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 June 30, 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
incorporationor 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 July 15, 1998, the
Company had outstanding 3,300,176 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 June 30, 1998, and December 31, 1997, and the related statements
of operations and cash flows for the respective three month and six month
periods ended June 30, 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.
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30 Dec. 31
1998 1997
----- ----
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 387,446 $2,260,426
Restricted cash for sinking
fund payment on industrial
development bond 128,425 76,164
Accounts receivable 2,638,762 2,095,455
Inventories 3,886,277 3,540,591
Marketable securities 10,741,463 10,403,109
Deferred income taxes 82,930 82,930
Prepaid expenses 49,955 67,307
--------------- ---------------
Total current assets 17,915,258 18,525,982
Property and equipment, net 4,639,369 3,933,804
Patents and trademarks 134,686 122,002
Other assets 755 755
--- ---
$ 22,690,068 $ 22,582,543
============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 570,721 $640,579
Other accrued expenses 261,619 264,484
Income taxes payable 15,539 285,403
Current portion of industrial development bond 100,000 100,000
--------------- --------------
Total current liabilities 947,879 1,290,466
Deferred income taxes 146,583 126,380
Industrial development bond 1,800,000 1,900,000
Stockholders' equity:
Common stock, $.001 par value: authorized 10,000,000
shares, issued 3,298,176 and 3,264,326
shares, respectively 3,298 3,265
Additional paid in capital 16,815,580 16,697,203
Less: Treasury stock (50,790) --
Retained earnings 3,027,518 2,565,229
--------- ---------
Total stockholders' equity 19,795,606 19,265,697
---------- ----------
$ 22,690,068 $ 22,582,543
============== ==============
</TABLE>
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------------------- ---------------- ------------------- --------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
<S> <C> <C> <C> <C>
Product sales $ 2,765,873 $ 1,551,060 $ 4,904,424 $ 3,139,186
Engineering services 333,480 52,200 382,640 675,179
------------------ ------------------ ------------------ --------------------
3,099,353 1,603,260 5,287,064 3,814,365
Cost of sales 1,582,604 768,114 2,860,027 1,940,789
------------------ ------------------ ------------------ --------------------
Gross profit 1,516,749 835,146 2,427,037 1,873,576
Operating expenses:
General and administrative 750,695 338,985 1,283,022 725,394
Selling and marketing 294,472 175,065 592,689 333,457
Research and development 51,890 272,494 155,974 458,121
----------------- ------------------ ------------------- --------------------
Total operating expenses 1,097,057 786,544 2,031,685 1,516,972
Operating income 419,692 48,602 395,352 356,604
Other income (expense):
Interest income 155,850 24,758 269,065 61,835
Interest expense (27,646) (20,641) (44,414) (37,463)
Unrealized gain on
marketable securities 11,718 - 74,214 -
------------------ ------------------ ------------------ --------------------
Income before provision for
income taxes 559,614 52,719 694,217 380,976
Provision for taxes (212,333) 4,268 (231,928) (98,451)
------------------ ------------------ ------------------ --------------------
Net income $ 347,281 $ 56,987 $ 462,289 $ 282,525
================== ================== ================== ====================
Basic net income per share $ .11 $ .03 $ .14 $ .15
================== ================== ================== ====================
Weighted average shares
outstanding 3,297,688 1,995,716 3,289,312 1,876,932
================== ================== ================== ====================
Diluted net income per share .10 .02 .13 .12
================== ================== ================== ====================
Diluted weighted average shares
Outstanding 3,654,132 2,445,541 3,652,666 2,363,694
================== ================== ================== ====================
</TABLE>
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities
<S> <C> <C>
Net income $ 462,289 $ 282,525
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization 220,386 164,418
Benefit for deferred income taxes 20,203 --
Unrealized gain on marketable securities (74,214) --
Changes in operating assets and liabilities:
Increase in restricted cash for sinking fund payment
on industrial development bond (52,261) --
(Increase) decrease in accounts receivable (543,307) 599,476
Increase in inventories (345,686) (1,084,804)
Increase in marketable securities (264,140) --
Decrease (increase) in prepaid expenses 17,352 (2,242)
Decrease in taxes receivable -- 41,458
(Decrease) increase in accounts payable (69,858) 125,594
Decrease in accrued liabilities (2,865) (54,916)
(Decrease) increase in income taxes payable (269,864) 46,883
--------------- ---------------
Net cash (used in) provided by operating activities (901,965) 118,392
Cash flows from investing activities
Purchase of property and equipment (925,951) (2,591,116)
Additions to patents and trademarks (12,684) --
--------------- ---------------
Net cash used in investing activities (938,635) (2,591,116)
Cash flows from financing activities
Proceeds from issuance of common stock -- 1,250,000
Proceeds from exercise of stock options 13,410 --
Proceeds from exercise of warrants 105,000 --
Purchase of treasury stock (50,790) --
Repayment of bank line of credit -- (60,108)
Repayment of industrial development bond (100,000)
--------------- ---------------
Net cash (used in) provided by financing activities (32,380) 1,189,892
--------------- ---------------
Net decrease in cash and cash equivalents (1,872,980) (1,282,832)
Cash and cash equivalents at beginning of period 2,260,426 2,085,055
--------------- ---------------
Cash and cash equivalents at end of period $ 387,446 $ 802,223
=============== ===============
</TABLE>
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
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. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------------ -----------------
<S> <C> <C>
Materials $ 2,358,521 $ 2,306,818
Work in progress 1,363,494 1,044,331
Finished Goods,
including completed
subassemblies 164,262 189,442
------------------- -----------------
$ 3,886,277 $ 3,540,591
=================== =================
</TABLE>
3. 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 August 30, 1998. The
line of credit is collateralized by accounts receivable and inventory and bears
interest at the prime rate (8.5% at June 30, 1998, and at December 31, 1997).
The Company's balance on its line of credit was zero at June 30, 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 June 30, 1998,
the Company was in compliance with these financial covenants.
4. Stockholders' Equity
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.
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 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.
6. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). 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 first six months ending June 30, 1998, SFAS No. 130 had no effect on the
Company's financial statements.
<PAGE>
- ------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Results of Operations
The Company's revenues for the second quarter of 1998 increased to $3,099,353,
from $1,603,260 for the second quarter of 1997, an increase of approximately 93%
for the three months ended June 30, 1998. For the first six months of 1998,
revenues increased 39% to $5,287,064 from $3,814,365 for the six months ended
1997. During the first six months of 1998, 57% of total revenues, compared to
68% of total revenues for the first six 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 15% of the total revenues for the second
quarter of 1998, compared to 14% for the second 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 49% for
the three months ended June 30, 1998, as compared to 52% for 1997. Gross profits
for six months ended June 30, 1998, were 46% for 1998 and 49% for 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 three months ended June 30,
1998, increased $531,117, from $514,050 in 1997 to $1,045,167 in 1998. For six
months ended June 30, 1998, selling, general and administrative increased
$816,860 from $1,058,851 in 1997 to $1,875,711 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. 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. For the three months ended June 30, 1998, research and
development expenses were $51,890 in 1998, compared to $272,494 in 1997. For six
months ended June 30, 1998, research and development expenses were $155,974 for
1998 and $458,121 for 1997. Significant fluctuations experienced in research and
development are due to the timing of the Company's research projects. Expenses
incurred during the second 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. Research and development expenses will continue at
approximately the same percentage as in the previous two years.
Net income increased to $347,281, approximately 11.2% of revenues, for the three
months ended June 30, 1998, from $56,987, approximately 3.6% of revenues, in
1997. Net income for six months ended June 30, 1998, increased to $462,289, 8.7%
of revenues, from $282,525, 7.4% of 1997 revenues. The increase in net income
during the second quarter of 1998, as compared to the second quarter of 1997, is
principally due to increased revenues generated by the Company.
As of June 30, 1998, the Company's backlog of customer orders was $5,695,807, as
compared to $7,739,000 on June 30, 1997. Management estimates that approximately
90% of the backlog will ship before December 31, 1998.
Liquidity and Capital Resources
During the three months and six months ended June 30, 1998, the Company produced
$347,281 and $462,289 in net income respectively from operating activities,
compared to net incomes of $56,987 and $282,525, respectively, for the three
months and six months ended June 30, 1997. Cash decreased by $1,872,980 for the
six months ending June 30, 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, patents from new research, production,
test equipment and tooling was $938,635 for the six months ended June 30, 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 $358,635 were
primarily due to upgrading the Company's research, design and engineering
capabilities. The Company expects to spend approximately $150,000 for the
remainder of 1998 for additional manufacturing equipment, as well as for normal
replacement of old equipment. The Company also anticipates approximately
$550,000 of additional research and development expenses during 1998.
The Company's working capital at June 30, 1998 was $16,967,379, compared to
$3,529,342 at June 30, 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 1997 Annual Report. The portion of working capital represented
by cash at such dates was $387,446 and $802,223 respectively. The Company has
$10,352,999 in short term, investment grade, interest bearing investments at
June 30, 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
Item 1. Legal Proceedings - None.
Item 2. Changes in Securities and Use of Proceeds - None.
Item 3. Defaults upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders
Matters submitted at the annual meeting of shareholders held June 4, 1998, were
to obtain the vote of shareholders to elect Dean G. Constantine, David J.
McNally, Phillip L. McStotts, Bradly A. Oldroyd and Darla R. Gill as directors
of the Company to serve one-, two-, or three-year terms and ratify the
appointment by the Board of Directors, for Ernst & Young, LLP, certified public
accountants, as the independent auditors for the year ended December 31, 1998.
Both of these matters were approved by the shareholders. For further details see
ZEVEX International, Inc. proxy statement filed with the Securities and Exchange
Commission on or about April 29, 1998.
Item 5. Other Information
On July 28, 1998, ZEVEX International, Inc.'s. wholly-owned subsidiary, ZEVEX,
Inc. signed an agreement to acquire the product rights to the enteral feeding
pumps, delivery sets and feeding tubes of Minneapolis, Minnesota-based Nutrition
Medical Inc.. Enteral pumps deliver nutrition to patients requiring feeding
through the intestines or stomach. Total sales of these products for the past 12
months ending June 30, 1998 were approximately $2 million. Consideration for the
transaction will be approximately $1.42 million, comprised of cash of $500,000
and 115,000 shares of ZEVEX International common stock, currently valued at
$920,000.
The acquisition is subject to approval by Nutrition Medical Inc. shareholders,
which is expected in the fourth quarter 1998. Effective immediately ZEVEX has
entered into an exclusive marketing agreement for these product lines. The
marketing agreement will be in effect until the completion of the acquisition.
Item 6. Exhibits and Reports on Form 8-K - None.
- -------------------------------------------------------------------------------
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: August 6, 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, Inc.
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 387,446
<SECURITIES> 10,741,463
<RECEIVABLES> 2,638,762
<ALLOWANCES> 0
<INVENTORY> 3,886,277
<CURRENT-ASSETS> 17,915,258
<PP&E> 5,882,233
<DEPRECIATION> 1,108,178
<TOTAL-ASSETS> 22,690,068
<CURRENT-LIABILITIES> 947,879
<BONDS> 1,800,000
0
0
<COMMON> 3,298
<OTHER-SE> 19,792,308
<TOTAL-LIABILITY-AND-EQUITY> 22,690,068
<SALES> 5,287,064
<TOTAL-REVENUES> 5,287,064
<CGS> 2,860,027
<TOTAL-COSTS> 2,860,027
<OTHER-EXPENSES> 2,031,685
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,414
<INCOME-PRETAX> 694,217
<INCOME-TAX> 231,928
<INCOME-CONTINUING> 462,289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 462,289
<EPS-PRIMARY> .14
<EPS-DILUTED> .13
</TABLE>
