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 September 30, 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 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 November 12, 1998, the
Company had outstanding 3,414,026 shares of common stock, par value $0.001 per
share.
<PAGE>
PART I
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q
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ZEVEX International, Inc. (the "Company"), files herewith balance sheets of the
Company as of September 30, 1999, and December 31, 1998, and the related
statements of operations and cash flows for the respective three month and nine
month periods ended September 30, 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.
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
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Sept 30 Dec. 31
1999 1998
----- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,186,778 $ 7,960,511
Restricted cash for sinking
fund payment on IDB 60,745 182,049
Accounts receivable 4,975,968 3,435,181
Inventories 6,067,509 5,574,394
Marketable securities 979,467 1,598,032
Deferred income taxes 171,960 249,251
Prepaid expenses 63,256 65,561
------------ -----------
Total current assets 15,505,683 19,064,979
Property and equipment, net 5,379,345 5,505,643
Patents and trademarks, net 134,799 139,792
Goodwill, net 8,550,700 8,998,006
Other assets 4,464 52,559
------------ -----------
$ 29,574,991 $ 33,760,979
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,784,702 $ 1,076,110
Other accrued expenses 473,005 684,952
Income taxes payable 340,627 50,891
Bank lines of credit 705,292 541,993
Current portion of long-term debt 114,194 5,042,000
---------- ---------
Total current liabilities 3,417,820 7,395,946
Deferred income taxes 125,398 97,228
Industrial development bond 1,700,000 1,800,000
Convertible debt, long-term 4,345,000 4,350,000
Other long-term liabilities -- 3,270
Stockholders' equity:
Common stock, $.001 par value: authorized
10,000,000 shares, issued 3,420,726 and 3,418,876
respectively for Sept. 1999 and Dec. 1998 3,420 3,419
Additional paid in capital 16,211,967 17,381,793
Less: Treasury stock (50,790) (50,790)
Unrealized loss on marketable securities, net (30,750) (147,309)
Retained earnings 3,852,926 2,927,422
--------- ---------
Total stockholders' equity 19,986,773 20,114,535
---------- ----------
$ 29,574,991 $ 33,760,979
============ ============
</TABLE>
<PAGE>
ZEVEX INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three months ended Nine months ended
Sept 30, Sept 30,
1999 1998 1999 1998
------------------- ----------------- ------------------- --------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue:
Product sales $ 4,970,055 $ 2,301,498 $ 14,347,617 $ 7,205,922
Engineering services 718,076 44,645 1,483,371 427,285
----------------- ------------------ ------------------- --------------------
Total revenue 5,688,131 2,346,143 15,830,988 7,633,207
Cost of sales 3,167,330 2,038,200 8,545,867 4,898,227
----------------- ------------------ ------------------- --------------------
Gross profit 2,520,801 307,943 7,285,121 2,734,980
Operating expenses:
General and administrative 983,154 648,974 3,056,534 1,931,996
Selling and marketing 593,599 351,508 1,701,334 944,197
Goodwill amortization 156,904 -- 465,316 --
Research and development 160,068 53,328 458,813 209,302
----------------- ------------------ ------------------- --------------------
Total operating expenses 1,893,725 1,053,810 5,681,997 3,085,495
Operating income (loss) 627,076 (745,867) 1,603,124 (350,515)
Other income (expense):
Interest income 11,235 158,188 99,825 427,252
Interest expense (106,896) (28,517) (327,030) (72,930)
Unrealized gain (loss) on
Marketable securities 0 (42,963) 87,903 31,251
----------------- ------------------ ------------------- --------------------
Income (loss) before
provision for income taxes 531,415 (659,159) 1,463,822 35,058
Provision (benefit) for taxes 199,674 (239,315) 538,318 7,387
----------------- ------------------ ------------------- --------------------
Net income (loss) $ 331,741 $ (419,844) $ 925,504 $ 42,445
================= ================== =================== ====================
Basic net income (loss) per share $ .10 $ (.13) $ .27 $ .01
================= ================== =================== ====================
Weighted average shares
outstanding 3,413,813 3,297,688 3,413,140 3,289,312
================= ================== =================== ====================
Diluted net income (loss) per share .10 (.12) .27 .01
================= ================== =================== ====================
Diluted weighted average shares
outstanding 3,433,988 3,654,132 3,435,485 3,652,666
================= ================== =================== ====================
</TABLE>
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Nine months ended
Sept 30,
1999 1998
--------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities
Net income $ 925,504 $ 42,445
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization 1,007,637 343,519
Decrease (benefit) for deferred income taxes 105,461 (34,399)
Unrealized loss on marketable securities 116,559 74,169
Changes in operating assets and liabilities:
Decrease in restricted cash for sinking fund
payment on industrial development bond 121,304 21,105
Increase in accounts receivable (1,540,787) (77,555)
Increase in inventories (493,115) (793,304)
Decrease (increase) in marketable securities 618,565 (858,425)
Decrease (increase) in prepaid expenses 2,305 (163,706)
Decrease (increase) in other assets 48,095 (28,894)
Increase in accounts payable 708,592 603,252
Decrease in accrued liabilities (211,947) (2,752)
Increase (decrease) in income taxes payable 289,736 (285,403)
--------------- ---------------
Net cash (used in) provided by operating activities 1,697,909 (1,159,948)
Cash flows from investing activities
Purchase of property and equipment (426,770) (1,055,200)
Additions to patents and trademarks (2,270) (20,462)
--------------- ---------------
Net cash used in investing activities (429,040) (1,075,662)
Cash flows from financing activities
Repurchase of common stock warrants (1,175,000) --
Proceeds from exercise of stock options 5,175 23,660
Proceeds from exercise of warrants -- 105,000
Purchase of treasury stock -- (50,790)
Payments on debt from business acquisitions (4,936,076) --
Proceeds/repayment of bank line of credit 163,299 --
Repayment of industrial development bond (100,000) (100,000)
--------------- ---------------
Net cash used in by financing activities (6,042,602) (22,130)
--------------- ---------------
Net decrease in cash and cash equivalents (4,773,733) (2,257,740)
Cash and cash equivalents at beginning of period 7,960,511 2,260,426
--------------- ---------------
Cash and cash equivalents at end of period $3,186,778 $ 2,686
=============== ===============
</TABLE>
See accompanying notes.
<PAGE>
ZEVEX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 its 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 September 30, 1999 and December 31, 1998 to
include 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 September 30, 1998, because these two acquisitions were
consummated effective as of December 31, 1998. At September 30, 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, 2000. The line of credit is
collateralized by accounts receivable and inventory and bears interest at the
prime rate, 8.25% at September 30, 1999 and 7.75% at December 31, 1998. The
Company's balance on its line of credit was $705,292 at September 30, 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 September 30, 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 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 June 14, 1999, the Company repurchased 470,0000 outstanding Common Stock
Warrants for $1,175,000. On February 4, 1998, the Company repurchased 6,700
shares of outstanding Common Stock for $50,790 which the Company anticipates
that it 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 $5.00 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 paid $10,000 per month for two years. The agreement expired in
April 1999. 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 2002.
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 nine months ending September 30, 1999, SFAS No. 130 would have required the
Company to show comprehensive income of $116,559 (net of tax effect) higher than
net income reported on the Company's financial statements.
6. Inventories
<TABLE>
<CAPTION>
<S> <C> <C>
Inventories consist of the following:
September 1999 December 1998
---------------------------------------
Materials $ 2,787,423 $ 3,156,276
Work in Progress 2,303,644 1,831,112
Finished goods, including completed subassemblies
976,442 587,006
=======================================
$ 6,067,509 $ 5,574,394
=======================================
</TABLE>
7. Net Income Per Common Share
Basic net income per common share is calculated by dividing net income for the
period by the weighted-average number of the Company's common shares
outstanding.
Diluted net income per common share includes the dilutive effect of options in
the weighted-average number of the Company's common shares outstanding as
calculated using the treasury stock method.
<PAGE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Results of Operations
The Company's revenues for the third quarter of 1999 increased to $5,688,131,
from $2,346,143 for the third quarter of 1998, an increase of approximately 142%
for the three months ended September 30, 1999. For the first nine months of
1999, revenues increased 107% to $15,830,988 from $7,633,207 for the nine months
ended 1998. During the first nine months of 1999, 12% of total revenues resulted
from sales to one customer, who was not a major customer in 1998, compared to
51% of total revenues for the first nine months of 1998, from sales to three
customers. Sales of the Company's proprietary enteral feeding products line
accounted for approximately 38% of the total revenues for the third quarter of
1999, compared to 39% for the third quarter of 1998. Sales of the Company's
proprietary JTech product line, accounted for approximately 13% of the total
revenues for the third quarter of 1999. Forty-nine percent of the Company's
revenues in the third quarter 1999 were products, which are manufactured for and
sold to OEM customers, who market the final product. Fifty percent of the first
nine months revenues were 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 44% for
the three months ended September 30, 1999, as compared to 13% for 1998. Gross
profits for nine months ended September 30, were 46% for 1999 and 36% for 1998.
Management attributes the increase in gross profit percentage year over year to
a number of matters, including (1) a shift in the revenue mix of its products to
higher margin items that were sold during 1999, (2) consistent delivery
schedules dictated by the Company's larger customers, and (3) the Company not
having certain costs incurred in 1998 related to the Nutrition Medical
acquisition as well as non-recurring engineering (NRE) tooling.
Selling, general and administrative expenses for the three months ended
September 30, 1999, increased $576,271, from $1,000,482 in 1998 to $1,576,753 in
1999. For nine months ended September 30, 1999, selling, general and
administrative increased $1,881,675 from $2,876,193 in 1998 to $4,757,868 in
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 increased staffing, travel, advertising and
administrative expenses related to the Company's proprietary clinical nutrition
delivery product line and JTech product lines. The Company also had an increase
in expenses related to employees, such as insurance, taxes, and pension
benefits. After consideration for the one time expenditures related to the
Nutrition Medical product line acquisition the Company believes that general and
administrative expenses in 1999 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 September 30, 1999, research
and development expenses were $160,068, compared to $53,328 in 1998. For nine
months ended September 30, 1999, research and development expenses were $458,313
as compared to $209,302 for 1998. Significant fluctuations experienced in
research and development are due to the timing of the Company's research
projects. Expenses incurred during the third quarter were for the continued
development of new applications of the Company's ultrasound technology, the
clinical nutrition and JTech 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 of revenues as in
the previous two years.
For the three months ended September 30, 1999 the Company had net income of
$331,741, 5.8% of revenues compared to a $419,844 net loss, for the three months
ended September 30, 1998. Net income for the nine months ended September 30,
1999, Increased to $925,504, 5.8% of revenues, from $42,445, 0.5% of 1998
revenues. The increase in net income during the third quarter of 1999, as
compared to the third quarter of 1998, is principally due to the increased
revenues, higher margin product sold through increased distribution and the
acquisitions of JTech and Aborn subsidiaries.
As of September 30, 1999, the Company's backlog of customer orders was
$5,247,000, as compared to $6,327,000 on September 30, 1998. Management
estimates that approximately 60% of the backlog will be shipped before December
31, 1999. The Company's backlog is for contract manufacturing only and can be
drastically affected by the timing of annual or semi-annual purchase orders
placed by its customers.
Liquidity and Capital Resources
During the three months and nine months ended September 30, 1999, the Company
produced net income of $331,741 and $925,504, respectively, compared to a net
loss of $419,844 and net income of $42,445, respectively, for the three months
and nine months ended September 30, 1998. Cash decreased by $4,773,733 for the
nine months ending September 30, 1999, as the Company made payments on business
acquisition debt, repurchase common stock warrants and continued to fund an
increase in accounts receivable and inventories, as well as purchases of
property, plant and equipment.
The Company's investment in property, patents from new research, production,
test equipment and tooling was $429,040 for the nine months ended September 30,
1999, compared to $1,075,662 in 1998. The Company paid $580,000 in March 1998 to
purchase a parcel of land, approximately 3.47 acres, to the north of its
facility. Total expenditures for equipment of $426,770 in 1999 were primarily
due to upgrading the Company's research, design and engineering capabilities.
The Company expects to spend approximately $100,000 for the remainder of 1999
for additional manufacturing equipment, as well as for normal replacement of old
equipment. The Company also anticipates approximately $150,000 of additional
research and development expenses during 1999.
The Company's working capital at September 30, 1999 was $12,087,863, compared to
$16,438,601 at September 30, 1998. The decrease in working capital is primarily
due to the payment 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 From 10-K. The
portion of working capital represented by cash at such dates was $3,186,778 and
$2,686 respectively. The Company however had in addition to the cash balance on
September 30, 1998 $11,133,568 in short term, investment grade, interest bearing
investments as compared to $979,467 in 1999. 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. The Company feels its working capital is
sufficient for operations for the next twelve months.
Year 2000 Compliance
Many existing computer programs, worldwide, use only the last two digits to
refer to a year. Such computer programs may not properly recognize a year
beginning with "20" instead of the current "19". If not corrected, many computer
applications could fail or create incorrect results. This phenomena is often
referred to as the "Year 2000" or "Y2K" problem. There is substantial concern
that if the Year 2000 problem is not adequately addressed, there may be
widespread problems with computer applications in all areas of use, potentially
affecting the global economy.
If the Company's internal systems and products do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
the Company's operations. Additionally, if the Company's supplier, customers,
and other parties experience Y2K difficulties, the Company could be adversely
affected. The Company is continuing the process of assessing and correcting
potential Year 2000 problems with the Company's operations.
State of Readiness
With regard to its information systems (financial, supply, inventory, order,
office support, etc.) the Company has developed and begun implementing a plan to
convert all necessary systems to be ready for the year 2000. Approximately 98.5%
of the necessary systems have been determined to be Y2K compliant by the
Company, or have been upgraded to new systems which are certified by the
manufacturer as Year 2000 compliant. Completion of correction or upgrading of
the remaining necessary systems is expected by December 1, 1999.
With regard to its non-information system operations, the Company is in the
process of reviewing and correcting Y2K problems in the following areas:
products currently manufactured by the Company; manufacturing and engineering
systems; and building systems. This review is approximately 99% complete and the
Company has been able to correct or plans to correct prior to 2000 each material
Y2K issue identified in the review.
With regard to potential Y2K issues for the Company's major material suppliers,
the Company is in the process of communicating with such parties. Although not
all major suppliers have indicated their Y2K compliance, the Company has not yet
identified any major supplier that believes it will be unable to operate due to
Y2K problems in 2000. Generally, the Company has alternative sources for
supplies in the event a supplier experiences such difficulties and the Company
does not presently anticipate material difficulties in obtaining materials due
to suppliers' Y2K problems.
With regard to major customers, the Company has had communications with such
parties and is reviewing responses regarding the Companies Y2K compliance. To
date, the Company has insufficient information from such parties to determine
the potential impact on the Company if such parties experience Y2K difficulties.
With regard to third-party utilities and services (for example, telephone
electrical, bankcard processing and shipping services), the Company has no plans
to evaluate the Y2K readiness of such providers.
Cost to Address Y2K Issues
As of October 25, 1999, the Company has spent approximately $195,000 in hardware
and software expenses to upgrade or correct Y2K problems with the Company's
internal systems. The Company currently expects to incur approximately an
additional $5,000 in costs for further upgrades and corrections. These costs
include, however, costs to upgrade and replace systems that would have in the
normal course of business. The estimated costs are based on management's best
projections but there can be no guarantee that these forecasts will be achieved
and actual results could differ materially from those anticipated. Company
management anticipates that these costs will be funded through operating cash
flows. The Company has not yet been able to estimate the costs it may incur as a
result of its suppliers and customers experiencing Y2K difficulties.
Risk of the Company's Y2K Issues
The Company anticipates that the material risks related to its information and
non-information systems will be timely mitigated by current efforts being made
by the Company to identify and correct internal Y2K problems. However, there is
no guarantee that the Company will successfully identify or correct all Y2K
problems in a timely manner. For example, due to the inherent limitations of
real-time clock devices and system BIOS in the Company's manufacturing equipment
or building systems, continued review and testing could uncover additional
problems. In some cases, problems may be unforeseen, and occur regardless of the
testing and review that is done.
Other major Y2K risks for the Company arise from the potential for major
customers to experience financial or operational difficulties resulting from Y2K
problems. If such customers reduce their orders for the Company's products or
services, the Company's operations could be adversely affected.
Additionally, a major potential Y2K risk to the Company's operations is service
disruption from third-party providers that supply telephone, electrical, banking
and shipping services. Any disruption of these critical services would hinder
the Company's ability to receive, process and ship 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; (v) prolonged labor disruption; (vi) deterioration in general of
regional economic conditions; (vii) adverse state or federal legislation or
regulation that increases the cost of compliance, or adverse findings by a
regulator with respect to existing operations; (viii) loss of customers;(ix)
adverse determinations in connection with pending or future litigation or other
material claims and judgments against the Company; (x) inability to achieve
future sales; and (xi) 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.
- -------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
- -------------------------------------------------------------------------------
No significant changes in the market have occurred since December 31, 1998.
Please refer to the Company's SEC Form 10-K for its fiscal year ended December
31, 1998, for additional discussions on market risks.
<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 - None.
Item 5. Other Information - None.
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: November 10, 1999
By /s/ Dean G. Constantine
Dean G. Constantine, President
(Chief Executive Officer)
By /s/ Phillip L. McStotts
Phillip L. McStotts, Secretary
(Principal Financial Officer)
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