FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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 33-19583
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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ] Not Applicable [ X ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of May 7, 1998, the Company
had outstanding 3,297,896 shares of common stock, par value $0.001 per share.
Page 1 of 10 consecutively numbered pages
<PAGE>
PART I
FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q
- --------------------------------------------------------------------------------
ZEVEX International, Inc. (the "Company"), files herewith balance sheets of the
Company as of March 31, 1998, and December 31, 1997, and the related statements
of operations and cash flows for the respective three month periods ended March
31, 1998, and 1997. In the opinion of the Company's management, the financial
statements reflect all adjustments, all of which are normal recurring
adjustments, necessary to fairly present the financial condition of the Company
for the interim periods presented. The financial statements included in this
report on Form 10-Q should be read in conjunction with the audited financial
statements of the Company and the notes thereto included in the annual report of
the Company on Form 10-K for the year ended December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Mar. 31 Dec. 31
1998 1997
----- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents
$ 1,481,696 $ 2,260,426
Restricted cash for sinking
fund payment on industrial
development bond 102,134 76,164
Accounts receivable 2,001,469 2,095,455
Inventories 3,662,360 3,540,591
Marketable securities 10,495,572 10,403,109
Deferred income taxes 89,182 82,930
Prepaid expenses
36,911 67,307
------ ------
Total current assets 17,869,324 18,525,982
Property and equipment, net 4,655,353 3,933,804
Patents and trademarks 119,193 122,002
Other assets
755 755
--- ---
$ 22,644,625 $ 22,582,543
============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ $
746,060 640,579
Other accrued expenses 266,051 264,484
Income taxes payable 40,747 285,403
Current portion of industrial development bond
100,000 100,000
------- -------
Total current liabilities 1,152,858 1,290,466
Deferred income taxes 152,227 126,380
Industrial development bond 1,900,000 1,900,000
Stockholders' equity:
Common stock, $.001 par value: authorized 10,000,000
shares, issued 3,295,676 and 3,264,326
shares, respectively 3,296 3,265
Additional paid in capital 16,806,797 16,697,203
Less: Treasury stock (50,790) --
Retained earnings
2,680,237 2,565,229
--------- ---------
Total stockholders' equity
19,439,540 19,265,697
---------- ----------
$ 22,644,625 $ 22,582,543
============== ==============
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZEVEX INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Three months ended
March 31,
1998 1997
----------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Product sales $ 2,138,551 $ 1,588,126
Engineering services 49,160 622,979
------------------ -----------------
2,187,711 2,211,105
Cost of sales 1,277,423 1,172,675
------------------ -----------------
Gross profit 910,288 1,038,430
Operating expenses:
General and administrative 532,327 386,409
Selling and marketing 298,217 158,392
Research and development 104,084 185,627
----------------- -----------------
Total operating expenses 934,628 730,428
Operating (loss) income (24,340) 308,002
Other income (expense):
Interest income 113,214 37,077
Interest expense (16,767) (16,822)
Unrealized gain on
marketable securities 62,496 --
------------------ -----------------
Income before provision for
income taxes 134,603 328,257
Provision for taxes (19,595) (102,719)
------------------ -----------------
Net income $ $
115,008 225,538
================== =================
Basic net income per share $ $
.04 .13
================== =================
Weighted average shares
outstanding 3,280,843 1,756,827
================== =================
Diluted net income per share
.03 .12
================== =================
Diluted weighted average shares
outstanding 3,659,104 1,901,352
================== =================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
1998 1997
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities
<S> <C> <C>
Net income $ 115,008 $ 225,538
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 69,000 82,209
Benefit for deferred income taxes 19,595 --
Unrealized gain on marketable securities (92,463) --
Changes in operating assets and liabilities:
Increase in restricted cash for sinking fund payment
on industrial development bond (25,970) --
Decrease (increase) in accounts receivable 93,986 (370,624)
Increase in inventories (121,769) (152,412)
Decrease in prepaid expenses 30,396 274
Decrease in taxes receivable -- 41,458
Increase in accounts payable 105,481 196,608
Increase in accrued liabilities 1,567 85,102
(Decrease) increase in income taxes payable (244,656) 61,261
--------------- ---------------
Net cash (used in) provided by operating activities (49,825) 169,414
Cash flows from investing activities
Purchase of property and equipment (787,740) (1,218,830)
Cash flows from financing activities
Proceeds from issuance of common stock -- 1,250,000
Proceeds from exercise of stock options 4,625 --
Proceeds from exercise of warrants 105,000 --
Purchase of treasury stock (50,790) --
Repayment of bank line of credit -- (60,108)
--------------- ---------------
Net cash provided by financing activities 58,835 1,189,892
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (778,730) 140,476
Cash and cash equivalents at beginning of period 2,260,426 2,085,055
--------------- ---------------
Cash and cash equivalents at end of period $ 1,481,696 $ 2,225,531
=============== ===============
See accompanying notes.
</TABLE>
<PAGE>
ZEVEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. Summary of Significant Accounting Policies
The Company was incorporated under the laws of the State of Nevada on December
30, 1987. The Company was originally incorporated as Downey Industries, Inc.,
and changed its name to ZEVEX International, Inc., on August 15, 1988. In
November 1997, the Company reincorporated into Delaware. The Company designs and
manufactures advanced medical devices, including surgical systems, device
components, and sensors for medical technology companies. The Company also
designs, manufactures, and markets its own medical devices using its proprietary
technologies. The Company's design and manufacturing service customers are
medical technology companies, who sell the Company's systems and devices under
private labels or incorporate the Company's devices into their products.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
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 1997 Annual Report and Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not indicative of
the results of operations to be expected for a full year.
2. Bank Line of Credit
On December 31, 1997, the Company renewed its line of credit arrangement with a
financial institution for $5 million. The line matures on May 31, 1998. The line
of credit is collateralized by accounts receivable and inventory and bears
interest at the prime rate (8.5%) at March 31, 1998, and at December 31, 1997.
The Company's balance on its line of credit was zero at March 31, 1998 and
December 31, 1997. Under the line of credit agreement, the Company is restricted
from declaring cash dividends. The renewal of the Company's line of credit
resulted in the addition of certain financial covenants. As of March 31, 1998,
the Company was in compliance with these financial covenants.
Repurchase of Common Stock
On February 4, 1998, the Company repurchased 6,700 shares of outstanding Common
Stock for $50,790. The Company anticipates that all the shares will be
contributed to the Employees' Stock Ownership Plan.
Warrants
In connection with the secondary public offering in November 1997, the Company
issued the underwriters warrants to purchase 100,000 shares of common stock at
$15 per share. The underwriters paid a price of $.01 per warrant. These warrants
expire 5 years from the date of the offering. The underwriters' warrants are
restricted from exercise, sale, transfer, assignment or hypothecation for a
period of one year commencing from the offering date. These warrants are
entitled to certain registration rights.
5. Related Party Transactions
On April 15, 1997, the Company entered into a consulting agreement with another
company owned by certain stockholders to provide services related to strategic
planning, public relations, financing and potential acquisition of new products
or companies. Under the consulting agreement, the Company paid an initial fee of
$50,000, and must pay $10,000 per month for two years. In addition, these
stockholders have the right to appoint one director to the Company's Board of
Directors.
In connection with the secondary public offering completed in November 1997,
certain stockholders waived their registration rights on 350,000 warrants. In
exchange, the Company and the stockholders executed a registration rights
agreement, entitling the stockholders to certain demand registration rights for
a period of two years from February 1, 1998.
<PAGE>
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Results of Operations
The Company's revenues for the first quarter of 1998 decreased to $2,187,711,
from $2,211,105 for the first quarter of 1997, a decrease of approximately 1%
for the three months ending March 31, 1998. During the first three months of
1998, 48% of total revenues, compared to 74% of total revenues for the first
three months of 1997, resulted from sales to three customers, all of whom were
major customers in 1997. Sales of the Company's Proprietary Product, the
EnteraLite(R) Ambulatory Enteral Feeding Pump, accounted for approximately 21%
of the total revenues for the first quarter of 1998, compared to 6% for the
first quarter of 1997. The majority of the Company's products are manufactured
for and sold to OEM customers, who market the final product. The Company's
manufacturing revenue growth depends upon growth in demand for systems, devices
and instruments manufactured by ZEVEX, and ZEVEX's ability to acquire additional
manufacturing service contracts from medical technology companies. ZEVEX's
contract manufacturing customers have complete control over the marketing and
sales of products that ZEVEX manufactures for them. ZEVEX has no ability to
increase demand for instruments that it manufactures for its
contract-manufacturing customers. No assurances can be given that orders from
any customer will increase or remain at current levels or that they will not
decline.
The Company's gross profit as a percentage of revenues was approximately 42% for
the first quarter of 1998, as compared to 47% for the first quarter of 1997.
Management attributes the decrease mainly to an increase in expenses relating to
the Company's proprietary product, the EnteraLite(R) Ambulatory Enteral Feeding
Pump. The rapid increase in sales of the EnteraLite(R) Feeding Pump exceeded the
current production capacity of ZEVEX's outside supplier of disposable sets.
Consequently, the Company experienced a surge in the cost of sales related to
this product, due to increased shipping and related expenses necessary to
maintain our obligation to our customers and our reputation for service.
Selling, general and administrative expenses for the quarter ended March 31,
1998, increased $285,743, from $544,801 in the first quarter of 1997 to $830,544
in 1998. Increased expenses resulted from the Company's continuing growth. The
Company had increased expenses related to its listing on the American Stock
Exchange, increased legal, accounting, general consulting and Public and
Investor Relations. An expanded sales and marketing effort increased staffing,
travel, advertising and administrative expenses related to the EnteraLite(R)
Feeding Pump, including increased costs associated with the Company's national
sales meeting. The Company also had an increase in expenses related to
employees, such as insurance, taxes, and pension benefits. The Company believes
that general and administrative expenses in 1998 as related to sales will
continue at approximately the same percentage as in the previous two years.
Research and development expenses vary from quarter to quarter depending on the
number and nature of pending research and development projects and their various
stages of completion. During the first quarter of 1998, research and development
expenses were $104,084, compared to $185,627 during the first quarter of 1997.
Expenses incurred during the first quarter were for the continued development of
new applications of the Company's ultrasound technology and proprietary
products. Management believes investing in research and development will serve
the Company's future well, and intends to continue this investment for the
foreseeable future.
Net income decreased to $115,008, approximately 5.3% of revenues, in the first
quarter of 1998, from $225,538, approximately 10.2% of revenues, in the first
quarter of 1997. The decrease in net income during the first quarter of 1998, as
compared to the first quarter of 1997, is principally due to the increased cost
of sales mentioned above, related to the additional costs of disposable sets for
the EnteraLite(R), and the increased general and administrative expenses
addressed previously.
As of March 31, 1998, the Company's backlog of customer orders was $7,001,866,
as compared to $4,732,000 on March 31, 1997. Management estimates that
approximately 80% of the backlog will ship before December 31, 1998.
<PAGE>
Liquidity and Capital Resources
During the quarter ending March 31, 1998, the Company had a loss of $24,340 from
operating activities, compared to income of $308,002 from operating activities
in the first quarter of 1997. Cash decreased by $778,730 for the three months
ending March 31, 1998, as the Company continued to fund an increase in accounts
receivable and inventories, as well as purchases related to property, plant and
equipment
The Company's investment in property, new research, production, test equipment
and tooling was $787,740 for the first quarter of 1998, compared to $1,218,830
in 1997. The Company paid $580,000 in the exercise of its first right of refusal
to purchase a parcel of land, approximately 3.47 acres, to the north of its
facility. Total expenditures for equipment of $207,740 were primarily due to
upgrading the Company's research, design and engineering capabilities. The
Company expects to spend approximately $240,000 for the remainder of 1998 for
additional manufacturing equipment, as well as for normal replacement of old
equipment. The Company also anticipates spending approximately $600,000 in
additional research and development expenses during 1998.
The Company's working capital at March 31, 1998 was $16,716,466, compared to
$4,859,698 at March 31, 1997. The increase in working capital is primarily due
to the secondary offering that was completed in November 1997, as described in
the Stockholders' Equity section of the Notes to Consolidated Financial
Statements in the Company's Annual Report. The portion of working capital
represented by cash at such dates was $1,481,696, and $2,225,531 respectively.
The Company has $10,229,967 in short term, investment grade, interest bearing
investments at March 31, 1998. The Company uses substantial portions of its cash
from time to time to fund its operations, including increases in inventories,
accounts receivable and work in process in connection with various customer
orders.
<PAGE>
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995
When used in this report, the words "estimate," "believe," "project" 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 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.
All of these forward-looking statements are based on estimates and assumptions
made by management of the Company, which although believed to be reasonable, are
inherently uncertain and difficult to predict. Therefore, undue reliance should
not be placed upon such estimates. There can be no assurance that the benefits
anticipated in these forward-looking statements will be achieved. The following
important factors, among others, could cause the Company not to achieve the
benefits contemplated herein, or otherwise cause the Company's results of
operations to be adversely affected in future periods: (i) continued or
increased competitive pressures from existing competitors and new entrants; (ii)
unanticipated costs related to the Company's growth and operating strategies;
(iii) loss or retirement of key members of management; (iv) increase in interest
rates of the Company's cost of borrowing, or a default under any material debt
agreement; (vi) prolonged labor disruption; (viii) deterioration in general of
regional economic conditions; (ix) adverse state or federal legislation or
regulation that increases the cost of compliance, or adverse findings by a
regulator with respect to existing operations; (x) loss of customers;(xi)
adverse determinations in connection with pending or future litigation or other
material claims and judgments against the Company; (xii) inability to achieve
future sales; and (xiii) the unavailability of funds for capital expenditures.
Many of such factors are beyond the control of the Company. Please refer to the
Company's SEC Form 10-K for its fiscal year ended December 31, 1997, for
additional cautionary statements.
<PAGE>
PART II
OTHER INFORMATION NOT APPLICABLE AT THIS TIME
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
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 14, 1998
By /s/ Dean G. Constantine
Dean G. Constantine, President
By /s/ Phillip L. McStotts
Phillip L. McStotts, Secretary
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000827056
<NAME> ZEVEX International
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 1,481,696
<SECURITIES> 10,495,572
<RECEIVABLES> 2,001,469
<ALLOWANCES> 0
<INVENTORY> 3,662,360
<CURRENT-ASSETS> 17,869,324
<PP&E> 5,598,427
<DEPRECIATION> 943,074
<TOTAL-ASSETS> 22,644,625
<CURRENT-LIABILITIES> 1,152,858
<BONDS> 1,900,000
0
0
<COMMON> 3,296
<OTHER-SE> 19,436,244
<TOTAL-LIABILITY-AND-EQUITY> 22,644,625
<SALES> 2,187,711
<TOTAL-REVENUES> 2,187,711
<CGS> 1,277,423
<TOTAL-COSTS> 1,277,423
<OTHER-EXPENSES> 934,628
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,767
<INCOME-PRETAX> 134,603
<INCOME-TAX> 19,595
<INCOME-CONTINUING> 115,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,008
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
