private labels or incorporate them into their products. We call
this our Applied Technology division. These OEM (Original Equipment
Manufacturer) products include ultrasonic sensors and surgical handpieces,
optoelectronic components, and electronic instruments. Our operation in Salt
Lake City has been certified to world-class medical device quality standards,
meeting ISO 9001 and ISO 13485 certification requirements and we employ a
quality system developed to meet the U. S. Food and Drug Administration's Good
Manufacturing Practices.
Results of Operations
Revenue decreased by 4% during the first quarter of 2005, compared to the first
quarter of 2004. Revenue was $5,984,164 during the first quarter of 2005,
compared to $6,208,704 for the first quarter of 2004. The decrease in revenue
from last year's first quarter is largely due to a decrease of $130,000 or 17%
in sales of our stationary enteral feeding delivery products within our
Therapeutics division. Our EnteraLite(R) Infinity(TM) and EnteraLite(R) portable
feeding pump and disposable set revenue and our international Therapeutics
revenue held steady during the quarter compared to the first quarter of 2004.
Our Applied Technology division revenue decreased 3% to $3.1 million during the
first quarter of 2005, compared to $3.2 million in the first quarter of 2004.
During the first quarter of 2005, surgical handpiece and sensor revenue
increased approximately $70,000 or 3%, over the first quarter of 2004. Our
engineering revenue held steady during the quarter, and our medical systems
revenue decreased approximately $160,000 from the first quarter of 2004. During
the first quarter of 2004, approximately $255,000 of Applied Technology medical
systems revenue was deferred revenue generated by the sale of products
manufactured for JTech, the Physical Evaluation business that was sold under a
Stock Purchase Agreement in December 2003. During the first quarter of 2005, two
customers each accounted for over 10% of our revenue.
Our gross profit as a percentage of revenue was approximately 36.5% for the
first quarter of 2005, compared to 37.5% for the first quarter of 2004. We
attribute the 1% decrease in gross profit to the different product mix delivered
in each quarter. Variations in our gross profit in year over year comparison in
our two divisions are due to product mix sold during the period within each
division. Please refer to Note 7 of the Unaudited Consolidated Financial
Statements for discussion of our business segments including gross profit and
the Company's definition of contribution margin.
Depreciation and amortization expenses decreased to $173,901 in the first
quarter 2005 from $214,293 in the first quarter 2004. The decrease is primarily
due the various ages of our depreciable assets.
Selling, general and administrative expenses increased during the first quarter
of 2005 to $1,790,379, compared to $1,688,147 for the first quarter of 2004. The
increase is primarily related to increases in personnel and insurance costs.
We invested $321,656 in the research and development of new products during the
first quarter of 2005, compared to $386,528 in the first quarter of 2004. In the
first quarter of 2005, research and development costs represented approximately
5% of our revenue, compared with 6% in the first quarter of 2004. We are
continuing our efforts to develop and introduce new proprietary products.
Additionally, we are investing in developing proprietary component technologies
for our contract manufacturing business. We expect research and development
costs to be approximately 5% of revenue during 2005.
Operating income decreased to $74,470, 1% of revenue in the first quarter of
2005, compared to operating income $251,621, 4% of revenue in the first quarter
of 2004. We had net income of $45,153, 1% of revenue in the first quarter of
2005, compared to net income of $208,781, 3% of revenue in the first quarter of
2004. The decrease in operating and net income during 2005, as compared to 2004,
is primarily due to the combined effect of lower sales, changes in product mix
and the resulting gross margin, and the increased selling, general and
administrative expenses.
We had income tax expense of $2,635 in the first quarter of 2005, compared to
income tax expense of $3,615 for the first quarter of 2004. Income tax expense
in 2005 and 2004 represent minimum tax payments due to the various states where
the Company is required to file. We expect we will be able to realize a portion
of the deferred tax asset related to net operating loss carry forwards in 2005,
which would result in a partial reversal of the related valuation allowance.
At March 31, 2005 and December 31, 2004, we had net current deferred tax assets
of $0, since the deferred tax assets have been fully offset by a valuation
allowance. Realization of our gross deferred tax assets is dependent on our
ability to generate taxable income in the year the assets are realized. Under
FAS 109 Accounting for Income Taxes, guidance has been issued relating to
cumulative losses in recent years. Under this guidance, when there is a
cumulative pretax loss for financial reporting for the current and two preceding
years and a company does not have objective planning strategies designed to
realize its deferred tax assets, generally no deferred tax asset should be
recognized. In following this guidance management has established a full
valuation allowance for all deferred tax assets. We are allowed to realize a
portion of the valuation allowance as we have taxable income.
As of March 31, 2005, our backlog of customer orders was $5,410,000, compared to
$5,255,000 on March 31, 2004. We estimate that approximately 90% of the backlog
will be shipped before December 31, 2005. Our backlog is for contract
manufacturing only and can be significantly affected by the timing of annual or
semi-annual purchase orders placed by our customers.
Liquidity and Capital Resources
Our primary sources of liquidity have consisted of cash flow from operations,
borrowings under our revolving line of credit and other financial arrangements
described below. In prior years, we also have increased working capital through
the issuance of stock and we may do so in the future.
Cash flows used in operating activities for the first quarter of 2005 were
$581,779, compared to cash flows provided by operating activities for the first
quarter of 2004 of $922,415. The change in cash flows during the first quarter
of 2005 was primarily associated with the changes in net income, an increase in
accounts receivable balances due to substantial product sales in the third month
of the current quarter, and a decrease in accounts payable.
Our working capital at March 31, 2005 was $6,065,141, compared to $6,220,219 at
March 31, 2004. The portion of working capital represented by cash at such dates
was $272,168 and $663,600 respectively. The ratio of current assets to current
liabilities decreased to 3.03 at March 31, 2005, from 4.02 at March 31, 2004.
We have a $3,000,000 open line of credit arrangement with a financial
institution. The line of credit matures on May 29, 2006, is collateralized by
accounts receivable and inventories, and bears interest at the financial
institution's prime rate, 5.75% at March 31, 2005 and 5.25% at December 31,
2004. We owed $760,592 on the line of credit at March 31, 2005 and $0 at
December 31, 2004. 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. In the first quarter of 2005, the Company
failed to meet one financial covenant of the line of credit. The Company
received a waiver for such covenant. The Company anticipates that it will fail
to meet this same covenant in the second quarter of 2005, and has informed the
financial institution. The line of credit was renewed on May 2, 2005. As of
December 31, 2004, the Company was in compliance with all financial covenants.
On April 18, 2001, we entered into a Term Loan Agreement with a bank for the
amount of $1,000,000. This agreement is secured by our manufacturing facility.
The proceeds from the Term Loan Agreement were used to reduce the balance on our
line of credit. The agreement was originally due on May 15, 2003. The Term Loan
Agreement which was renegotiated effective May 15, 2003, is now due May 15, 2008
and is being amortized over a thirteen-year term at an interest rate of 5.4%. We
owed $806,567 on the Term Loan Agreement at March 31, 2005.
In 1997, we completed construction of our 51,000 square foot headquarters and
manufacturing facility. The cost of this undertaking was $2,591,177. In 1996, we
negotiated a $2.0 million Industrial Development Bond ("IDB") to finance this
construction. As of March 31, 2005, the remaining principal balance on the IBD
was $1,300,000. During the first three months of 2005, the interest paid monthly
ranged from 1.83% to 2.11% (APR).
Purchases of leasehold improvements to our facilities, tooling and new
engineering, production and testing equipment totaled $103,092 for the first
three months of 2005, compared to $41,146 for the first three months of 2004. We
expect to spend approximately $850,000 during the remainder of 2005 for
additional manufacturing equipment and software, for normal replacement of aging
equipment, and manufacturing tooling related to our proprietary products.
Our expected principal liquidity requirements are working capital, investments
in capital expenditures, and debt reduction. We believe our sources of liquidity
are sufficient for operations during the coming twelve months. These sources
include our projected cash from operations and, if necessary, draws from our
existing revolving line of credit.
Off Balance Sheet Items
We have no off-balance sheet items.
Critical Accounting Policies and Estimates
In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" and 33-8056, "Commission
Statement about Management's Discussion and Analysis of Financial Condition and
Results of Operations," we have identified the following critical accounting
policies that affect the more significant judgments and estimates used in the
preparation of the consolidated financial statements. The preparation of the
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
judgments that affect our reported amounts of assets and liabilities, revenues
and expenses, and related disclosures. Our significant accounting policies are
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
We evaluate our estimates and judgments on an on-going basis. We base our
estimates on historical experience and on assumptions that we believe to be
reasonable under the circumstances. Our experience and assumptions form the
basis for our judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may vary from what
we anticipate and different assumptions or estimates about the future could
change our reported results. We believe the following accounting policies are
the most critical to us, in that they are material to the portrayal of our
financial statements and they require our most difficult, subjective, or complex
judgments in the preparation of our consolidated financial statements:
Allowance for Doubtful Accounts
As a general policy, collateral is not required for accounts receivable;
however, we periodically monitor the need for an allowance for doubtful accounts
based upon expected collections of accounts receivable, historical bad debt
rates, and specific identification of uncollectible accounts. Based on these
factors, we record an allowance to provide for accounts that we believe may not
be ultimately collectable. Additionally, customers' financial condition and
credit worthiness are regularly evaluated. Historically, losses on collections
have not been material.
Product and Inventory Obsolescence
Rapid change and technological innovation characterize the marketplace for
medical products. As a result, we and our customers are subject to the risk of
product and inventory obsolescence, whether from prolonged development,
government approval cycles, or the development of improved products or processes
by competitors. In addition, the marketplace could conclude that the task for
which a customer's medical product was designed is no longer an element of a
generally accepted diagnostic or therapeutic regimen. Accordingly, we write down
inventory that we believe is in excess or obsolete. Inventories are stated at
the lower of cost or market; cost is determined using the first-in, first-out
method.
Sales Returns and Warranty
We record a provision for estimated sales returns and allowances and warranty
reserve on products we have sold. These estimates are based on historical sales
returns and warranty expenses and other known factors. If the historical data we
use to calculate these estimates does not properly reflect future returns and
warranty expenses, revenue could be overstated or understated and expenses could
be understated or overstated.
Revenue Recognition
We recognize revenue from products sold directly to distributors and end
customers when persuasive evidence of an arrangement exists, the price is fixed
and determinable, shipment is made and title has passed, and collectibility is
reasonably assured. If such criteria are not met, revenue is deferred.
Contracts to perform engineering design and product development services are
generally performed on a time and materials basis. Revenue generally is
recognized as milestones are achieved.
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 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.
In accordance with SFAS No. 142 goodwill and indefinite-lived intangible 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. We are annually required to complete Step 1 (determining and comparing
the fair value of our reporting units to their carrying values, as of March 31,
2005, we had one reporting unit with goodwill) of the impairment test. Step 2 is
required to be completed if Step 1 indicates that the carrying value of the
reporting unit exceeds the fair value, involves the calculation of the implied
fair value of goodwill. We will complete Step 1 of the impairment assessment for
the reporting unit with goodwill at its annual impairment testing date in the
second quarter of 2005.
Net intangible assets and goodwill amounted to approximately $4.4 million as of
March 31, 2005. Net fixed assets amounted to approximately $4.3 million as of
March 31, 2005.
Income Taxes
Income taxes are recorded based on the liability method, which requires
recognition of deferred tax assets and liabilities based on differences between
financial reporting and tax bases of assets and liabilities measured using
enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. A valuation allowance is recorded to reduce
our deferred tax asset to an amount that is more likely than not to be realized,
as determined based on our analyses of projected taxable income, including tax
strategies available to generate future taxable income. Our analyses of future
taxable income are subject to a wide range of variables, many of which involve
our estimates, and therefore our deferred tax asset may not be ultimately
realized. As of March 31, 2005 a full valuation has been recorded for all
deferred tax assets.
Other
As part of a nationwide investigation into billing practices associated with
enteral nutrition delivery products, particularly in regard to billing practices
for pumps and disposable delivery sets, on July 2, 2001, the U.S. Office of
Inspector General (OIG), served a subpoena on the ZEVEX, Inc. subsidiary.
According to published reports, the investigation involved most manufacturers,
distributors and health care service providers in the United States enteral pump
industry and similar subpoenas were served on many of those parties. The
subpoena requested documents relating to our enteral pump customers, marketing
and billing practices. We responded to the subpoena. Since October of 2001 we
have not been contacted further by the OIG, although we understand the
investigation is proceeding and we intend to cooperate with the investigation
when contacted again. At this time we are uncertain as to any future impact this
investigation will have on our operations or financial position.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
- --------------------------------------------------------------------------------
For quantitative and qualitative disclosures about market risk affecting ZEVEX,
see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2004,
which is incorporated herein by reference. Our exposure to market risk has not
changed materially since December 31, 2004.
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ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Our management, including our CEO and CFO, has evaluated the effectiveness of
our "disclosure controls and procedures" (the disclosure controls and other
procedures that are designed to provide reasonable assurance that for recording,
processing, summarizing, and reporting on a timely basis the information
required to be disclosed in the periodic reports that we file with the U.S.
Securities and Exchange Commission) as of the end of the first quarter.
The evaluation of our disclosure controls by the CEO and CFO included a review
of the controls' objectives and design, the operation of the controls, and the
effect of the controls on the information presented in this Quarterly Report.
Our management, including the CEO and CFO, does not expect that disclosure
controls can or will prevent or detect all errors and all fraud, if any. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Also, projections of any evaluation of the disclosure controls and
procedures to future periods are subject to the risk that the disclosure
controls and procedures may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Based on their review and evaluation as of March 31, 2005, and subject to the
inherent limitations as described above, our CEO and CFO have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) are effective. In addition, they are
not aware of any change in our internal control over financial reporting during
the quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits
The following exhibits are attached hereto or are incorporated herein
by reference as indicated in the table below:
Exhibit Location if other
No. Title of Document than attached hereto
------ ----------------- --------------------
3.01* Certificate of Incorporation Amendment No. 1 to Form S-1,
filed October 24, 1997
3.02* Amended Bylaws March 31, 2002 Form 10-Q
filed May 10, 2002
31.01 Rule 13a-14(a)/15d-14(a)
Certification of Chief Executive Officer
31.02 Rule 13a-14(a)/15d-14(a)
Certification of Chief Financial Officer
32.01 Section 1350 Certification of Chief Executive Officer
32.02 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
On April 5, 2005, a Form 8-K was filed to disclose financial
results for the fourth quarter and year ending December 31, 2004.
* Denotes exhibits specifically incorporated in this Form 10-Q by
reference to other filings of the Company pursuant to the provisions of
Securities and Exchange Commission Rule 12b-32 and Regulation S-K. These
documents are located under File No. 001-10287 at, among other locations,
the Securities and Exchange Commission, Public Reference Branch, 450
5th St., N.W., Washington, D.C. 20549.
- -------------------------------------------------------------------------------
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZEVEX INTERNATIONAL, INC.
Dated: May 4, 2005
By /s/ David J. McNally
--------------------------
David J. McNally, CEO
(Chief Executive Officer)
By /s/ Phillip L. McStotts
------------------------------
Phillip L. McStotts, Secretary
(Principal Financial Officer)
Exhibit 31.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER,
AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
I, David J. McNally, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ZEVEX International,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I, are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Dated: May 4, 2005
By /s/ David J. McNally
--------------------------
David J. McNally, CEO
(Chief Executive Officer)
Exhibit 31.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER,
AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.
I, Phillip L. McStotts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ZEVEX International,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I, are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Dated: May 4, 2005
By /s/ Phillip L. McStotts
-----------------------------
Phillip L. McStotts, CFO
(Chief Financial Officer)
EXHIBIT 32.01
CERTIFICATION OF CHIEF EXECUTIVE OFFICER,
AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
I, David J. McNally, hereby certify pursuant to 18 U.S.C. Section 1350 adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
(i) The accompanying quarterly report on Form 10-Q for the quarter
ended March 31, 2005, fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of ZEVEX
International, Inc.
Dated: May 4, 2005
By /s/ David J. McNally
David J. McNally, CEO
(Chief Executive Officer)
This certification accompanies the above-described Report on Form 10-Q pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
EXHIBIT 32.02
CERTIFICATION OF CHIEF FINANCIAL OFFICER,
AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
I, Phillip L. McStotts, hereby certify pursuant to 18 U.S.C. Section 1350
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:
(i) The accompanying quarterly report on Form 10-Q for the quarter
ended March 31, 2005, fully complies with the requirements of Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of ZEVEX
International, Inc.
Dated: May 4, 2005
By /s/ Phillip L. McStotts
Phillip L. McStotts, CFO
(Chief Financial Officer)
This certification accompanies the above-described Report on Form 10-Q pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the
extent required by such Act, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.