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, 1999
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 (I.R.S. Employer
incorporation 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 3, 1999, the Company
had issued 3,418,876 shares of common stock, par value $0.001 per share.
<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, 1999, and December 31, 1998, and the related statements
of operations and cash flows for the respective three month periods ended March
31, 1999 and 1998. 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, 1998.
<PAGE>
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Mar. 31 Dec. 31
1999 1998
----- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,352,882 $ 7,960,511
Restricted cash for sinking
Fund payment on IDB 209,141 182,049
Accounts receivable 4,243,771 3,435,181
Inventories 5,792,182 5,574,394
Marketable securities 607,017 1,598,032
Deferred income taxes 200,643 249,251
Prepaid expenses
------------
80,128 65,561
------ ------
Total current assets 15,485,764 19,064,979
Property and equipment, net 5,518,217 5,505,643
Patents and trademarks, net 137,856 139,792
Goodwill, net 8,850,675 8,998,006
Other assets 40,321 52,559
------ ------
$ 30,032,833 $ 33,760,979
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,133,156 $ 1,076,110
Other accrued expenses 683,081 469,079
Income taxes payable 100,592 50,891
Other current liabilities 59,194 215,873
Bank lines of credit 492,839 541,993
Current portion of long-term debt 804,217 5,042,000
------- ---------
Total current liabilities 3,273,079 7,395,946
Deferred income taxes 130,015 97,228
Industrial development bond 1,800,000 1,800,000
Convertible debt, long-term 4,350,000 4,350,000
Other long-term liabilities -- 3,270
Stockholders' equity:
Common stock, $.001 par value: authorized
10,000,000 shares, issued 3,418,876
respectively for 1999 and 1998 3,419 3,419
Additional paid in capital 17,381,793 17,381,793
Less: Treasury stock (50,790) (50,790)
Unrealized loss on marketable securities, net (69,873) (147,309)
Retained earnings 3,215,190 2,927,422
--------- ---------
Total stockholders' equity 20,479,739 20,114,535
---------- ----------
$ 30,032,833 $ 33,760,979
============ ============
</TABLE>
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three months ended
March 31,
1999 1998
----------------- ----------------
(unaudited) (unaudited)
Revenue:
Product sales $ 4,298,226 $ 2,138,551
Engineering services 363,227 49,160
----------------- ----------------
4,661,453 2,187,711
Cost of sales 2,387,107 1,277,423
----------------- ----------------
Gross profit 2,274,346 910,288
Operating expenses:
General and administrative 1,050,827 532,327
Selling and marketing 529,443 298,217
Goodwill amortization 147,331 --
Research and development 129,062 104,084
----------------- ----------------
Total operating expenses 1,856,663 934,628
Operating income (loss) 417,683 (24,340)
Other income (expense):
Interest income 54,769 113,214
Interest expense (105,030) (16,767)
Unrealized gain on
marketable securities 87,903 62,496
----------------- ----------------
Income before provision for
income taxes 455,325 134,603
Provision for income taxes (167,557) (19,595)
----------------- ----------------
Net income $ 287,768 $ 115,008
================= ================
Basic net income per share $ .08 $ .04
================= ================
Weighted average shares
outstanding 3,412,176 3,280,843
================= ================
Diluted net income per share
.08 .03
================= ================
Diluted weighted average shares
outstanding 3,624,475 3,659,104
================= ================
</TABLE>
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Three months ended
March 31,
1999 1998
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income $ 287,768 $ 115,008
Adjustments to reconcile net income to net cash provided by (used in) by
operating activities:
Depreciation and amortization 328,567 69,000
Deferred income taxes 81,395 19,595
Decrease (increase) on marketable securities 1,068,451 (92,463)
Changes in operating assets and liabilities:
Increase in restricted cash for sinking fund payment
on industrial development bond (27,092) (25,970)
(Increase) decrease in accounts receivable (808,590) 93,986
Increase in inventories (217,788) (121,769)
(Increase) decrease in prepaid expenses (14,567) 30,396
Decrease in other assets 12,238 --
Increase in accounts payable 57,046 105,481
Increase in accrued liabilities 20,770 1,567
Increase (decrease) in income taxes payable 49,701 (244,656)
--------------- ---------------
Net cash provide by (used in) operating activities 837,899 (49,825)
Cash flows from investing activities
Purchase of property and equipment (191,214) (787,740)
Additions of patents and trademarks (660) --
--------------- ---------------
Net cash used in investing activities (191,874) (787,740)
Cash flows from financing activities
Payments on debt related to business acquisitions (4,204,500) --
Proceeds from bank line of credit 492,839 --
Repayment of bank line of credit (541,993) --
Proceeds from exercise of stock options -- 4,625
Proceeds from exercise of warrants -- 105,000
Purchase of treasury stock -- (50,790)
--------------- ---------------
Net cash (used in) provided by financing activities (4,253,654) 58,835
--------------- ---------------
Net (decrease) in cash and cash equivalents (3,607,629) (778,730)
Cash and cash equivalents at beginning of period 7,960,511 2,260,426
--------------- ---------------
Cash and cash equivalents at end of period $ 4,352,882 $ 1,481,696
=============== ===============
</TABLE>
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
1. Summary of Significant Accounting Policies
Description of Organization and Business
The Company was incorporated under the laws of the State of Nevada on December
30, 1987. The Company was originally incorporated as Downey Industries, Inc. and
changed it's name to ZEVEX International, Inc. on August 15, 1988. In November
1997 the Company reincorporated into Delaware. During 1998, the Company's
operations consisted of the business of its wholly-owned subsidiary, ZEVEX, Inc.
In December 1998, the Company acquired an additional product line and completed
the acquisition of two additional subsidiaries, Aborn Electronics, Inc. and
JTech Medical Industries, Inc. The Company and its subsidiaries design and
manufacture advanced medical devices, including surgical systems, device
components, and sensors for medical and industrial technology companies. The
Company and its subsidiaries also design, manufacture, and market their own
medical devices using proprietary technologies. The Company's design and
manufacturing service customers are primarily medical technology companies,
which sell the Company's systems and devices under private labels or incorporate
the Company's devices into their products.
Principles of Consolidation
The consolidated balance sheet at March 31, 1999 and December 31, 1998 includes
the accounts of ZEVEX International, Inc. (Company) and its wholly-owned
operating subsidiaries, ZEVEX, Inc., Aborn Electronics, Inc., and JTech Medical
Industries, Inc. The consolidated statement of operations excludes the results
of Aborn and JTech for March 31, 1998, because these two acquisitions were
consummated effective as of December 31, 1998. At March 31, 1998, the
consolidated financial statements include the accounts of ZEVEX International,
Inc. (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 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 1998 Annual Report on SEC Form 10-K.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for interim periods are not indicative of
the results of operations to be expected for a full year.
2. Bank Line of Credit
The Company renewed its line of credit arrangement with a financial institution
for $5 million. The line matures on May 31, 1999. The line of credit is
collateralized by accounts receivable and inventory and bears interest at the
prime rate, 7.75% at March 31, 1999 and December 31, 1998. The Company's balance
on its line of credit was $492,839 at March 31, 1999 and $441,993 at December
31, 1998. Under the line of credit agreement, the Company is restricted from
declaring cash dividends. In addition, the Company's line of credit contains
certain financial covenants. As of March 31, 1999, the Company was in compliance
with these financial covenants.
In addition, JTech had a line of credit with a financial institution for
$150,000. The line bore interest at the prime rate plus 1% (8.75% at March 31,
1999 and December 31, 1998) that matured on March 15, 1999 and was not renewed.
The balance under this line of credit was $100,000 at December 31, 1998. The
line of credit was collateralized by all of the assets of JTech and contained
certain covenants. JTech was in compliance with the debt covenants at December
31, 1998.
3. 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.
4. Related Party Transactions
On December 31, 1998, the Company acquired JTech pursuant to a Stock Purchase
Agreement among the Company and the four shareholders of JTech (the "JTech Stock
Purchase"). Leonard C. Smith, one of the selling JTech shareholders, received
$1,257,900 in cash and a convertible debenture in connection with the JTech
Stock Purchase. The convertible debenture, in the principal amount of
$1,290,000, is due January 6, 2002 and is convertible at Mr. Smith's option
during the period from January 6, 2000 to January 6, 2002 at $11 per share.
JTech also entered into an Employment Agreement with Leonard C. Smith, dated
December 31, 1998, which provides that Mr. Smith serve as President of JTech for
three years at a salary of $100,000 per year. Pursuant to the employment
agreement, Mr. Smith also received an option to purchase 40,000 shares of the
Company's common stock, vesting over four years, at $4.875 per share, the
closing price of such stock on Nasdaq on the date of the JTech Stock Purchase.
Mr. Smith was appointed to fill a vacancy on the Company's Board of Directors,
effective April 26, 1999. Mr. Smith's term on the Board will expire at the 2001
annual meeting of shareholders.
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 pay $10,000 per month for two years. In addition, these certain
stockholders have the right to nominate one director to the Company's Board of
Directors. The certain stockholders exercised this right with its nomination of
Kirk Blosch in June 1998. Mr. Blosch is serving a 3-year term as a director,
which term expires at the annual meeting of shareholders in June 1999. Mr.
Blosch has been nominated to serve another 3-year term.
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 these stockholders executed a registration rights
agreement, entitling these stockholders to certain demand registration rights
for a period of two years from February 1, 1998.
5. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. Other comprehensive
income may include foreign currency translation adjustments, and unrealized
gains and losses on marketable securities classified as available-for-sale. For
the three months ending March 31, 1999, SFAS No. 130 would have required the
Company to show comprehensive income of $77,346 (net of tax effect) higher than
net income reported 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 first quarter of 1999 increased to $4,661,453,
from $2,187,711 for the first quarter of 1998, an increase of approximately 113%
for the three months ending March 31, 1999. During the first three months of
1999, 14% of total revenues resulted from sales to one customer, who was not a
major customer in 1998, compared to 48% of total revenues for the first three
months of 1998, from sales to three customers. Sales of the Company's
proprietary enteral feeding products line accounted for approximately 34% of the
total revenues for the first quarter of 1999, compared to 21% for the first
quarter of 1998. Sales of the Company's proprietary JTech product line,
accounted for approximately 20% of the total revenues for the first quarter of
1999. Forty-six percent of the Company's revenues in the first quarter 1999 were
products, which are manufactured for and sold to OEM customers, who market the
final product. The Company's contract 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 first quarter of 1999, as compared to 42% for the first quarter of 1998.
Management attributes the increase mainly to an increase in revenues relating to
the Company's proprietary products.
Selling, general and administrative expenses for the quarter ended March 31,
1999, increased $749,726, from $830,544 in the first quarter of 1998 to
$1,580,270 in the first quarter 1999. Increased expenses resulted from the
Company's continuing growth, which has resulted primarily from the acquisitions
of JTech and Aborn. An expanded sales and marketing effort also increased
staffing, travel, advertising and administrative expenses related to the enteral
feeding and JTech product lines. 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 1999 will continue
at approximately the same percentage of sales 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 1999, research and development
expenses were $129,062, compared to $104,084 during the first quarter of 1998.
Expenses incurred during the first quarter were for the continued development of
new applications of the Company's ultrasound technology and proprietary products
for both ZEVEX and JTech. Management believes investing in research and
development will serve the Company's future well, and intends to continue this
kind of investment for the foreseeable future with expected expenditures for
1999 at approximately $600,000.
Net income increased to $287,768, approximately 6.2% of revenues, in the first
quarter of 1999, from $115,008, approximately 5.3% of revenues, in the first
quarter of 1998. The increase in net income during the first quarter of 1999, as
compared to the first quarter of 1998, is principally due to increased revenues
and the decreased cost of sales mentioned above, related to the additional
revenues of the proprietary products.
As of March 31, 1999, the Company's backlog of OEM contract manufacturing
customer orders was $5,593,245, as compared to $7,001,866 on March 31, 1998.
Management estimates that approximately 80% of the backlog will ship before
December 31, 1998.
Liquidity and Capital Resources
During the quarter ending March 31, 1999, the Company had $837,899 of cash
provided by operating activities, compared to $49,825 of cash used in operating
activities in the first quarter of 1998. Cash decreased by $3,607,629 for the
three months ending March 31, 1999, as the Company made payments on debt related
to the business acquisitions of JTech and Aborn, and continuing to fund an
increase in accounts receivable and inventories, and purchases related to plant
and equipment
The Company's investment in property, new research, production, test equipment
and tooling was $191,214 for the first quarter of 1999, compared to $787,740 in
1998. 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 in the first quarter of 1998. Total expenditures for equipment in the
first quarter of 1999 was $191,214, primarily for upgrading the Company's
research, design, manufacturing, and engineering capabilities. The Company
expects to spend approximately $240,000 for the remainder of 1999 for additional
manufacturing equipment and software, as well as for normal replacement of old
equipment. The Company also anticipates spending approximately $600,000 in
additional research and development expenses during 1999.
The Company's working capital at March 31, 1999 was $12,112,685, compared to
$16,716,466 at March 31, 1998. The decrease in working capital is primarily due
to the payments on debt related to the acquisitions completed in December 1998,
as described in the Acquisition section of the Notes to Consolidated Financial
Statements in the Company's Annual Report on SEC Form 10-K. The portion of
working capital represented by cash at such dates was $4,352,882 and $1,481,696,
respectively. 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, as
well as acquisitions of additional technologies and product complementary to the
Company's current technologies and products. The Company feels its working
capital is sufficient for operations for the next twelve months.
<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, 1998, 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 13, 1999
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> 3-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,352,882
<SECURITIES> 607,017
<RECEIVABLES> 4,381,771
<ALLOWANCES> 138,000
<INVENTORY> 5,792,182
<CURRENT-ASSETS> 15,485,764
<PP&E> 7,206,872
<DEPRECIATION> 1,688,655
<TOTAL-ASSETS> 30,032,833
<CURRENT-LIABILITIES> 3,273,079
<BONDS> 1,800,000
0
0
<COMMON> 3,419
<OTHER-SE> 20,479,739
<TOTAL-LIABILITY-AND-EQUITY> 30,032,833
<SALES> 4,661,453
<TOTAL-REVENUES> 4,661,453
<CGS> 2,387,107
<TOTAL-COSTS> 2,387,107
<OTHER-EXPENSES> 1,856,663
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,030
<INCOME-PRETAX> 455,325
<INCOME-TAX> 167,557
<INCOME-CONTINUING> 287,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 287,768
<EPS-BASIC> .08
<EPS-DILUTED> .08
</TABLE>
