SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

**FORM 10-Q**

 

**[** **X** **]     QUARTERLY REPORT PURSUANT TO SECTION** **13 OR** **15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

For the quarterly period ended **September 30, 2006**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION** **13 OR** **15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

For the transition period from .................to.................

 

Commission file number 001-12965

 

**ZEVEX INTERNATIONAL, INC.**

(Exact name of registrant as specified in charter)

 
|   | **DELAWARE**                                          | **87-0462807**   |
|--------|-----------------------------------------------------------------|----------------------------|
|   | (State or other jurisdiction of   | (I.R.S. Employer      |  
 

incorporation or organization)  

Identification No.)

 

**4314 ZEVEX Park Lane, Salt Lake City, Utah 84123**

(Address of principal executive offices and zip code)

 

**(801) 264-1001**

(Registrant's telephone number, including area code)

 

**NOT APPLICABLE**

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  **[ X ]**    No     

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

 

Large Accelerated Filer [  

]  

Accelerated Filer **[**

**]**

Non-Accelerated Filer [ X  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 

Yes    

No **[ X ]**

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  As of October 13, 2006, the Company had outstanding 5,634,591 shares of common stock, par value $0.001 per share.

 

 

 

 

 

1

 

 

 

**ZEVEX INTERNATIONAL, INC.**

 

**FORM 10-Q**

 

**For the Three Month and Nine Month Periods Ended September 30, 2006**

 

 

 

**TABLE OF CONTENTS**

 

 

**PART I. FINANCIAL INFORMATION**

 

Item 1. Unaudited Financial Statements:

 

 

Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005

4

 

 

Consolidated Statements of Operations for the three month and nine month

 
 

periods ended September 30, 2006 and 2005

5

 

 

Consolidated Statements of Cash Flows for the nine month periods ended

 
 

September 30, 2006 and 2005

6

 

 

Notes to Consolidated Financial Statements

7

 

Item 2. Management's Discussion and Analysis of Financial Condition and

 

Results of Operations

14

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

21

 

Item 4. Controls and Procedures

22

 

**PART II. OTHER INFORMATION**

 

Item 6. Exhibits and Reports on Form 8-K

22

 

Signatures

23

 

 

 

 

2

 

 

 

**PART I**

 

**FINANCIAL INFORMATION**

 

____________________________________________________________________________________________

 

**ITEM 1.  FINANCIAL STATEMENTS REQUIRED BY FORM 10-Q**

____________________________________________________________________________________________

 

ZEVEX International, Inc. (“ZEVEX” or the “Company”) files herewith balance sheets of ZEVEX as of September 30, 2006, (unaudited) and December 31, 2005, and the related (unaudited) statements of operations for the respective three month and nine month periods ended September 30, 2006 and 2005 and the related (unaudited) statements of cash flows for the nine month periods ended September 30, 2006 and 2005.  In the opinion of ZEVEX’s management, the financial statements reflect all adjustments, all of which are normal recurring adjustments, necessary to fairly present the financial condition of ZEVEX for the interim periods presented.  The financial statements included in this report on Form 10-Q should be read in conjunction with the audited financial statements of ZEVEX and the notes thereto included in the Annual Report of ZEVEX on Form 10-K for the year ended December 31, 2005.

 

 

 

3

 

 

 

 

**ZEVEX INTERNATIONAL, INC.**

**CONSOLIDATED BALANCE SHEETS**

 

 

 

 

 

 

 

 

 

**September 30,**

 

December 31,

 

 

 

**2006**

 

2005

**ASSETS**

 

 

**(unaudited)**

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

 

**$     3,362,761**

 

$   1,284,218 

Designated cash for sinking fund payment on industrial

 

 

 

 

 

development bond

 

 

**65,509**

 

89,037 

Accounts receivable, net of allowance for doubtful accounts

 

 

 

 

 

of $129,000 at September 30, 2006 and $130,000 at December 31, 2005 

 

 

**7,430,511**

 

5,641,229 

Inventories

 

 

**5,454,909**

 

4,586,418 

Deferred income taxes

 

 

**511,634**

 

- 

Prepaid expenses and other current assets

 

 

**515,438**

 

213,612 

Total current assets

 

 

**17,340,762**

 

11,814,514 

Property and equipment, net 

 

 

**4,562,326**

 

4,639,136 

Patents, trademarks and other intangibles, net

 

 

**341,182**

 

348,467 

Goodwill, net

 

 

**4,048,264**

 

4,048,264 

Deferred income taxes, non-current

 

 

**204,692**

 

- 

**Total assets**

 

 

**$   26,497,226**

 

$ 20,850,381 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

 

**$     2,690,273**

 

$   2,462,071 

Other accrued liabilities

 

 

**1,496,294**

 

1,293,876 

Deferred revenue

 

 

**-**

 

52,081 

Current portion of industrial development bond

 

 

**100,000**

 

100,000 

Current portion of other long-term debt

 

 

**58,557**

 

56,219 

Total current liabilities

 

 

**4,345,124**

 

3,964,247 

 

 

 

 

 

 

Industrial development bond

 

 

**1,000,000**

 

1,100,000 

Other long-term debt

 

 

**665,928**

 

710,143 

Stockholders' equity

 

 

 

 

 

Common stock; $.001 par value, 22,000,000

 

 

 

 

 

authorized shares, 5,692,543 issued and 5,633,841

 

 

 

 

 

outstanding at September 30, 2006 and  5,349,890

 

 

 

 

 

issued and 5,291,040 outstanding at December 31, 2005

 

 

**5,692**

 

5,350 

Additional paid in capital

 

 

**18,756,915**

 

16,719,396 

Unrealized loss on marketable securities

 

 

**(5,850)**

 

- 

Treasury stock, 58,702 shares (at cost) at September 30, 2006

 

 

 

 

 

and 58,850 shares (at cost) at December 31, 2005

 

 

**(89,085)**

 

(89,422)

Retained earnings (accumulated deficit)

 

 

**1,818,502**

 

(1,559,333)

Total stockholders' equity

 

 

**20,486,174**

 

15,075,991 

**Total liabilities and stockholders' equity**

 

 

**$   26,497,226**

 

$ 20,850,381 

 

 

 

4

 

 

 

 

**ZEVEX INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 

 

 

 

 

 

 

 

 

**Three months ended**

 

 

 

**Nine months ended**

 

 

 

**September 30,**

 

 

 

**September 30,**

 

 

 

**2006**

 

**2005**

 

**2006**

 

**2005**

 

**(unaudited)**

 

**(unaudited)**

 

**(unaudited)**

 

**(unaudited)**

Revenue:

 

 

 

 

 

 

 

Product sales

 **$** **10,260,922** 

 

$ 7,985,249 

 

 **$** **30,857,138** 

 

$ 20,512,430 

Engineering services

**181,558** 

 

151,974 

 

**654,315** 

 

406,610 

Total revenue

**10,442,480** 

 

8,137,223 

 

**31,511,453** 

 

20,919,040 

 

 

 

 

 

 

 

 

Cost of sales

**6,932,666** 

 

5,056,861 

 

**20,562,223** 

 

13,183,688 

Gross profit

**3,509,814** 

 

3,080,362 

 

**10,949,230** 

 

7,735,352 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

General and administrative

**1,273,201** 

   

1,125,484 

   

**3,999,423** 

 

3,254,096 

Selling and marketing

**1,043,698** 

 

819,716 

 

**3,072,871** 

 

2,492,773 

Research and development

**487,017** 

 

330,242 

 

**1,211,263** 

 

895,870 

Total operating expenses

**2,803,916** 

 

2,275,442 

 

**8,283,557** 

 

6,642,739 

 

 

 

 

 

 

 

 

Operating income

**705,898** 

 

804,920 

 

**2,665,673** 

 

1,092,613 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest and other income

**40,242** 

 

12,337 

 

**64,310** 

 

28,892 

Patent infringement settlement

**-** 

 

- 

 

**947,760** 

 

- 

Interest expense

**(30,749)**

 

(31,774)

 

**(100,867)**

 

(119,766)

Income before income taxes

**715,391** 

 

785,483 

 

**3,576,876** 

 

1,001,739 

 

 

 

 

 

 

 

 

Provision for income taxes

**(296,859)**

 

- 

 

**(196,970)**

 

(2,635)

 

 

 

 

 

 

 

 

Net income

**$**      **418,532** 

 

$   785,483 

 

**$**   **3,379,906** 

 

$     999,104 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

**$**            **0.07** 

 

$         0.15 

 

**$**            **0.61** 

 

$           0.20 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

**5,633,149** 

 

5,110,936 

 

**5,502,806** 

 

5,106,823 

 

 

 

 

 

 

 

 

Diluted net income per share

**$**            **0.07** 

 

$         0.15 

 

**$**            **0.55** 

 

$           0.19 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

**6,323,146** 

 

5,363,213 

 

**6,189,496** 

 

5,297,835 

 

 

 

 

6

 

 

 

**ZEVEX INTERNATIONAL, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

 

 

 

 

 

 

 

**Nine months ended September 30**

 

 

 

 

 

**2006**

 

**2005**

 

 

 

**(unaudited)**

 

**(unaudited)**

**Cash flows from operating activities**

 

 

 

 

 

Net income 

 

 

**$** **3,379,906** 

 

$              999,104 

Adjustments to reconcile net income to net cash

 

 

 

 

 

provided by operating activities: 

 

 

 

 

 

Depreciation and amortization

 

 

**542,547** 

 

526,286 

Non-cash stock-based compensation expense

 

 

**322,976** 

 

- 

Stock issued for services

 

 

**55,724** 

 

25,928 

Provision for bad debts

 

 

**(1,975)**

 

3,407 

Realized gain on disposal of assets

 

 

**(8,323)**

 

- 

Deferred income taxes

 

 

**(716,326)**

 

- 

Changes in operating assets and liabilities:

 

 

 

 

 

Designated cash for sinking fund payment

 

 

 

 

 

on industrial development bond

 

 

**23,528** 

 

24,145 

Accounts receivable

 

 

**(1,787,307)**

 

(1,983,903)

Inventories

 

 

**(868,490)**

 

299,203 

Prepaid expenses and other assets

 

 

**(307,676)**

 

116,427 

Accounts payable

 

 

**228,202** 

 

388,540 

Accrued and other liabilities

 

 

**202,482** 

 

252,344 

Deferred revenue

 

 

**(52,081)**

 

83,332 

Income taxes receivable/payable

 

 

**(64)**

 

- 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

**1,013,123** 

 

734,813 

 

 

 

 

 

 

**Cash flows from investing activities**

 

 

 

 

 

Purchase of property and equipment

 

 

**(1,024,116)**

 

(766,387)

Additions of patents and trademarks

 

 

**(14,336)**

 

(38,797)

Proceeds from sale of land

 

 

**588,323** 

 

- 

 

 

 

 

 

 

Net cash used in investing activities

 

 

**(450,129)**

 

(805,184)

 

 

 

 

 

 

**Cash flows from financing activities**

 

 

 

 

 

Principal payments on long-term debt

 

 

**(41,877)**

 

(39,662)

Payments on industrial development bond

 

 

**(100,000)**

 

(100,000)

Net proceeds from bank line of credit

 

 

**-** 

 

610,536 

Income tax benefit from exercise of stock options

 

 

**909,701** 

 

- 

Proceeds from exercise of stock options

 

 

**747,725** 

 

- 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

**1,515,549** 

 

470,874 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

**2,078,543** 

 

400,503 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

**1,284,218** 

 

212,859 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

 

**$** **3,362,761** 

 

$              613,362 

 

 

 

 

7

 

 

 

ZEVEX INTERNATIONAL, INC.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2006

 

**1.  Description of Business and Summary of Significant Accounting Policies**

 

**Description of Business**

 

The Company, through its divisions and subsidiary, engages in the business of designing, manufacturing and distributing medical devices.  The Therapeutics division manufactures and markets enteral nutrition delivery devices. The Applied Technology division designs and manufactures advanced medical components and systems for medical technology companies.  

 

For additional information regarding the Company, refer to its 2005 Annual Report on SEC Form 10-K.  

 

**Principles of Consolidation**

 

The consolidated financial statements include the accounts of ZEVEX International, Inc. (the Company) and its wholly-owned operating subsidiary ZEVEX, Inc.  All significant intercompany balances and transactions have been eliminated in consolidation.   

 

**Basis of Presentation**

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information along with the instructions to SEC Form 10-Q. Accordingly, certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted.  These financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company’s 2005 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 in the financial statements.  The results of operations for interim periods may not be indicative of the results of operations to be expected for a full year.

 

**Stock Split**

 

On May 19, 2006, the Company effected a 3-for-2 stock split in the form of a 50% stock dividend.  The dividend entitled all shareholders of record date of May 4, 2006 to receive one additional common share for every two common shares held.  148 shares of Treasury Stock were used to adjust for fractional shares related to the dividend.  The capital stock accounts, all share data and earnings per share data give effect to the stock split, applied retrospectively, to all periods presented.  

 

**Stock-Based Compensation**

 

The Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123R effective as of January 1, 2006, the beginning of the Company’s fiscal year.  The Company has adopted SFAS 123R using the modified prospective method, which requires the application of SFAS No. 123R to new awards and to awards modified, repurchased or cancelled after the effective date.  Additionally, compensation cost for the portion of outstanding awards for which services have not been rendered (such as unvested options) that are outstanding as of the date of adoption will be recognized as the remaining services are rendered.  Results for prior periods have not been restated in accordance with AFAS No. 123R.

 

Through December 31, 2005, the Company elected to follow Accounting Principles Board Opinion No. 25 - *Accounting for Stock Issued to Employees* (APB 25) and related interpretations in accounting for its employee stock options, rather than adopting the alternative fair value accounting provided for under SFAS No. 123, *Accounting for Stock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock Based Compensation – Transition and Disclosure*, and as a result the Company did not recognize any compensation expense.     The table below illustrates the effect on net 

 

 

 

9

 

 

 

**1.  Description of Business and Summary of Significant Accounting Policies**

**Stock-Based Compensation (continued)**

 

income and income per share had compensation cost for the Company’s employee stock options been determined consistent with the fair value methodology prescribed under SFAS 123 for the three months and nine months ended  September 30, 2005.  Net income for the three months and nine months ended September 30, 2006 includes $84,000 and $258,000, respectively in stock-based compensation expense associated with granted stock options and restricted stock units as a result of adopting SFAS 123R.  Also, net income for the three months and nine months ended  September 30, 2006 includes $48,000 and $65,000, respectively in stock-based compensation expense associated with accelerated vesting of stock options granted in prior years for termination of certain employees prior to when actual vesting would have occurred.

 

 

**Three months ended**

**Nine months ended**

 

**Sept. 30, 2006**

**Sept. 30, 2005**

**Sept. 30, 2006**

**Sept. 30, 2005**

Net income as reported

**$**     **418,532**

**$**     **785,483**

**$**  **3,379,906**

**$**    **999,104**

Less: Stock compensation expense determined under fair value method, net of related tax effects

 

 

**-**

 

 

**127,013**

 

 

**-**

 

 

**367,182**

Pro forma net income

**$**     **418,532**

**$**     **658,470**

**$**  **3,379,906**

**$**    **631,922**

Earnings per share:

 

 

 

 

Basic – as reported

**$**            **0.07**

**$**            **0.15**

**$**            **0.61**

**$**          **0.20**

Basic – pro forma

**$**            **0.07**

**$**            **0.13**

**$**            **0.61**

**$**          **0.12**

Diluted – as reported

**$**            **0.07**

**$**            **0.15**

**$**            **0.55**

**$**          **0.19**

Diluted – pro forma

**$**            **0.07**

**$**            **0.12**

**$**            **0.55**

**$**          **0.12**

 

**New Accounting Pronouncements**

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and spoilage, requiring that such costs be recognized as current-period costs regardless of whether they meet the criterion of “so abnormal”, currently required by the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”.  SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  As such, the Company adopted this statement as of January 1, 2006.  There was no impact on the financial statements as a result of such adoption in the nine months ended September 30, 2006.  Because the provisions of this standard must be applied prospectively, there will be no effect on previously-issued financial statements.  It is not possible to predict the effect SFAS No. 151might have on future reported results because it will depend on the levels of “abnormal” inventory costs incurred in the future, if any.  However, the Company has not historically had significant amounts of “abnormal” inventory costs, as defined by this Statement.

 

In May 2005, FASB issued Statement No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”).  SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle.  It also requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement.  The Company adopted this statement as of January 1, 2006.  There was no impact on the financial statements as a result of such adoption in the nine months ended September 30, 2006. 

 

In June 2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FAS 109, “Accounting for Income Taxes” (“FIN 48”) to create a single model to address accounting for uncertainty in tax positions.  FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company will adopt FIN 48 as of January 1, 2007.  The Company is continuing to evaluate the effect, if any, the adoption of FIN 48 will have on the financial position and results of operations. 

 

 

 

11

 

 

 

**2.  Debt**

 

The Company maintains a line of credit arrangement with a financial institution with availability of $3 million.  The line matures on May 27, 2007, is collateralized by accounts receivable and inventory and bears interest at the rate of LIBOR plus 1.80%, which was an effective rate of 7.12% at September 30, 2006 and LIBOR plus 2.40%, which was an effective rate of 6.79% at December 31, 2005. The Company’s balance on this line of credit was $0 at September 30, 2006 and December 31, 2005. Under the line of credit agreement, the Company is restricted from declaring cash dividends and must maintain certain levels of working capital and meet certain other financial covenants.  The Company was in compliance with such covenants as of September 30, 2006.

 

On April 18, 2001, the Company entered into a Term Loan Agreement with a bank for the amount of $1,000,000.  The agreement, as amended, is secured by the Company’s manufacturing facility.  The note is due May 15, 2008 and is being amortized over a thirteen-year term, at an interest rate of 5.4%.  The outstanding balance at September 30, 2006 was $724,485, of which $58,557 is classified as current.

 

**3.  Stock Based Compensation**

 

The Company adopted SFAS No. 123R as of January 1, 2006, the beginning of the Company’s fiscal year.  SFAS No. 123R revises SFAS No. 123 and supersedes APB 25 and requires companies to expense the fair value of employee stock options and other equity-based awards.  For the three month and nine month periods ended September 30 2006, the Company recorded a total non-cash charge of $84,000 and $258,000, respectively related to stock-based compensation resulting from the adoption of SFAS No. 123R.

 

Also, net income for the three months and nine months ended September 30, 2006 includes $48,000 and $65,000, respectively in stock-based compensation expense associated with accelerated vesting of stock options granted in prior years for termination of employees prior the when actual vesting would have occurred.

 

The Company recognizes compensation expense equal to the grant-date fair value of stock-based awards for all awards expected to vest, over the period during which the related service is rendered by grantees. The fair value of stock-based awards is determined primarily using the Black-Scholes pricing model, which is the same valuation model used previously in valuing stock options for the pro forma footnote disclosures under the requirements of SFAS No. 123 (see Note 1).  The Company uses the “straight line” vesting method to value awards for all options granted after September 30, 2005 and allocates those values over the requisite service periods.  Prior to September 30, 2005 the Company used the “graded” vesting method to value awards for all options granted prior to September 30, 2005 and allocated those values over the requisite service periods in determining pro formaexpense under SFAS No. 123.

 

In September 1997, the Board of Directors consolidated its previous three stock option plans into one plan and established the Amended 1993 Stock Option Plan (the “1993 Plan”), which was ratified by shareholders in October 1993. Under the 1993 Plan, 900,000 shares of common stock were authorized for issuance, subject to adjustment for such matters as stock splits and stock dividends.

 

The 1993 Plan provides for the grant of incentive stock options, stock appreciation rights, and stock awards to eligible participants and may be administered by the Board of Directors or by the Compensation Committee.  All options granted under the 1993 Plan expire after five to seven years from the grant date and become exercisable no later than four years from the grant date.

 

During 1999, the Board of Directors established the 1999 Stock Option Plan (the “1999 Plan”), which was ratified by shareholders in June 1999. The 1999 Plan authorized 900,000 shares of common stock for issuance, subject to adjustment for such matters as stock splits and stock dividends.  The 1999 Plan provides for the grant of incentive stock options, stock appreciation rights, and stock awards to eligible participants and may be administered by the Board of Directors or by the Compensation Committee.  All options granted under the 1999 Plan expire after five to ten years from the grant date and become exercisable either immediately or up to six years from the grant date.

 

During 2006, the Board of Directors established the 2006 Equity Incentive Plan (the “2006 Plan”), which was ratified by shareholders in May 2006. The 2006 Plan authorized 1,000,000 shares of common stock for issuance, subject to adjustment for such matters as stock splits and stock dividends.  The 2006 Plan provides for the grant of 

 

 

 

12

 

 

 

**3.  Stock Based Compensation (continued)**

 

restricted stock, restricted stock units, incentive stock options, stock appreciation rights, and stock awards to eligible participants and may be administered by the Board of Directors or by the Compensation Committee.  During the three months ended September 30, 2006, 50,400 restricted stock units (RSU) were granted under the 2006 Plan.  The restricted stock has a four year vesting period, during which the recipient must remain employed with the Company.  The fair value of the stock on the date of grants made during three months ended September 30, 2006 was $9.98 per share.

 

A summary of stock option activity for both plans, and related information for the nine months ended September 30, 2006, follows:

 

 

**Shares**

**Outstanding Stock Options**

**Restricted Stock Units**

**Average**

**Aggregate**

 

**Available****for Grant**

**Number****of Shares**

**Price****Per Share**

**Number of Shares**

**Price****Per Share**

**Exercise Price**

**Intrinsic****Value**

 

 

 

 

 

 

 

 

Balance at January 1,2006

45,185

1,452,000

$ 1.27 – 8.55

--

--

$  3.26

$7,060,138

Additional authorization

1,000,000

--

--

--

--

--

--

Options/shares granted

(49,736)

49,736

2.40 – 13.13

--

--

10.03

--

RSU granted 

(50,400)

--

--

50,400

$ 9.98

--

--

Options exercised

--

(342,611)

1.27 – 3.17 

--

--

2.28

3,568,444

Options forfeited

91,500

(91,500)

2.23 – 8.55

--

--

3.02

612,638

Options expired

--

--

--

--

--

--

--

**Balance at Sept. 30, 2006**

**1,036,549**

**1,067,625**

**$1.44 – 13.13**

**50,400**

**$ 9.98**

**$ 3.91**

**$5,495,096**

 

 

 

 

 

 

 

 

**Vested at Sept. 30, 2006**

 

**826,125**

**$ 1.44 – 8.55**

**--**

**--**

**$ 3.19**

**$4,795,416**

 

 

 

 

 

 

 

 

 

Below is option information based on segregated ranges of exercise prices as of September 30, 2006:

 

**Options Outstanding**

 

**Options Exercisable**

 

 

**Range of****Exercise****Prices**

 

 

 

 

**Number****Outstanding**

 

**Weighted-****Average****Remaining****Contractual****Life**

 

 

**Weighted-****Average****Exercise****Price**

 

 

 

 

**Number Exercisable**

**Weighted-****Average****Remaining****Contractual****Life**

 

**Weighted-****Average****Exercise****Price**

**$**    **1.44-3.33**

 

**857,625**

 

**3.7** **years**

 

**$**  **2.67**

 

**751,125**

**3.4** **years**

**$**  **2.65**

**8.55-13.13**

 

**210,000**

 

**5.0** **years**

 

**8.99**

 

**75,000**

**6.2** **years**

**8.55**

**$**  **1.44-13.13**

 

**1,067,625**

 

**3.9** **years**

 

**$**  **3.91**

 

**826,125**

**3.6** **years**

**$**  **3.19**

 

Total stock-based compensation expense was approximately $132,000 and $323,000 for the three months and nine months ended September 30, 2006.  As of September 30, 2006, there was approximately $677,000 of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the Plans.  That cost is expected to be recognized over the applicable vesting terms of three to five years.

 

Black-Scholes pricing models require using certain assumptions, including expected volatility, dividend yields, risk-free interest rates, expected lives, and forfeiture rates.  Expected stock price volatility, for options issued during the nine month period ending September 30, 2006 ranged from 77.35% to 78.99%, and was estimated using historical volatilities of the Company’s stock at each grant date.  Expected dividend yields were 0.0%.  US Treasury bill yields with terms corresponding to expected terms of the awards being valued were used to estimate risk-free interest rates, the weighted average of which was 4.89%.  The weighted-average grant-date fair value of equity options granted during the period was $7.00 per option share.  In estimating expected lives, contractual and vesting terms of awards, along with historical experience, were considered; however, due to insufficienthistorical data from which to reliably estimate expected lives, the Company used estimates based on the “shortcut approach” set forth in SFAS 123R, where the expected life of 3.5 years was estimated to be the mid-point between the vesting date and the end of the contractual term.  Estimated forfeiture rates were based primarily on historical data.

 

 

 

13

 

 

 

**4.  Comprehensive Income**

 

For the three month and nine month periods ended September 30, 2006, the Company had comprehensive income of $420,331 and $3,374,056, respectively.  For the three month and nine month periods ended September 30, 2005, the Company had a comprehensive income of $776,483 and $998,654, respectively.

 

**5.  Inventories**

 

Inventories consist of the following:

 

**September 30, 2006**

December 31, 2005

Materials

**$**     **3,455,869**

$     3,139,027

Work in progress

**748,939**

756,747

Finished goods, including completed subassemblies

**1,250,101**

690,644

 

**$**     **5,454,909**

$     4,586,418

 

**6.  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.  For the three months ended September 30, 2006 and September 30, 2005, 15,000 option shares and 329,250 option shares, respectively, were not included because they were antidilutive.  For the nine months ended September 30, 2006 and September 30, 2005, 15,000 option shares and 419,250 option shares, respectively, were not included because they were antidilutive. 

 

**7.  Business Segments**

 

The Company operates in two business segments: Therapeutics and Applied Technology.  The Therapeutics segment includes the manufacture and sale of feeding pumps and disposable sets used by patients who require direct gastrointestinal nutrition therapy (also called enteral feeding).  In the Applied Technology segment, the Company provides design and manufacturing services to medical device companies who, in turn, sell the Company’s components and systems under private labels or incorporate them into their products.  The Company evaluates the performance of these segments through gross profit, less selling and marketing expenses, and research and development expenses (or contribution margin).  The Company does not allocate general and administrative expenses by segment.  General and administrative expenses are included in Corporate and Unallocated amounts indicated below.  

 

Segment information for the three months ended September 30, 2006 (in thousands) follows:

 

 

 

**Therapeutics**

**Applied**

**Technology**

**Corporate and**

**Unallocated**

 

**Total**

Revenue

$         7,424

$         3,018

$                --

$       10,442

Cost of sales

  5,007

1,926

--

6,933

Gross profit

2,417

1,092

--

  3,509

Selling and marketing

771

272

--

1,043

Research and development

228

259

--

487

Contribution margin 

1,418

561

--

1,979

General and administrative

--

--

1,273

1,273

Other (income)/expenses

--

--

(10)

(10)

Provision for income taxes

--

--

297

297

Net income

 

 

 

$           419

 

 

 

 

 

Total assets

$            68

$         4,048

$        22,381

$     26,497

 

 

 

 

14

 

 

 

**7.  Business Segments (continued)**

 

Included in the segment assets disclosed above are specifically identified fixed assets and goodwill.  All assets other than those specifically identified fixed assets and goodwill are included in Corporate and Unallocated.  The only specifically identified fixed assets include enteral feeding pumps and certain tooling, which are included in the Therapeutics segment.  All other fixed assets are used jointly by these segments.  Goodwill represents approximately $4,048,000 in the Applied Technology segment.  The above segments include stock-based compensation of approximately $132,000, allocated to Therapeutics in the amount of $37,000, Applied Technology in the amount of $44,000, and Corporate and Unallocated in the amount of $51,000.  No compensation costs were capitalized.

 

Segment information for the three months ended September 30, 2005 (in thousands) follows:

 

 

 

**Therapeutics**

**Applied**

**Technology**

**Corporate and**

**Unallocated**

 

**Total**

Revenue

$         4,745

$         3,392

$                --

$       8,137

Cost of sales

  3,064

1,993

--

5,057

Gross profit

1,681

1,399

--

  3,080

Selling and marketing

658

162

--

820

Research and development

246

84

--

330

Contribution margin 

777

1,153

--

1,930

General and administrative

--

--

1,125

1,125

Other (income)/expenses

--

--

20

20

Provision for income taxes

--

--

--

--

Net income

 

 

 

$          785

 

 

 

 

 

 

Segment information for the nine months ended September 30, 2006 (in thousands) follows:

 

 

 

 

**Therapeutics**

 

**Applied**

**Technology**

 

**Corporate and**

**Unallocated**

 

 

**Total**

Revenue

$        20,739

$         10,772

$                --

$       31,511

Cost of sales

 14,109

6,453

--

20,562

Gross profit

6,630

4,319

--

 10,949

Selling and marketing

2,211

862

--

3,073

Research and development

727

484

--

1,211

Contribution margin 

3,692

2,973

--

6,665

General and administrative

--

--

3,999

3,999

Other (income)/expenses

--

--

(911)

(911)

Provision for income taxes

--

--

197

197

Net Income

 

 

 

$          3,380

 

 

 

 

 

 

The above segments include stock-based compensation of approximately $323,000, allocated to Therapeutics in the amount of $81,000, Applied Technology in the amount of $84,000, and Corporate and Unallocated in the amount of $158,000.  No compensation costs were capitalized.

 

 

 

 

 

 

 

 

15

 

 

 

**7.  Business Segments (continued)**

 

Segment information for the nine months ended September 30, 2005 (in thousands) follows:

 

 

 

**Therapeutics**

**Applied**

**Technology**

**Corporate and**

**Unallocated**

 

**Total**

Revenue

$         11,234

$         9,685

$                --

$       20,919

Cost of sales

7,427

5,757

--

13,184

Gross profit

3,807

3,928

--

7,735

Selling and marketing

2,057

435

--

2,492

Research and development

542

354

--

896

Contribution margin 

1,208

3,139

--

4,347

General and administrative

--

--

3,254

3,254

Other (income)/expenses

--

--

91

91

Provision for income taxes

--

--

3

3

Net income

 

 

 

$           999

 

**8.  Other Events**

 

On February 23, 2006, ZEVEX International, Inc., (the “Company”) filed a complaint in the United States District Court, alleging the infringement of certain patents by a medical device manufacturer.  The complaint alleged that the manufacturer made, sold and offered for sale infusion pumps that utilized ZEVEX patented technology.  On April 7, 2006, the parties entered into a Settlement Agreement under which the Company granted a non-exclusive royalty-free license to the manufacturer to use certain Patents in the intravenous infusion pump market and dismissed the lawsuit within seven days of settlement.  The Settlement Agreement also provided that the manufacturer would pay to the Company the sum of One Million Dollars ($1,000,000), provide a covenant not to sue under certain claims of Patents held by the manufacturer, and provide appropriate patent markings on manufactured product.  Such amount isincluded net of associated legal costs in the statement of operations for the nine months ended September 30, 2006.  

 

 

 

16

 

 

 

**____________________________________________________________________________________________**

**ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

____________________________________________________________________________________________

 

This Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and other parts of this Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  In some cases, such forward-looking statements may be identified by the use of words such as “estimate,” “believe,” “project,”  “anticipate” and similar expressions, and together with other discussion of future trends or results, are intended to identify forward-looking statements.  Such statements, which include our statements about the level of anticipated expenses during 2006 and our liquidity position, are subject to certain risks and uncertainties, including those discussedbelow that could cause actual results to differ materially from those projected.  These forward-looking statements speak only as of the date hereof and we disclaim any obligation to update them.  All of these forward-looking statements are based on estimates and assumptions made by our management, which although believed to be reasonable, are inherently uncertain and difficult to predict.  Therefore, undue reliance should not be placed upon such estimates.  There can be no assurance that the benefits anticipated in these forward-looking statements will be achieved.  The following important factors, among others, could cause us not to achieve the benefits contemplated herein, or otherwise cause our results of operations to be adversely affected in future periods: (i) continued or increased competitive pressures from existing competitors and new entrants; (ii) unanticipated costs related to our growth and operating strategies; (iii) loss or retirement of key members of management; (iv)increase in interest rates of our cost of borrowing, or a default under any material debt agreement; (v) adverse state or federal legislation or regulation that increases the cost of compliance, or adverse findings by a regulator with respect to existing operations; (vi) loss of customers; (vii) inability to achieve future sales; (viii) the unavailability of sufficient funds for operations or capital expenditures; and (ix) inability to introduce new products as planned.  Many of such factors are beyond our control.  Please refer to our SEC Form 10-K for the fiscal year ended December 31, 2005 for additional cautionary statements.   

 

**Overview**

 

We develop and manufacture high-quality, high-value medical products.  We effectively integrate, implement, and support solutions throughout product life cycles based upon our core competencies in sensing, fluid management, and surgical ultrasound technologies.  We provide value in a continuum of product solutions, as a diversified medical device company committed to creating products that transform life with patented and proprietary medical device technologies – from sensors and surgical tools to medical electronic systems.

 

We focus on product development and manufacturing, and distribute our products through selected medical device marketing companies and distributors.  We employ product and territory managers to ensure that our services and sales support are complementary to the quality of our innovative products.  This distribution strategy allows us to leverage our expertise and technology across diverse applications, while remaining focused on our core competencies.

 

Our Therapeutics Division

 

Through the sale of enteral feeding pumps and related devices, we have established a competitive position in the U.S. enteral nutrition delivery market.  The market in which we compete includes feeding pumps and disposable sets that are used by patients who require direct gastrointestinal nutrition therapy (also called enteral feeding).  Enteral feeding is the means of providing liquid nutrition to patients who may have experienced head or neck trauma, or have gastrointestinal disorders such as short bowel syndrome, Crohn’s Disease, bowel pseudo-obstruction and other disorders that prevent normal digestion.

 

In the third quarter and first nine months of 2006, our Therapeutics division produced significant revenue growth.  This revenue growth was the result of increasing sales of our EnteraLite® Infinity® portable feeding pump product line in the U.S. and the international roll-out of the Flocare® Infinity® product line which we private-label for Nutricia Clinical.  Both of these product lines were launched in 2005.  

 

 

 

16

 

 

 

During the third quarter of 2006 our Therapeutics division produced revenue of $7.4 million, achieving growth of 56% over the third quarter of 2005.  Based on the growing market acceptance of the EnteraLite® Infinity® product line and the continued sales strength of our original EnteraLite® product line, our domestic Therapeutics sales force produced revenue of $3.6 million, achieving growth of 14% over the third quarter of 2005.  Based primarily upon strong sales to Nutricia Clinical, revenue from our international Therapeutics division increased to $3.9 million during the third quarter, growing 139% over the third quarter of 2005.

 

During the first nine months of 2006, our Therapeutics division produced revenue of $20.7 million and growth of 85% over the first nine months of 2005.  During that same period, our domestic Therapeutics sales force generated revenue of $9.7 million and growth of 15% over the first nine months of 2005.  International Therapeutics division revenue was $11 million during the first nine months of 2006, up significantly from $2.8 million during the first nine months of 2005, primarily due to sales to Nutricia Clinical.  

 

Our Applied Technology Division

 

We also provide design and manufacturing services in a multi-billion dollar market to worldwide medical device leaders who, in turn, sell our components and systems under private label or incorporate them into their products.  We call this our Applied Technology division.  These OEM (Original Equipment Manufacturer) products include ultrasonic sensors and surgical handpieces, sensor components, and electronic instruments.  Our operation in Salt Lake City has been certified to world-class medical device quality standards, meeting ISO 9001:2000 and ISO 13485:2003 certification requirements.  We also employ a quality system that has been designed to meet the U. S. Food and Drug Administration’s Good Manufacturing Practices.

 

In the third quarter of 2006 our Applied Technology division sales decreased 11% compared to the same period of 2005.  The decrease in sales for the quarter was primarily due to a decrease in demand from one of our largest sensor customers and one of our systems customers.  We believe that this decrease is temporary, and expect that revenue from these customers will increase during the fourth quarter.

 

During the first nine months of 2006, our Applied Technology division experienced sales growth of our core sensors and surgical ultrasound products compared to the same nine month period of 2005.  Our largest customers for these products continued to post market share gains, from which we have benefited.  As a result, our Applied Technology division produced revenue of $10.8 million, growth of 11% for the first nine months of 2006 over 2005.  

 

In the third quarter of 2006, revenue from our two divisions grew 28%, producing consolidated revenue of $10,442,480 and net income of $418,532, compared to consolidated revenue of $8,137,223 and net income of $785,483 for the third quarter of 2005.  For the first nine months of 2006, consolidated revenue grew 51% to $31,511,453 and net income was $3,379,906, compared to consolidated revenue of $20,919,040 and net income of $999,104 for the first nine months of 2005.  

 

Revenue from our Therapeutics division and from our Applied Technology division constituted 71% and 29%, respectively, of our third quarter 2006 consolidated revenue, and 66% and 34%, respectively, of our consolidated revenue for the first nine months of 2006.  Revenue from our Therapeutics division and our Applied Technology division constituted 58% and 42%, respectively, of our consolidated revenue for the third quarter in 2005, and 54% and 46%, respectively, of our consolidated revenue for the first nine months in 2005. 

 

**Results of Operations**

 

Our revenue increased by approximately 28% during the third quarter of 2006, to $10,442,480, compared to $8,137,223 for the third quarter of 2005.  Therapeutics division products generated 71% and Applied Technology division products generated 29% of total revenue during the third quarter 2006. During the third quarter of 2006, one customer accounted for 34% of total revenue.  During the same period of 2005, one customer accounted for 15% and another customer accounted for 13% of total revenue.

 

Our Therapeutics division revenue increased 56% to $7,424,629 during the third quarter of 2006, compared to $4,745,042 in the third quarter of 2005.  The increase in revenue from last year is due to an increase of 139% in our international Therapeutics revenue, largely due to the growth of our business with Nutricia Clinical.  Nutricia 

 

 

18

 

 

Clinical is our exclusive distributor for the Flocare® Infinity®, a private-label version of our EnteraLite® Infinity® portable enteral feeding pump, in 32 countries outside of North America.  Our domestic EnteraLite® Infinity® and EnteraLite( portable feeding pump and disposable set revenue increased 24% over the third quarter of 2005, while revenue from our stationary enteral feeding delivery products decreased 22% over the same period of 2005.  

 

Our Applied Technology division revenue decreased 11% to $3,017,851 during the third quarter of 2006, compared to $3,392,181 in same period of 2005. Specifically, during the third quarter of 2006, sensor and surgical handpiece revenue decreased approximately 7%, from the third quarter of 2005, primarily because one of our largest sensor customers substantially reduced its purchases of our sensors compared with the prior year’s quarter.  Applied Technology engineering services revenue increased 35% to $180,000 during the third quarter of 2006 compared to $135,000 for the same period in 2005.  Our medical systems revenue decreased approximately 39% to $360,000, from $590,000 for the third quarter of 2005, due to a reduction in demand from one particular customer.

 

Our revenue increased by approximately 51% during the first nine months of 2006, to $31,511,453, compared to $20,919,040 for the first nine months of 2005.  Our Therapeutics division products generated 66% and revenue of Applied Technology division products generated 34% of total revenue during the first nine months of 2006.  During the first nine months of 2006 one customer accounted for 32% and another customer accounted for 10% of total revenue.  During the same period of 2005, one customer accounted for 14% of total revenue.

 

Our Therapeutics division revenue increased 85% to $20,738,813 during the first nine months of 2006, compared to $11,234,335 for the first nine months of 2005.  The increase in revenue from last year is due primarily to an increase of 297% in our international Therapeutics revenue largely due to the growth of our business with Nutricia Clinical.  Our domestic EnteraLite® Infinity® and EnteraLite( portable feeding pump and disposable set revenue increased 24% over the first nine months of 2005.  These increases were partially offset by a decrease of 14% in sales of domestic stationary enteral feeding delivery products within our Therapeutics division for the same period.  

 

Our Applied Technology division revenue increased 11% to $10,772,640 during the first nine months of 2006, compared to $9,684,705 in same period of 2005.  Specifically, during 2006, sensor and surgical handpiece revenue increased approximately 21% to $8.7 million, compared to $7.2 million in the first nine months of 2005, primarily because our largest customers for these products continued to post market share gains early in the year.  Applied Technology engineering service revenue increased 99% to $620,000 during first nine months of 2006 compared to $310,000 for first nine months of 2005.  These increases more than offset a decrease in medical systems revenue of approximately to $1.4 million or 35% compared to $2.2 million for the same period of 2005.

 

Our gross profit as a percentage of revenue was approximately 33.6% for the third quarter of 2006 compared to 37.9% for the third quarter of 2005.  Gross profit as a percentage of revenue was approximately 34.8% for the first nine months of 2006 compared to 37% for the first nine months of 2005.We primarily attribute this decrease to the following four factors.  First, the product mix delivered by each business division differed during the periods in 2006 and 2005. Specifically, during the third quarter of 2006, our revenue was greater in lower margin products than in the prior year.   Second, we incurred one-time costs associated with the transfer of manufacturing of the enteral disposable products of our Therapeutics division to a new third-party supplier.  Third, we generated lower-margin service revenue of approximately $800,000 inthe third quarter and $2,200,000 in the first nine months of 2006.  The service relates to the maintenance of Nutricia Clinical’s enteral feeding pumps and is performed on our behalf by our third party service provider in Europe.  Although this service business generates operating margin, the gross margin on service is well below our corporate average.  Fourth, material costs have increased over the prior year at a rate that was greater than expected.  Our engineers in research and development and operations are currently executing cost reduction initiatives that we expect will allow us return to prior levels of gross margin during the first half of 2007.  Please refer to Note 7 of the Unaudited Consolidated Financial Statements for discussion of our business segments, including gross profit and our definition of contribution margin.

 

Depreciation and amortization expenses were $201,521 in the third quarter of 2006 compared to $177,092 in the third quarter of 2005, and $542,547 in the first nine months of 2006 compared to $526,286 in the first nine months of 2005.  

 

Selling, general and administrative expenses during the third quarter of 2006 increased to $2,316,899, compared to $1,945,200 for the third quarter of 2005.  During the first nine months of 2006 selling, general and administrative expenses increased to $7,072,294, compared to $5,746,869 for the first nine months of 2005.  The increases for these 

 

 

19

 

 

periods are primarily related to increased investments in sales and marketing, and increased general and administrative expenses, including recruiting expenses, personnel and insurance costs, legal fees, non-cash stock-based compensation expense, incentive bonus accruals, and Sarbanes-Oxley Section 404 compliance costs.  Due to our sales growth in the first nine months of 2006, our selling, general and administrative expenses actually decreased as a percentage of sales, from 27% in first nine months of 2005 to 22% in first nine months of 2006.  Also, due to the appreciation of our stock, our market capitalization held by non-affiliate shareholders exceeded $75 million on June 30, 2006, which means that we will be an “accelerated filer” under the SEC rules.  One significant requirement of being an “accelerated filer” is that we will be required in 2006 to comply with all of the reportingand certification requirements relating to our internal controls over financial reporting under Section 404 of the Sarbanes Oxley Act.  In order to meet such requirements, we are required now to document and test our internal controls, which we will report and certify in 2006.  In this regard, we have met the qualification requirements for Sarbanes-Oxley Section 404 compliance by year-end.  As a result, we estimate that we will incur additional expenses for consulting and auditing expenses related to compliance during the fourth quarter of 2006, which will be included in general and administrative expenses.

 

We combine the resources of our full-time engineers with several independent contractors to perform research and development projects.  We increased our investment in the research and development of new products and technologies to $487,017 during the third quarter of 2006, up from $330,242 invested in the same period of 2005.  In the third quarter of 2006, research and development costs represented approximately 5% of our revenue, compared with 4% in the third quarter of 2005.  For the nine month period ended September 30, 2006, we invested $1,211,263 in research and development, compared to $895,870 for the same period of 2005.  In the first nine months of 2006 and 2005, our investment in research and development was approximately 4% of revenue.  We are continuing our efforts to develop and introduce new proprietary products for our Therapeutics business.  Additionally, we are investing in developingproprietary component technologies for our Applied Technology business.  We expect research and development costs to be approximately 4.5% of revenue during 2006. 

 

Operating income decreased to $705,898, or 7% of revenue, in the third quarter of 2006 compared to operating income of $804,920, or 10% of revenue in the third quarter of 2005.  Operating income increased to $2,665,673, or 8.5% of revenue for the first nine months of 2006 compared to operating income of $1,092,613, or 5% of revenue for the first nine months of 2005.  We had net income of $418,532 or 4% of revenue in the third quarter of 2006 compared to net income of $785,483, or 10% of revenue in the third quarter of 2005.  We had net income of $3,379,906, or 11% of revenue in the first nine months of 2006 compared to net income of $999,104, or 5% of revenue in the first nine months of 2005.  The decreases in operating and net income during the third quarter of 2006, as compared to the same period of 2005, are primarily related to two factors.  First, we increased selling, general and administrativeexpenses and our investment in research and development in 2006.  Second, in the third quarter of 2005, income taxes were offset by the reversal of a tax valuation allowance, therefore eliminating all tax expense for the third quarter of 2005.  

 

For the first nine months of 2006 operating and net income increased as compared to the same periods of 2005.  These increases primarily relate to an increase in revenue in 2006 and the resulting increase in our gross profit, which was partially offset by increased selling, general and administrative expenses, research and development costs, and the tax expense recorded in 2006.  In addition to the above stated increases in operating income, net income for the first nine months of 2006 also includes $948,000 in pre-tax income from a patent settlement that is referred to in note 8 to the financial statements, and a benefit for income taxes discussed below. 

 

We had an income tax expense of $296,859 in the third quarter of 2006 compared to an income tax expense of $0 in the third quarter of 2005.  We had an income tax expense of $196,970 for the first nine months of 2006 compared to an income tax expense of $2,635 for the first nine months of 2005.  The effective income tax rate of 6% for the first nine months of 2006 is due to the reversal of part of our deferred tax asset valuation allowance as a result of our continued profitable operations, the expected positive results of future operations, and our assessment that it is more likely than not that the related deferred tax asset will be realized.  Income tax expense for the third quarter and first nine months of 2005 represents minimum tax payments due to the various states in which we are required to file.  

 

We have a federal and state charitable contribution carryforward totaling approximately $4,916,000 that is limited to a percentage of taxable income and is recognizable only if the Company has taxable income.  This carryforward expires in 2007.  The Company also has a federal capital loss carryforward of approximately $9,892,000 that begins to expire in 2006.  

 

 

 

20

 

 

 

We have recorded a full valuation allowance against our federal and state charitable contribution carryforward and federal capital loss carryforward deferred tax assets because we do not consider it more likely than not that these assets will be realized based upon limitations on usage of certain of the carryforwards.  A portion of the valuation allowance relates to the benefit for stock option exercises, and increases the amount of the net operating loss carryforward.  When this benefit is used in the future, the related reduction in the valuation allowance of $821,247 will be recorded to additional-paid-in-capital, rather than as a reduction of income tax expense. 

 

As of September 30, 2006, our backlog of customer orders was $7,458,000 compared to $7,641,000 on September 30, 2005. We estimate that approximately 40% of this backlog will be shipped before December 31, 2006.  Our backlog is for manufacturing orders within the Applied Technology division only and can be significantly affected by the timing of annual or semi-annual purchase orders placed by our customers.

 

**Liquidity and Capital Resources**

 

Our primary sources of liquidity have consisted of cash flows from operations, borrowings under our revolving line of credit and other financial arrangements described below.  In prior years, we have also increased working capital through the issuance of stock and we may do so in the future.

 

Cash flows provided by operating activities for the first nine months of 2006 were $1,013,123, compared to cash flows provided by operating activities for the first nine months of 2005 of $734,813.  The improvement in cash flows generated during the first nine months of 2006 was primarily associated with the increase in net income and increases in accounts payable, accrued expenses, and non-cash stock-based compensation expense, which in turn were partially offset by increases in accounts receivable balances due to revenue growth increases in inventories and deferred income taxes.

 

Our working capital at September 30, 2006 was $12,995,638 compared to $6,563,737 at September 30, 2005.  The increase in working capital is primarily related to the increase in revenue and the corresponding increase in accounts receivable and deferred income tax assets related to the valuation allowance reversal discussed above.  The portion of working capital represented by cash was $3,362,761 at September 30, 2006 and $613,362 at September 30, 2005.  

We maintain a line of credit arrangement with a financial institution with availability of $3 million.  The line matures on May 27, 2007, is collateralized by accounts receivable and inventory and bears interest at the rate of LIBOR plus 1.80%, which was an effective rate of 7.12% at September 30, 2006.  The rate at December 31, 2005 was LIBOR plus 2.40%, which was an effective rate of 6.79%.  The balance on our line of credit was $0 at September 30, 2006 and December 31, 2005. Under the line of credit agreement, we are restricted from declaring cash dividends and must maintain certain levels of working capital and meet certain other financial covenants.  We were in compliance with such covenants as of September 30, 2006. 

 

On April 18, 2001, we entered into a Term Loan Agreement with a bank for the amount of $1,000,000.  This agreement is secured by our manufacturing facility.  The proceeds from the Term Loan Agreement were used to reduce the balance on our line of credit.  The agreement was originally due on May 15, 2003.  The Term Loan Agreement was later renegotiated and is now due May 15, 2008.  The amount due under the Term Loan Agreement is being amortized over a thirteen-year term at an interest rate of 5.4%.  The outstanding balance at September 30, 2006 was $724,485, of which $58,557 is classified as current. 

 

In 1997, we completed construction of our 51,000 square foot headquarters and manufacturing facility.  The cost of this undertaking was $2,591,177.  In 1996, we negotiated a $2.0 million Industrial Development Bond (“IDB”) to finance this construction.  As of September 30, 2006, the remaining principal balance on the IDB was $1,100,000.  During the first nine months of 2006, the monthly interest ranged from 2.99% to 4.18% (APR).

 

Purchases of leasehold improvements to our facilities, tooling and new engineering, production and testing equipment totaled $1,024,116 for the first nine months of 2006 compared to $766,387 for the first nine months of 2005.  We expect to spend approximately $200,000 during the remainder of 2006 for additional manufacturing equipment and software, for normal replacement of aging equipment, and for manufacturing tooling related to our proprietary products.  

 

 

 

21

 

 

 

On February 23, 2006, we filed a complaint in the United States District Court, alleging the infringement of certain patents by a medical device manufacturer.  The complaint alleged that the manufacturer made, sold and offered for sale infusion pumps that utilized our patented technology.  On April 7, 2006, the parties entered into a Settlement Agreement under which we granted a non-exclusive royalty-free license to the manufacturer to use certain Patents in the intravenous infusion pump market and dismissed the lawsuit.  The Settlement Agreement also provided that the manufacturer would pay us the sum of One Million Dollars ($1,000,000), provided a covenant not to sue under certain claims of Patents held by the manufacturer, and provided for appropriate patent markings on manufactured product.

 

On September 15, 2006, we sold 3.9 vacant acres adjacent to our facility which netted us $588,323 in cash.  We estimate that our current facility is being utilized at approximately 50% of capacity, which we believe allows us to meet our expected growth over the next several years.  

 

Our expected principal liquidity requirements are working capital, investments in capital expenditures, and debt reduction.  We believe our sources of liquidity are sufficient for operations during the coming twelve months.  These sources include our projected cash from operations and, if necessary, draw from our existing revolving line of credit.

 

**Off-Balance Sheet Items**

 

We have no off-balance sheet items. 

 

Critical Accounting Policies and Estimates

 

In response to the SEC’s Release numbers 33-8040 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies”, and 33-8056, “Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations”, we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.  The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures.  Our significant accounting policies are included in our Annual Report on Form 10-K for the year ended December 31, 2005.

 

We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances.  Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results.  We believe the following accounting policies are the most critical to us, in that they are material to the portrayal of our financial statements and they require our most difficult, subjective, or complex judgments in the preparation of our consolidated financial statements.

 

**Allowance for Doubtful Accounts**

 

As a general policy, collateral is not required for accounts receivable; however, we periodically monitor the need for an allowance for doubtful accounts based upon our expected collections of accounts receivable, historical bad debt rates, and specific identification of uncollectible accounts.  Based on these factors, we record an allowance to provide for accounts that we believe may not be ultimately collectable.  Additionally, customers’ financial condition and credit worthiness are regularly evaluated.  Historically, losses on our accounts receivable have not been material.  

 

**Product and Inventory Obsolescence**

 

Rapid change and technological innovation characterize the marketplace for medical products.  As a result, we and our customers are subject to the risk of product and inventory obsolescence, whether from prolonged development, government approval cycles, or the development of improved products or processes by competitors.  In addition, the marketplace could conclude that the task for which a customer’s medical product was designed is no longer an element of a generally accepted diagnostic or therapeutic regimen.  Accordingly, we write down inventory that we believe is in excess or obsolete.  Inventories are stated at the lower of cost or market; cost is determined using the first-in, first-out method.

 

 

 

22

 

 

 

**Sales Returns and Warranty**

 

We record a provision for estimated sales returns and allowances and warranty reserve on products that we have sold.  These estimates are based on historical sales returns and warranty expenses and other known factors.  If the historical data we use to calculate these estimates does not properly reflect future returns and warranty expenses, revenue could be overstated or understated and expenses could be understated or overstated.

 

**Revenue Recognition**

 

We recognize revenue from products sold directly to end customers when persuasive evidence of an arrangement exists, the price is fixed or determinable, shipment is made and title has passed, and collectibility is reasonably assured.If such criteria are not met, revenue is deferred.  

 

We recognize revenue from products sold to distributors when persuasive evidence of an arrangement exists, the price is fixed or determinable, shipment is made and title has passed, and collectibility is reasonably assured.  If such criteria are not met, revenue is deferred.  There are no post-shipment obligations other than warranty service related to the product, no rights to return the product unless they are defective, no price protection, and no volume pricing rebates or stock rotation rights.

 

Contracts to perform engineering design and product development services are generally performed on a time and materials basis.  Revenue generally is recognized on a monthly basis. 

 

**Impairment**

 

We have made acquisitions in the past that included a significant amount of fixed assets, goodwill, and other intangible assets. The cost of the acquired companies was allocated first to identifiable assets based on estimated fair values.  Intangible assets consist of goodwill, contracts, patents, and licenses.  

 

Effective in 2002, goodwill is no longer amortized but is subject to an annual (or, under certain circumstances, more frequent) impairment test, based on its estimated fair value.  Other intangible assets will generally continue to be amortized over their useful lives and also will be subject to an impairment test based on estimated fair value. Estimated fair value is typically less than values based on undiscounted operating earnings because fair value estimates include a discount factor in valuing future cash flows. There are many assumptions and estimates underlying the determination of an impairment loss. Another estimate using different, but still reasonable assumptions could produce a significantly different result. Therefore, impairment losses could be recorded in the future.

 

Currently, we assess the impairment of fixed assets and identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors we consider important that could trigger an impairment review include the following:

 

 

**•**

A significant underperformance relative to expected historical or projected future operating results;

 

**•**

A significant change in the manner of how we use the acquired asset or the strategy for our overall business;

 

**•**

A significant negative industry or economic trend.

 

When we determine that one or more of the above indicators of impairment exist, we evaluate the carrying amounts of the affected assets.  The evaluation, which involves significant management judgment, is based on various analyses including cash flow and profitability projections.  To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of the related long-lived assets, the carrying amount of the underlying assets will be reduced, with the reduction charged to expense, so that the carrying amount is equal to fair value, primarily determined based on future discounted cash flows, using a discount rate determined by management to be commensurate with the risk inherent in our current business model.  

 

In accordance with SFAS No. 142 goodwill and indefinite-lived intangible assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this Statement.  This impairment test 

 

 

23

 

 

uses a fair value approach.  We are annually required to complete Step 1 (determining and comparing the fair value of our reporting units to their carrying values, as of March 31, 2006, we had one reporting unit with goodwill) of the impairment test.  Step 2 is required to be completed if Step 1 indicates that the carrying value of the reporting unit exceeds the fair value, involves the calculation of the implied fair value of goodwill.  We completed Step 1 of the impairment assessment for the reporting unit with goodwill at its annual impairment testing date in the second quarter of 2006.  Based upon our valuation procedures, we determined that the fair value of the reporting unit exceeded its carrying value.  As such, we were not required to complete Step 2 of the impairment test and no impairment loss was recognized.  No indicators of impairment were identified since the 2006 annual impairment testing date.

 

Net intangible assets and goodwill amounted to approximately $4.4 million as of September 30, 2006.  Net fixed assets amounted to approximately $4.6 million as of September 30, 2006.

 

**Income Taxes**

 

Income taxes are recorded based on the liability method, which requires recognition of deferred tax assets and liabilities based on the difference between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.  A valuation allowance is recorded to reduce our deferred tax asset to an amount that is more likely than not to be realized, as determined based on our analyses of projected taxable income, including tax strategies available to generate future taxable income.  Our analyses of future taxable income are subject to a wide range of variables, many of which involve our estimates, and therefore our deferred tax asset may not be ultimately realized.  As of September 30, 2006, we have recorded a full valuation allowance against our federal and state charitable contributioncarryforward and federal capital loss carryforward deferred tax assets because we did not consider it more likely than not that these assets would be realized based upon limitations on usage of certain of the carryforwards.  A portion of the valuation allowance related to the benefit for stock option exercise increases the amount of the net operating loss carryforward.  When this benefit is used in the future the related reduction in the valuation allowance of $821,247 will be recorded to additional-paid-in-capital rather than income tax expense. 

 

**Stock-Based Compensation**

 

The Company has adopted Financial Accounting Standards Board Statement of Financial Accounting Standards (“SFAS”) No. 123R.  The Company uses the Modified Prospective method, which requires the application of SFAS No. 123R to new awards and to awards modified, repurchased or cancelled after the effective date.  Additionally, compensation cost for the portion of outstanding awards for which service has not been rendered (such as unvested options) that are outstanding as of the date of adoption will be recognized as the remaining services are rendered.  The Company recorded $84,000 and $258,000, respectively, in stock-based compensation expense during the current three and nine month periods as a result of adopting SFAS No. 123R.  Results from prior periods have not been restated.

 

Also, net income for the three months and nine months ended  September 30, 2006 includes $48,000 and $65,000, respectively in stock-based compensation expense associated with accelerated vesting of granted stock options in prior years for termination of employees prior the when actual vesting would have occurred.

**____________________________________________________________________________________________**

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE**

**ABOUT MARKET RISK**

____________________________________________________________________________________________

 

For quantitative and qualitative disclosures about market risk affecting ZEVEX, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on SEC Form 10-K for the fiscal year ended December 31, 2005, which is incorporated herein by reference.  Our exposure to market risk has not changed materially since December 31, 2005.

 

 

 

 

 

24

 

 

 

**____________________________________________________________________________________________**

 

**ITEM 4.  CONTROLS AND PROCEDURES**

____________________________________________________________________________________________

 

Our management, including our CEO and CFO, has evaluated the effectiveness of our “disclosure controls and procedures” (the disclosure controls and other procedures that are designed to provide reasonable assurance that for recording, processing, summarizing, and reporting on a timely basis the information required to be disclosed in the periodic reports that we file with the U.S. Securities and Exchange Commission), as of the end of the third quarter. 

 

The evaluation of our disclosure controls by the CEO and CFO included a review of the controls' objectives and design, the operation of the controls, and the effect of the controls on the information presented in this Quarterly Report.  Our management, including the CEO and CFO, does not expect that disclosure controls can or will prevent or detect all errors and all fraud, if any.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Also, projections of any evaluation of the disclosure controls and procedures to future periods are subject to the risk that the disclosure controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Based on their review and evaluation as of September 30, 2006, and subject to the inherent limitations as described above, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934), are effective.  In addition, they are not aware of any change in our internal control over financial reporting during the quarter ended September 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

 

**PART II**

 

**OTHER INFORMATION**

 

**____________________________________________________________________________________________**

 

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

____________________________________________________________________________________________

 

 

(a)

Exhibits

 

The following exhibits are attached hereto or are incorporated herein by reference as indicated in the table below:

 

 

Exhibit

Location if other

 
 

No.  

Title of Document

than attached hereto

 

 

3.01*

Certificate of Incorporation

Amendment No. 1 to Form S-1,

filed October 24, 1997

 

 

3.02*

Amended Bylaws

March 31, 2002 Form 10-Q

filed May 10, 2002

 

 

31.01  

Rule 13a-14(a)/15d-14(a)

Certification of Chief Executive Officer 

 

 

31.02  

Rule 13a-14(a)/15d-14(a)

 
 

Certification of Chief Financial Officer

 

 

32.01  

Section 1350 Certification of Chief Executive Officer

 

 

32.02  

Section 1350 Certification of Chief Financial Officer

 

 

 

25

 

 

 

 

 

(b)  

Reports on Form 8-K.

 

None

 

 

*

Denotes exhibits specifically incorporated in this Form 10-Q by reference to other filings of the Company

pursuant to the provisions of Securities and Exchange Commission Rule 12b-32 and Regulation S-K.  These          documents are located under File No. 001-10287 at, among other locations, the Securities and Exchange Commission, Public Reference Branch, 450 5th St., N.W., Washington, D.C. 20549.

 

 

____________________________________________________________________________________________

 

**SIGNATURES**

____________________________________________________________________________________________

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ZEVEX INTERNATIONAL, INC.

 

Dated:  October 31, 2006 

 

 

By  

/s/ David J. McNally  

 
 

David J. McNally, CEO

 
 

(Chief Executive Officer)

 

 

By  

/s/ Phillip L. McStotts  

 
 

Phillip L. McStotts, Secretary

 

(Principal Financial Officer)

 
 

 

 

26

 

 

 

**Exhibit 31.01**

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER,**

**AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.**

 

I, David J. McNally, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ZEVEX International, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 

 

4. The registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Dated:  October 31, 2006 

 

 

By  

/s/ David J. McNally  

 
 

David J. McNally, CEO

 
 

(Chief Executive Officer)

 

 

 

 

 

 

27

 

 

 

**Exhibit 31.02**

**CERTIFICATION OF CHIEF FINANCIAL OFFICER,**

**AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.**

 

I, Phillip L. McStotts, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ZEVEX International, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 

 

4. The registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Dated:  October 31, 2006 

 

 

By  

/s/ Phillip L. McStotts  

 

Phillip L. McStotts, CFO

 
 

(Chief Financial Officer)

 
 

 

 

 

28

 

 

 

**EXHIBIT 32.01**

 

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER,**

**AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.**

 

I, David J. McNally, hereby certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

 

 (i)    The accompanying quarterly report on Form 10-Q for the quarter ended September 30, 2006, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

 

 (ii)   The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of ZEVEX International, Inc.

 

Dated:  October 31, 2006 

 

 

By  
/s/ David J. McNally  
 

David J. McNally, CEO
 
 

(Chief Executive Officer)
 

This certification accompanies the above-described Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

 

 

30

 

 

 

 

 

31

 

 

 

 

 

 

**EXHIBIT 32.02**

 

**CERTIFICATION OF CHIEF FINANCIAL OFFICER,**

**AS REQUIRED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.**

 

I, Phillip L. McStotts, hereby certify pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

 

 (i)    The accompanying quarterly report on Form 10-Q for the quarter ended September 30, 2006, fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

 

 (ii)   The information contained in such report fairly presents, in all material respects, the financial condition and results of operations of ZEVEX International, Inc.

 

Dated:  October 31, 2006 

 

 

By  
/s/ Phillip L. McStotts  
 

Phillip L. McStotts, CFO
 
 

(Chief Financial Officer)
 
 

 

This certification accompanies the above-described Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

 

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